Private ruling: CGT rollover and small business concessions
Published: January 2015
Ruling period: Year ending 30 June 2015.

Ruling: A3: Yes. The CGT small business concessions in Division 152 of the ITAA 1997 will apply to capital gains made from the disposal of shares in Companies X and Y, provided that the Unit Trust meets all the relevant conditions for the concessions at the time of the disposal of the shares.

Relevant facts and circumstances: A controls two separate businesses, which are owned and carried on through a Unit Trust A's l company B Pty Ltd is the sole unit holder of 100% of the units in the Unit Trust. A owns 100% of the shares in B Pty Ltd. A large national entity has offered to enter into a joint venture franchise agreement ("JVFA"). The JVFA is structured to operate between the national entity and a new proprietary limited company. In order to comply with the basic terms of the JVFA proposal, A is required to arrange the transfer of the two businesses into two separate and new companies. A will arrange a rollover of the assets of each business from the Unit Trust to the two new companies. The names of the two new companies will be Company X and Company Y. The two new companies are each to be set up with an issued share capital of X A shares. The consideration for the A shares will be the business assets rolled over from the Unit Trust. In this way the Unit Trust will become the holder of X A shares in each of the new companies. The Unit Trust will then have transferred the business assets to Company X and Company Y in exchange for all the shares in each (X A shares). The A shares will be non-redeemable shares. Each new company will enter into a separate JVFA with the national entity. There is an agreement in principle to later sell portions of the A shares in companies X and Y to future franchisee investors. The franchisee investors will be introduced by the national entity. The portions of the A shares will be sold to the franchisee investors at market value. The first business was commenced by the Unit Trust prior to September 1985. The assets of that business have changed over the years. There is a mixture of pre and post CGT assets in that business. The financial accounts of the Unit Trust will be determined and finalised on an accruals basis, and the business results and assets for the two businesses will be clearly distinguished. The tax agent has confirmed that the net asset value of the Trust, it affiliates and any entities connected with it will not exceed $6 million when the sale of the shares in Company X and Company Y is transacted. All the above-mentioned entities are Australian resident entities. Assumption For the purposes of the CGT small business concessions (Division 152 of the ITAA 1997) it is assumed that the maximum net value of the assets of the Trust, its affiliates and entities connected with the Trust will not exceed $6 million when shares in SODN and SOP are disposed of.

Relevant legislative provisions: Part 3-1 | Division 122 | Section 122-15 | Section 122-20 | Section 122-25 | Section 122-35 | Section 122-60 | Division 152 | Section 152-10 | Section 152-15 | Section 152-20 | Section 152-35 | Section 152-40 | Division 328 | Section 328-125 | Section 328-130 | Taxation Administration Act 1953 Schedule 1 | Division 357 | Section 357-110 | Division 359 | Subsection 359-50(2)

Reasons for decision: Detailed Reasoning - Question 1: Division 122 roll-over - disposal of asset(s) by a trust to a wholly owned company Rollover relief is available under section 122-15 of the ITAA 1997 to the trustee of a trust who disposes of a CGT asset, or all the assets of a business, to a company in which the trustees will own all of the shares after the CGT event. There are seven basic conditions that must be met for the replacement asset roll-over relief to apply to disposals by trustees to wholly owned companies. | Detailed Reasoning - Condition 1: Under subsection 122-15 of the ITAA 1997 one of the following CGT events, known as a 'trigger event' must happen involving the trustees and a company: A1 - Dispose of a CGT asset or, all the assets of a business to the company D1 - Create contractual or other rights in the company D2 - Grant an option to the company D3 - Grant the company a right to income from mining F1 - Grant, renew or extend a lease to the company | Detailed Reasoning - Condition 2: The consideration the trustees receive for the trigger event happening under subsections 122-20(1) and (2) of the ITAA 1997 must only be: (a) Shares in the company; or (b) For a disposal of a CGT asset, or all the assets of a business to a company (a disposal case) - shares in the company and the company undertaking to discharge one or more liabilities in respect of the asset or assets of the business (as appropriate). | Detailed Reasoning - Condition 3: Under subsection 122-20(2) of the ITAA 1997 the shares cannot be redeemable shares. | Detailed Reasoning - Condition 4: Under subsection 122-20(3) of the ITAA 1997 the market value of the shares that the trustee receives for the trigger event happening must be substantially the same as: (a) For a disposal case - the market value of the asset or assets you disposed of, less any liabilities the company undertakes to discharge in respect of the asset or assets (as appropriate); or (b) For another trigger event happening (a creation case) - the market value of the CGT asset created in the company (the created asset). | Detailed Reasoning - Condition 5: Under subsection 122-25(1) of the ITAA 1997 the trustee must own all of the shares in the company just after the time of the trigger event. | Detailed Reasoning - Condition 6: Under subsection 122-25(5) of the ITAA 1997 the company must not be exempt from income tax on its ordinary and statutory income because it is an exempt entity for the income year of the trigger event. | Detailed Reasoning - Condition 7: Under subsection 122-25(7) of the ITAA 1997 if you are the trustee of a trust at the time of the trigger event, either: (a) At that time, the trust must be a resident trust for CGT purposes and the company must be an Australian resident; or (b) Both of the following requirements must be satisfied: (i) Each CGT asset must be a CGT asset of the trust that is taxable Australian property at that time; and (ii) The shares in the company mentioned in subsection 122-20(1) must be taxable Australian property just after that time Roll-over relief does not apply to certain CGT assets Under subsection 122-25(2) of the ITAA 1997 the roll-over relief does not apply to the disposal or creation of assets listed in the table, including precluded assets. In a situation where a trust disposes of all of the assets of a business to a company, the rollover will not apply to: (a) A collectable or personal use asset; or (b) A decoration awarded for valour or brave conduct (except if you paid money or gave any other property); or (c) An asset that becomes trading stock of the company just after the disposal or creation (unless it was your trading stock when you disposed of it); or (d) An asset that becomes a registered emissions unit held by the company just after the disposal or creation (unless it was a registered emissions unit held by you when you disposed of it). | Detailed Reasoning - Application of the law to your circumstances: Condition 1 will be satisfied as a CGT event A1 (a 'trigger event') will happen when all of the business assets of the Trust are disposed of to, Company X and Company Y. Condition 2 will be satisfied as the only consideration the Trustee of the Unit Trust will receive for the disposal of the business assets will be shares in the companies and an undertaking by the companies to discharge any liabilities in respect of the assets of the business. Condition 3 will be satisfied as the shares the Trustee of the Unit Trust receives as consideration for the disposal of the business assets will not be redeemable shares. Condition 4 will be satisfied as the market value of the shares the Trustee of the Unit Trust receives as consideration for the disposal of the business assets will be the same as the market value of the asset or assets disposed of, less any liabilities the companies undertake to discharge in respect of the asset or assets (as appropriate). Condition 5 will be satisfied as the Trustee will own all of the shares in the companies just after the time of the trigger event. Condition 6 will be satisfied as the companies will not be exempt from income tax on their ordinary and statutory income because they are exempt entities for the income year of the trigger event. Condition 7 will be satisfied as just after the trigger event Trust will be a resident trust for CGT purposes and the companies will be Australian residents. As all the necessary conditions will be satisfied the Trustee will be able to take advantage of the roll over relief provided for in Subdivision 122-A of the ITAA 1997. | Detailed Reasoning - Status and cost base of shares after roll-over: If the assets transferred to the companies are a mixture of post-CGT and pre-CGT assets, some of the shares received on the roll-over are taken to be pre-CGT shares. The number of shares deemed to be pre-CGT shares is calculated using the formula set out in subsection 122-60(1) of the ITAA 1997. The number of shares (which must be a whole number) deemed to be pre-CGT shares (when expressed as a percentage of all the shares) is the greatest possible that does not exceed the percentage calculated using the formula: Total market value of pre-CGT assets that are not precluded assets, less any liabilities the company undertakes to discharge in respect of those assets x 100 total market value of all assets, less any liabilities the company undertakes to discharge in respect of those assets Section 122-37 of the ITAA 1997 explains how a liability in respect of an asset is worked out. The cost base or reduced cost base of the shares deemed to be post-CGT shares is calculated using the formula set out in subsections 122-60(2) and (3) of the ITAA 1997. The first element of the cost base/reduced cost base (as appropriate) of each post-CGT share is the sum of the market values of any precluded post-CGT assets and the cost bases/reduced cost bases (as appropriate) of the other post-CGT assets (less any liabilities the company undertakes to discharge in respect of all of those assets) divided by the number of post-CGT shares. Precluded assets are defined in subsection 122-25(3) of the ITAA 1997 as: (a) a depreciating asset; or (b) trading stock; or (c) an interest in the copyright in a film referred to in section 118-30; or (d) a registered emissions unit | Detailed Reasoning - All assets post-CGT assets: If all the assets that are transferred were acquired after 20 September 1985, the cost base of the shares is calculated according to the rules set down in section 122-50 of the ITAA 1997. All of the shares will be taken to have been acquired after 20 September 1985. | Detailed Reasoning - All assets pre-CGT assets: If any of the assets transferred are precluded assets, not all the shares will be taken to be pre-CGT shares. The number of pre-CGT shares is calculated using the formula in subsection 122-55(2) of the ITAA 1997. The cost base of the post-CGT shares is calculated using the formula in subsection 122-55(3) of the ITAA 1997. | Detailed Reasoning - Basic conditions for the CGT small business concessions: The basic conditions for access to the CGT small business concessions are set out in section 152-10 of the ITAA 1997: "A capital gain (except a capital gain from CGT event K7) you make may be reduced or disregarded under this Division if the following basic conditions are satisfied for the gain: (a) a CGT event happens in relation to a CGT asset of yours in an income year; (b) the event would (apart from this Division) have resulted in the gain; (c) at least one of the following applies: (i) you are a small business entity for the income year; (ii) you satisfy the maximum net asset value test (see section 152-15); (iii) you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an interest in an asset of the partnership (iv) the conditions mentioned in subsection (1A) or (1B) are satisfied in relation to the CGT asset in the income year; (d) the CGT asset satisfies the active asset test (see section 152-35)" | Detailed Reasoning - Active asset test: The CGT asset must pass the 'active asset test' set out in subsection 152-35(1) of the ITAA 1997.Subsection 152-35(1) of the ITAA 1997 states that a CGT asset will satisfy the active asset test if: (a) the taxpayer has owned the asset for 15 years or less and the asset was an active asset of the taxpayer for a total of at least half of the relevant period, or (b) the taxpayer owned the asset for more than 15 years and the asset was an active asset of the taxpayer for a total of at least 7.5 years during the relevant period. | Detailed Reasoning - Meaning of active asset: Subsection 152-40(1) of the ITAA 1997 explains the meaning of 'active asset'. A CGT asset will be an 'active asset' if: (a) you won the asset (either tangible or intangible) and it is used, or held ready for use, in the course of carrying on a business that it is carried on (whether alone or in partnership) by: (i) you; or (ii) your affiliate; or (iii) another entity that is connected with you; or (b) if the asset is an intangible asset - you own it and it is inherently connected with a business that is carried on (whether alone or in partnership) by you, your affiliate, or another entity that is connected with you. | Detailed Reasoning - Shares as active assets: Under subsection 152-40(3) of the ITAA 1997 a share in a resident company or an interest in a resident trust is an active asset at a given time if the taxpayer owns it at that time and the total of the following is 80% or more of the market value of all of the assets of the company or trust: (i) the market values of the company or trust's active assets; (ii) the market value of any financial instruments of the company or trust that are inherently connected with a business that the company or trust carries on; (iii) any cash of the company or trust that is inherently connected with such a business. A share in a company or an interest in a trust is therefore an active asset of the entity claiming the small business concessions if the company or trust itself has active assets and the 80% test is met. It is necessary to 'look through' the company or trust to establish whether the 80% of the company's or trust's assets are active assets. To satisfy the active asset test in section 152-35 of the ITAA 1997, a CGT asset must be an active asset for at least half of a particular period. For a share in an Australian resident company to meet this requirement, the company must satisfy the 80% test for that same period. Additional basic conditions for shares in a company or interests in a trust | Detailed Reasoning - 152-10(2): If the *CGT asset is a *share in a company or an interest in a trust (the object company or trust ), one of these additional basic conditions must be satisfied just before the *CGT event: (a) you are a *CGT concession stakeholder in the object company or trust; or (b) CGT concession stakeholders in the object company or trust together have a *small business participation percentage in you of at least 90%. | Detailed Reasoning - Example:: A discretionary trust sells shares in an operating company (the object company). Anna receives 90% of the distributions from the trust, and the trust has a 50% interest in the object company. The trust cannot be a CGT concession stakeholder in the object company because it is not an individual and therefore cannot satisfy paragraph (2)(a). However, the trust can satisfy paragraph (2)(b) because Anna is a CGT concession stakeholder in the object company (because her small business participation percentage in the object company is 45%, which is greater than 20%) and her small business participation percentage in the trust is 90%. Section 152-60 of the ITAA 1997 states that an individual is a CGT concession stakeholder of a company or trust if the individual is: (a) a significant individual in the company or trust; or (b) a spouse of a significant individual in the company or trust, if the spouse has a small business participation percentage in the company or trust at the time that is greater than zero. The term 'significant individual' is given its meaning in section 152-55 of the ITAA 1997 as an individual that has a small business participation percentage in the company or trust of at least 20%. The small business participation percentage can either be direct or indirect - refer sections 152-70 and 152-75 of the ITAA 1997. Application of the law to your circumstances Assuming that the maximum net asset value of the trust, its affiliates and any entities connected with the trust does not exceed $6 million at the time of the disposal of the shares in Company X and Company Y, the CGT small business concessions will apply to any capital gain made from the disposal of the shares. The shares in Company X and Company Y will be active assets if the market values of the active assets of the companies amount to more than 80% of the market values of all the assets of the companies. The trust will pass the CGT concession stakeholder test as there will be an individual who has an indirect small business participation percentage of at least 20% in the object trust (the entity making the capital gain).

Issue 1 Question 1: Does the rollover relief provided by Division 122 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to the transfer of business assets by the Unit Trust to Company X and Company Y? | Answer: Yes. The trust meets all of the conditions for the rollover relief in Division 122 of the ITAA 1997. | Issue 1 Question 2: What is the CGT status of the shares in Companies X and Y after the Division 122 rollover? | Answer: If the assets transferred to the companies are a mixture of post-CGT and pre-CGT assets, some of the shares received on the roll-over are taken to be pre-CGT shares. The number of pre-CGT shares is calculated using the formula set out in subsection 122-60(1) of the ITAA 1997. | Issue 2 Question 1: Would the CGT small business concessions in Division 152 of the ITAA 1997 apply to a future disposal of shares in Company X and Company Y by the Unit Trust?