Private ruling: CGT small business relief – Business restructure
Date of advice: 25 March 2019
Published: May 2019
Ruling period: Year ending 30 June 20xx
Date scheme commenced: 1 July 20xx

Ruling: Q1: Will you as a Unit Trust satisfy the basic conditions for CGT small business relief in Subdivision 152-A of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes | Q2: Will you as a unitholding trust satisfy the basic conditions for CGT small business relief in Subdivision 152-A of the ITAA 1997? | A2: Yes | Q3: Will you as an individual taxpayer satisfy the meaning of significant individual in section 152-55 for the purposes of significant individual test in section 152-50 of the ITAA 1997? | A3: Yes | Q4: Will you as a unitholding trust satisfy the conditions to utilise the CGT small business 50% (active asset) reduction in Subdivision 152-C of the ITAA 1997? | A4: Yes | Q5: Will you as a unitholding trust satisfy the conditions to utilise the small business rollover in Subdivision 152-E of the ITAA 1997? | A5: Yes | Q6: Will the purchase of shares in a company by you as a discretionary (unitholding) trust before the end of the replacement asset period satisfy the conditions of a replacement asset for the purposes of Subdivision 152-E of the ITAA1997? | A6: Yes | Q7: Will you as a unitholding trust and the individual associated with you satisfy the conditions for the small business retirement exemption in Subdivision 152-D of the ITAA 1997? | A7: Yes

Relevant facts and circumstances: You are a unit trust established for the purpose of operating a financial services business. You have X initial unitholding trusts owning equal number of ordinary units in the unit trust at a subscription price of $X per unit. Your trustee is a company. The individuals connected to you are authorised representatives of a licensed financial services entity. These individuals provide financial services to a range of clients. You and your connected entities and affiliates together will have a combined net asset value under the $6 million threshold for the purposes of the maximum net asset value (MNAV) test. You confirmed that at least 80% of your assets are active assets – in fact this figure is likely to be closer to 100%. Proposed scheme Your unitholders established a company and are proposing to sell their units to the company for market value of $xx million. As consideration for the sale – each unitholding trust will get a certain number of shares in the company plus an amount representing as funds owed by the company to each unitholding trust. The company will not borrow funds to pay for the liability to the sellers (unitholding trusts). Following the proposed sale of the units by the unitholding trusts to the company, you will continue to operate the financial services business. Unitholding trusts The business activity of each unitholding trust is investment operation. Each of the unitholding trusts and their connected entities and affiliates together have a combined net asset value of less than $6 million for the purposes of the MNAV test. In the proposed year of transfer, each of the unitholding trusts will be distributing to individual beneficiary to pass the 90% test and so each trust will also have a significant individual such that there will be an individual in each trust with an interest of at least 20%. The current ages of the individual taxpayers associated with the unitholding trusts are: ● Individual X (Trust 1) – age X ● Individual Y (Trust 2) – age X ● Individual Z (Trust 3) – age X Each of the unitholding trusts propose to apply the CGT 50% general discount and the small business CGT concessions in Division 152 of the ITAA 1997 in relation to the gain made from the sale of their respective units. The CGT concessions include the small business 50% reduction (Subdivision 152-C); the small business rollover (Subdivision 152-E); and the small business retirement exemption (Subdivision 152-D). For Trust 3 and individual Z, the small business retirement exemption is likely to be applied rather than the small business rollover concession. Proposed tax consolidated group The company being recently established by your unitholders has not been trading yet. You and company propose to form a tax consolidated group with the company as the head entity and you will be 100% owned by the company being your only unitholder following the business restructure. You advised that the purpose of undertaking the restructure is to enable the current unitholders to bring in new investors in a structure with a company as the head entity (which is better understood by the market).

Relevant legislative provisions: I ncome Tax Assessment Act 1997 Division 104 | Section 104-10 | Section 104-185 | Section 104-190 | Section 104-197 | Section 104-198 | Division 152 | Subdivision 152-A | Subdivision 152-C | Subdivision 152-D | Subdivision 152-E | Section 152-10 | Section 152-15 | Section 152-35 | Section 152-40 | Section 152-50 | Section 152-55 | Section 152-60 | Section 152-205 | Section 152-210 | Section 152-220 | Section 152-300 | Section 152-305 | Section 152-310 | Section 152-315 | Section 152-320 | Section 152-325 | Section 152-410

Reasons for decision: Detailed Reasoning - Questions 1, 2 and 3: Division 152 of the ITAA 1997 provides for CGT relief for small business. Basic conditions Subsection 152-10(1) sets out the basic conditions for relief as follows: (a) A CGT event happens in relation to a CGT asset that you own in an income year (excluding CGT event D1); (b) The event would have resulted in a gain (apart from Division 152); (c) At least one of the following applies: (i) You are a CGT small business entity for the income year having an aggregated turnover threshold of $2 million; (ii) You satisfy the maximum net asset value (MNAV) test in 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 in subsection 152-10(1A) or (1B) are satisfied in relation to the CGT asset in the income year; (d) The CGT asset satisfies the active asset test in section 152-35. Maximum net asset value (MNAV) test Section 152-15 of the ITAA 1997 provides that the MNAV test is satisfied if, just before the CGT event, the sum of the net value of the CGT assets owned by you and by any entities connected with you and by any affiliates of yours does not exceed the $6 million threshold. The MNAV test treats you and your connected entities and affiliates as one economic unit. However the assets which are assets of an entity that is connected with you and your affiliates are not to be counted twice in calculating the assets’ net value. Active asset test Subsection 152-35(1) provides that a CGT asset satisfies the active asset test if: (a) You have owned the asset for 15 years or less and the asset was an active asset of yours for a total of at least half of the relevant period; or (b) You have owned the asset for more than 15 years and the asset was an active asset of yours for a total of at least 7 ½ years during the relevant period. Subsection 152-35(2) provides that the relevant period begins when you acquired the asset and ends at the CGT event. If the business ceases within 12 months before the CGT event (or such longer time as the Commissioner allows), the relevant period is from the acquisition of the asset until the business ceases. There is no requirement that the asset be active just before the CGT event. Section 152-40 explains the meaning of an active asset. Subsection 152-40(1) provides that a CGT asset is an active asset of yours at a given time if, at that time: (a) You own the asset (whether the asset is tangible or intangible) and it is used, or held ready for use, in the course of carrying on a business that is carried on (whether alone or in partnership) by you, your affiliate or another entity connected with you, or (b) If it is an intangible asset, you own it and it is inherently connected with a business carried on (whether alone or in partnership) by you, your affiliate or another entity connected with you (e.g. goodwill). Subsection 152-40(3) provides that a CGT asset is also an active asset of yours if, at that time you own it and: (a) it is either a share in a company that is an Australian resident at that time or an interest in a trust that is a resident trust for CGT purposes for the income year in which that time occurs; and (b) the total of: (i) the market values of the active assets of the company or trust; and (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; and (iii) any cash of the company or trust that is inherently connected with such a business; is 80% or more of the market value of all of the assets of the company or trust. Additional basic conditions Subsection 152-10(2) provides for additional basic conditions if the CGT asset is a share in a company or an interest in a trust as follows: ● Just the before the CGT event, either: − you must be a CGT concession stakeholder in the company or trust; or − CGT concession stakeholders in the company or trust must have a small business participation percentage in the entity claiming the concession of at least 90%. ● You either: − carried on a business just before the CGT event; or − satisfy the MNAV test. ● The company or trust must satisfy the modified connected entities test (e.g. either the company or trust must be a CGT small business entity or satisfy the MNAV test) ● The CGT asset satisfies a modified active asset test. CGT concession stakeholder and significant individual test Section 152-60 of the ITAA 1997 provides that an individual is a CGT concession stakeholder of a company or trust at a time if the individual is: ● A significant individual in the company or trust; or ● 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 that time that is greater than zero. Section 152-55 of the ITAA 1997 provides that an individual is a significant individual in a company or a trust at a time, if at that, the individual has a small business participation percentage in the company or trust of at least 20%. Section 152-50 of the ITAA 1997 provides that an entity satisfies the significant individual test if the entity had at least one significant individual just before the CGT event. Modified connected entities test/modified active asset test The modified connected entities test treats the entity as controlling another entity if it has a control percentage of at least 20% in that other entity (rather than at least 40%). Any determination by the Commissioner that the entity does not control another entity (a control percentage at least 40% but less than 50%) is disregarded for the modified connected entities test. | Detailed Reasoning - Application to your circumstances: In this case, CGT event A1 will happen to each of the unitholding trusts when they transfer their units in the unit trust to the company. Each of them will make a capital gain from the event apart from the concessions in Division 152 of the ITAA 1997. For you as a unit trust, you confirmed that you and your connected entities and affiliates will have a combined net asset value under the $6 million threshold just before the proposed sale. For the unitholding trusts, it’s also confirmed that each trust and their connected entities and affiliates will have a combined net asset value under the $6 million threshold just before the proposed sale. Therefore, the maximum net asset value test will be satisfied. You confirmed that more than 80% of your assets are used in the business – in fact this figure is likely to be closer to 100%. As such you will satisfy the active asset test. Accordingly the units owned by the unitholding trusts in you (unit trust) will also satisfy the active asset test – see Taxation Determination TD 2006/65. Therefore, the active asset test will be satisfied. For the purposes of the active asset test, it is not required that the assets be active just before the CGT event. You advised that in the proposed year of disposal (2019 income year) the trustee of each of the unitholding trusts will be distributing to individuals to pass the 90% test. As a result each of the unitholding trusts will have a significant individual such that there will be an individual in each trust with an interest (small business participation percentage) in the trust of at least 20%. Therefore, the unitholding trusts will satisfy the significant individual test and the CGT concession stakeholder test. Each of the unitholding trusts will be a connected entity to you having more than 20% interest in the unit trust and each of them is also conducting a business. Therefore the additional conditions in subsection 12-10(2) will also be satisfied. | Detailed Reasoning - Question 4: Small business 50% reduction Subdivision 152-C of the ITAA 1997 provides for the small business 50% (active asset) reduction which allows you to reduce your capital gain by 50%. If that gain had already been reduced by the 50% CGT discount, this concession applies to that reduced gain. To qualify for the small business 50% reduction, you only need to satisfy the basic conditions in Subdivision 152-A as outlined above – section 152-205. The capital gain as reduced by this concession may also qualify for the small business retirement exemption (in Subdivision 152-D) or the small business rollover (in Subdivision 152-E) – subsection 152-210(1). If the gain qualifies for both of those concessions, you may choose which order to apply them in – subsection 152-210(2). You may choose not to apply this concession to a particular capital gain – section 152-220. If you make that choice, you may apply the small business retirement exemption instead. | Detailed Reasoning - Application to your circumstances: In this case, as you and the unitholding trusts will satisfy the basic conditions in Subdivision 152-A, each of the unitholding trust is able to choose the small business 50% reduction to reduce the capital gain by 50%. If the capital gain has been reduced already by the general CGT 50% discount, this concession will apply to that reduced gain allowing a total of 75% reduction of the capital gain. | Detailed Reasoning - Questions 5 and 6: Small business rollover Subdivision 152-E of the ITAA 1997 provides for the small business rollover which allows you to defer the making of a capital gain from a CGT event happening in relation to one or more of your small business assets. To qualify for the small business rollover, you must satisfy the basic conditions in Subdivision 152-A as outlined above. You may choose the rollover even if you haven’t acquired a replacement asset yet or incurred fourth element expenditure, but: ● CGT event J5 happens if, by the end of the replacement asset period, you do not acquire the replacement asset or incur the fourth element expenditure; and ● CGT event J6 happens if, by the end of the replacement asset period, the cost of the replacement asset or the amount of fourth element expenditure incurred (or both) is less than the amount of the capital gain you disregarded. If you have acquired a replacement asset or incurred fourth element expenditure but there is a change in relation to the replacement asset or improved asset after the end of the replacement asset period, CGT event J2 may happen – section 152-410. CGT events relating to small business rollover The benefit of the small business rollover will be reversed by the happening of CGT event J5 in section 104-197 if by the end of the replacement asset period: ● No replacement asset has been acquired an no fourth element expenditure has been incurred in relation to the asset; ● The replacement asset is not an active asset as defined in section 152-40; or ● If the replacement asset is a share in a company or an interest in a trust – you or a connected entity is not a CGT concession stakeholder in the company or trust; or CGT concession stakeholders in the company or trust do not have a small business participation percentage in you of at least 90%. The capital gain for the purposes of CGT event J5 will be equal to the previous capital gain that was rolled over under Subdivision 152-E. CGT event J6 in section 104-198 happens if the cost of acquisition of replacement asset or amount of fourth element expenditure or both are not sufficient to cover the disregarded gain. The time of the event is at the end of the replacement asset period. The replacement asset period may be modified or extended as provided in section 104-190 of the ITAA 1997. CGT event J2 in section 104-185 happens where certain changes to a replacement asset occur as set out in subsection 104-185(2) as follows: (a) The asset stops being your active asset subject to the exception prescribed in subsection 104-185(8); (b) The asset becomes your trading stock; (c) You start to use the asset solely to produce your exempt income or non-assessable non-exempt income. The time of the event is when the change happens – subsection 104-185(4). The capital gain made from the event is determined based on subsections 104-185(5), (6) and (7). | Detailed Reasoning - Application to your circumstances: In this case, as you (unit trust) and the unitholding trusts will satisfy the basic conditions outlined in Subdivision 152-A, each of the unitholding trust is able to choose the small business rollover in Subdivision 152-E. The proposed replacement assets will be shares in the company. The shares in the company will qualify as replacement assets because they are active assets within the meaning of section 152-40 and the Company has a CGT concession stakeholder. It is proposed the company will be the head entity of a tax consolidated group owning 100% of the units in you (unit trust) following the proposed transfer of the units by the unitholding trusts to the company. This makes you a connected entity to the company. As confirmed more than 80% of your assets are active assets. As you are conducting a business and a connected entity to the company, the shares in the Company will also qualify as active assets under subsection 152-40. Therefore each of the said unitholding trusts are eligible to choose the small business rollover in Subdivision 152-E and may treat the shares in the company as replacement assets for rollover purposes. The shares will need to be purchased during the replacement asset period. There are CGT events relating to the small business rollover which may cancel the benefit of the rollover if certain conditions are satisfied, for example CGT event J5, J6 and J2. | Detailed Reasoning - Question 7: Small business retirement exemption Subdivision 152-D of the ITAA 1997 provides for the small business retirement exemption which allows you to choose to disregard a capital gain from a CGT event happening to a CGT asset of your small business if the capital proceeds from the event are used in connection with your retirement. There is a lifetime limit of $500,000 for all choices that can be made in respect of an individual under this Subdivision. You do not need to satisfy the basic conditions for this exemption in relation to CGT events J5 and J6 – section 152-300. Individual choosing the exemption Subsection 152-305(1) provides that if you are an individual, you can choose to disregard all or part of a capital gain if: a) The basic conditions in Subdivision 152-A are satisfied for the gain; and b) If you are under 55 just before you make the choice – you contribute an amount equal to the asset’s CGT exempt amount to a complying superannuation fund or an RSA; and c) The contribution is made: i. If the relevant CGT event is CGT event J2, J5 or J6 – when you made the choice; or ii. Otherwise – at the later of when you made the choice and when you received the proceeds. Company or trust choosing the exemption Subsection 152-305(2) provides that a company or a trust (except a public entity) can also choose to disregard such an amount if: (a) The basic conditions in Subdivision 152-A are satisfied for the capital gain; and (b) The company or trust satisfies the significant individual test; and (c) The company or trust conditions in section 152-325 are satisfied, e.g. conditions referring to making a payment to the CGT concession stakeholder and the amount and timing of the payment and such payment being treated as not a dividend and not a frankable distribution. Consequences of choosing the exemption Subsection 152-310(1) provides that if the individual, company or trust makes the choice mentioned in section 152-305 for any part of the capital gain from the CGT asset, that part of the capital gain equal to its CGT exempt amount is disregarded. Subsection 152-310(2) provides that any payment or part of one of the company or trust makes to comply with section 152-325: (a) Is not assessable income, and is not exempt income, of the CGT concession stakeholder to whom it is made; and (b) Cannot be deducted from the assessable income of the company or trust. Subsection 152-310(3) provides that if: (a) The paying entity receives a payment (whether directly or indirectly through one or more interposed entities) that a company or trust makes to comply with section 152-325; and (b) The paying entity passes on the payment to the CGT concession stakeholder or another interposed entity; Then: (c) The payment cannot be deducted from the paying entity’s assessable income; and (d) The payment received by the paying entity is not assessable income and is not exempt income. Choosing the amount to disregard Subsections 152-315(1) and (2) provide that you can choose to disregard all or part of each capital gain to which the small business retirement exemption applies. However, the choice must be made in a way that ensures that: (a) For an individual – your CGT retirement exemption limit is not exceeded; or (b) For a company or trust – the CGT retirement exemption limit of each individual for whom the choice is made is not exceeded. The amount chosen for the asset is its CGT exempt amount and that amount must be specified in writing – subsections 152-315(3) and (4). If the company or trust is making the choice and it has more than one CGT concession stakeholder, it must specify in writing the percentage of each CGT asset’s CGT exempt amount that is attributable to each of those stakeholders. One or more of the percentages may be nil, but all of the percentages must add up to 100% - subsection 152-315(5). Meaning of CGT retirement exemption limit Subsection 152-320(1) provides that an individual’s ‘CGT retirement exemption limit’ at a time is $500,000 reduced by the CGT exempt amounts of CGT assets specified in choices previously made by or for the individual under Subdivision 152-D. | Detailed Reasoning - Application to your circumstances: In this case, if the unitholding trusts will choose to apply small business 50% reduction in Subdivision 152-C and the small business rollover in Subdivision 152-E to reduce the capital gain, the reduced capital gain will also qualify for the small business retirement exemption in Subdivision 52-D. In relation to Trust 3, as explained the trust will satisfy the basic conditions outlined in Subdivision 152-A including the significant individual test. If individual Z is the only CGT concession stakeholder in the trust, that person will get 100% of the exempt amount. It is not required for the trustee to make a contribution to a complying super fund on behalf of individual Z because that person is over the age of 55 years. The requirement to make a payment to the concession stakeholder is seven days after the choice is made to disregard the gain by applying the retirement exemption. Generally the choice is made when you lodge the trust tax return for the income year. In choosing the amount of capital gain to be disregarded, the CGT retirement exemption limit must not be exceeded.