Private ruling: Capital gains tax concessions for small business
Published: September 2013
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Do you satisfy the basic conditions required to be able to access the capital gains tax (CGT) for small business? Answer: Yes

Relevant facts and circumstances: You (the Trust) are a discretionary trust. You own shares in Company A, an Australian resident company. You hold X% of the ownership of Company A. You have sold your shares in Company A. You state that the only assets of the trust are the shares held in Company A. You state that you do not control, or have significant influence over Company A. You state that the value of the active assets of Company A make up more than 80% of the total assets. You state that this 80% level was satisfied for at least half the time you held the shares in Company A. You state that X is the CGT concession stakeholder of the trust. They will receive more than 90% of the distributions from the trust in the relevant financial year. X and Y are the controllers of the trust. You have borrowed a sum of money to return original capital invested to the affiliates. The affiliates have contributed the sum to superannuation as a voluntary contribution (non-concessional). You state that X and Y have a Y% interest in a partnership. You state that the X Trust is jointly controlled by X and Y. The only asset of the X Trust is a block of land used solely for the personal use and enjoyment of X and Y. The connected entities and affiliates of the trust (and entities connected with your affiliates) include; · X · Y · The partnership · X and Y's self-managed superannuation fund · X Trust You have provided the values of the assets and liabilities of your connected entities and affiliates which, when totalled, is less than $6 million.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 152-10 | Income Tax Assessment Act 1997 Section 152-15 | Income Tax Assessment Act 1997 Section 152-35 | Income Tax Assessment Act 1997 Section 152-40 | Income Tax Assessment Act 1997 Section 152-60 | Income Tax Assessment Act 1997 Section 152-55 | Income Tax Assessment Act 1997 Section 152-65 | Income Tax Assessment Act 1997 Section 152-70 | Income Tax Assessment Act 1997 Section 152-75 | Income Tax Assessment Act 1997 Section 328-130 | Income Tax Assessment Act 1997 Section 328-125 | Income Tax Assessment Act 1997 Section 152-20

Reasons for decision: Detailed Reasoning - Small business CGT concession eligibility: Section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997) contains the basic conditions you must satisfy to be eligible for the small business capital gains tax (CGT) concessions. These conditions are: (a) a CGT event happens in relation to a CGT asset in an income year. (b) the event would 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 (MNAV) in section 152-15 of the ITAA 1997 (iii) you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an asset of the partnership or (iv) the conditions in subsection 152-10(1A) or (1B) of the ITAA 1997 are satisfied in relation to the CGT asset in the income year. (a) the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997. Subsection 152-10(2) of the ITAA 1997 provides that 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%. You have disposed of shares in Company A to a third party, accordingly, CGT event A1 has occurred. The disposal has resulted in a capital gain and therefore you meet conditions (a) and (b) of the basic conditions. Therefore, we need to establish whether you satisfy the MNAV test (condition (c)), the active asset test (condition (d)) and one of the additional conditions relating to shares in a company as listed in subsection 152-10(2) of the ITAA 1997. | Detailed Reasoning - Active asset test (condition (d)): Section 152-40 of the ITAA 1997 provides the meaning of 'active asset'. A CGT asset will be an active asset at a time if, at that time, you own the asset and the asset was used or held ready for use by you, an affiliate of yours, or by another entity that is 'connected with' you, in the course of carrying on a business. Subsection 152-35(1) of the ITAA 1997 states that a CGT asset satisfies the active asset test if: · 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 period of ownership, or · 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 and a half years. Subsection 152-40(3) of the ITAA 1997 provides that a share in a company that is an Australian resident can also be an active asset. This is provided that the total of: · the market values of the active assets of the company; and · the market value of any financial instruments of the company that are inherently connected with a business that the company carries on; and · any cash of the company that is inherently connected with such a business; is 80% or more of the market value of all of the assets of the company. As the active asset test requires a CGT asset to have been an active asset for at least half of a particular period, as outlined earlier, in order for a share in an Australian resident company to meet this requirement, the company must satisfy the 80% test for that same period. The 80% test will be taken to have been met: · where breaches of the threshold are only temporary in nature (subsection 152-40(3B) of the ITAA 1997), and · in circumstances where it is reasonable to conclude that the 80% threshold has been passed (subsection 152-40(3A) of the ITAA 1997), such as when there have been no significant changes to the assets or liabilities of the company. Importantly, an interest in an entity that itself holds interests in another entity that operates a business may be an active asset, depending on the successive application of the 80% test at each level. In your case, you acquired the shares in Company A on three separate dates. You state that Company A satisfies the 80% test and has satisfied this test for at least half the period that you have held the shares. Accordingly, the shares will satisfy the active asset test. | Detailed Reasoning - CGT concession stakeholder (additional condition): 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 the spouse of a significant individual where 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 explains that an individual is a significant individual in a company or trust if the individual has a small business participation percentage in the trust of at least 20%. The 20% can be made up of direct and indirect percentages. A company or trust satisfies the significant individual test if it had at least one significant individual just before the CGT event. Section 152-65 of the ITAA 1997 provides that an entity's small business participation percentage in another entity at a time is the percentage that is the sum of: a) the entity's direct small business participation percentage in the other entity at that time; and b) the entity's indirect small business participation percentage in the other entity at that time. Subsection 152-70(1) of the ITAA 1997 explains that an entity's direct small business participation percentage in a trust, where entities do not have entitlements to all the income and capital of the trust (such as occurs in a non-fixed trust), and the trust makes a distribution of income or capital, is the percentage of: · distributions of income that the entity is beneficially entitled to during the income year, or · distributions of capital that the entity is beneficially entitled to during the income year. Subsection 152-75(1) of the ITAA 1997 states that you work out the indirect small business participation percentage that an entity (the holding entity) holds at a particular time in another entity (the test entity) by multiplying: (a) the holding entity's direct small business participation percentage (if any) in another entity (the intermediate entity) at that time; by (b) the sum of: i. the intermediate entity's direct small business participation percentage (if any) in the test entity at that time; and ii. the intermediate entity's indirect small business participation percentage (if any) in the test entity at that time (as worked out under one or more other applications of this section). When testing an intermediate entity's indirect small business participation percentage in another entity, the intermediate entity becomes the holding entity. In your case, the CGT asset in question is the shares in Company A. You own X% of the shares in Company A. X will receive 90% of the distribution of income and capital of the trust in the year in which the CGT event (the disposal of shares) happens. Therefore, X will have a direct participation percentage in the trust of 90%. Further, as the trust has a X% participation percentage in Company A, X will have a Z% indirect participation percentage in Company A (90% x Z%). Accordingly, as X holds a Z% small business participation percentage in Company A, they will be a significant individual and CGT concession stakeholder in Company A. As the trust cannot be a CGT concession stakeholder in the object company (Company A) because it is not an individual, it cannot satisfy paragraph 152-10(2)(a) of the ITAA 1997. However, the trust can satisfy paragraph 152-10(2)(b) of the ITAA 1997 because X is a CGT concession stakeholder in Company A (because their small business participation percentage in Company A is Z%, which is greater than 20%) and their small business participation percentage in the trust is 90%. Accordingly, the trust satisfies the additional basic condition required to access the capital gains tax concessions for small business. | Detailed Reasoning - Affiliate: Subsection 328-130(1) of the ITAA 1997 explains that an individual or a company is an affiliate of yours if the individual or company acts, or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you, in relation to the affairs of the business of the individual or company. Trusts, partnerships and superannuation funds cannot be your affiliates. However a trust, partnership or superannuation fund may have an affiliate who is an individual or company. You hold X% of the shares in Company A and have stated that you do not control, or have significant influence over Company A. Therefore, it is unlikely that Company A would act, or reasonably be expected to act in accordance with your directions or wishes, or in concert with you. Accordingly, Company A would not be considered your affiliate and their net assets would not be included in the calculation of the MNAV test for the trust. You state that X and Y are affiliates of the trust, accordingly, the value of their net assets will need to be included in the calculation of the MNAV test for the trust. You state that X and Y's self-managed superannuation fund is an affiliate of the trust, however, a superannuation fund cannot be your affiliate. Further, the personal superannuation accounts of individuals who are your affiliates are not included in the calculation of the MNAV test. Accordingly, the net assets of your affiliates' superannuation fund will not be included in the MNAV test for the trust. | Detailed Reasoning - An entity that is 'connected with' you: Subsection 328-125(1) of the ITAA 1997 explains that an entity is connected with another entity if: a) either entity controls the other entity in a way described in this section; or b) both entities are controlled in a way described in this section by the same third entity. Subsection 328-125(2) of the ITAA 1997 provides that an entity (the first entity) controls another entity if the first entity, its affiliates, or the first entity together with its affiliates: a) beneficially owns, or have the right to acquire the beneficial ownership of, interests in the other entity that give the right to receive a least 40% (the control percentage) of any distribution of income or capital by the other entity: or b) if the other entity is a company - beneficially owns, or has the right to acquire beneficial ownership of, equity interests in the company that give at least 40% of the voting power in the company. Subsection 328-125(3) of the ITAA 1997 explains that an entity (the first entity) controls a discretionary trust if a trustee of the trust acts, or could reasonably be expected to act, in accordance with the directions or wishes of the first entity, its affiliates, or the first entity together with its affiliates. Subsection 328-125(4) of the ITAA 1997 provides that an entity (the first entity) controls a discretionary trust for an income year if, for any of the 4 income years before that year: a) the trustee of the trust paid to, or applied for the benefit of: i. the first entity; or ii. any of the first entity's affiliates; or iii. the first entity and any of its affiliates; any of the income or capital of the trust; and b) the percentage (the control percentage) of the income or capital paid or applied is at least 40% of the total amount of income or capital paid or applied by the trustee for that year. Subsection 328-125(7) states that the section applies to an entity (the first entity) that directly controls another entity (the second entity) as if the first entity also controlled any other entity that is directly, or indirectly by any other application or applications of this section, controlled by the second entity. You hold X% of the shares in Company A, accordingly, as you do not own equity interests in the company that give at least 40% of the voting power, Company A will not be an entity that is 'connected with' you. You hold a Y% interest in a partnership, accordingly, the partnership is an entity 'connected with' you and you will need to include all the assets and liabilities of the partnership in the calculation of the MNAV test for the trust. You state that the X Trust and X and Y's self-managed superannuation fund are entities that are connected with you. | Detailed Reasoning - Maximum net asset value (MNAV) test (condition (c)): Section 152-15 of the ITAA 1997 explains that you satisfy the MNAV test if, just before the CGT event, the sum of the following amounts does not exceed $6,000,000: (a) the net value of the CGT assets of yours; (b) the net value of the CGT assets of any entities connected with you; (c) the net value of the CGT assets of any affiliates of yours or entities connected with your affiliates (not counting any assets already counted under paragraph (b)). Importantly, the Commissioner takes the view, in ATO Interpretative Decision ATO ID 2003/166, that cash or Australian currency is a CGT asset for the purposes of the MNAV test Subsection 152-20(1) of the ITAA 1997 provides that the net value of the CGT assets of an entity is the amount (whether positive, negative or nil) obtained by subtracting from the sum of the market values of those assets the sum of: a) the liabilities of the entity that are related to the assets; and b) the following provisions made by the entity: i. provisions for annual leave; ii. provisions for long service leave; iii. provisions for unearned income; iv. provisions for tax liabilities. Subsection 152-20(2) of the ITAA 1997 provides that in working out the net value of the CGT assets of an entity: a) disregard shares, units or other interests (except debt) in another entity that is connected with the first-mentioned entity or with an affiliate of the first-mentioned entity, but include any liabilities related to any such shares, units or interests; and b) if the entity is an individual, disregard: i. assets being used solely for the personal use and enjoyment of the individual, or the individual's affiliate (except a dwelling, or an ownership interest in a dwelling, that is the individual's main residence, including any adjacent land to which the main residence exemption can extend because of section 118-120); and ii. except for an amount included under subsection (2A), the market value of a dwelling, or an ownership interest in a dwelling, that is the individual's main residence (including any relevant adjacent land); and iii. a right to, or to any part of, any allowance, annuity or capital amount payable out of a superannuation fund or an approved deposit fund; and iv. a right to, or to any part of, an asset of a superannuation fund or of an approved deposit fund; and v. a policy of insurance on the life of an individual. Subsection 152-20(3) of the ITAA 1997 states that in working out the net value of the CGT assets of: (a) your affiliate; or (b) an entity that is connected with your affiliate; include only those assets that are used, or held ready for use, in the carrying on of a business by you or another entity connected with you (whether the business is carried on alone or jointly with others). Subsection 152-20(4) of the ITAA 1997 explains that you disregard assets under subsection (3) that are used, or held ready for use, in the carrying on of a business by an entity that is connected with you only because of your affiliate. In your case, the net assets of X and Y's self-managed superannuation fund will be excluded from the MNAV test by virtue of paragraph 152-20(2)(b) of the ITAA 1997. However, the net assets of the X Trust will need to be included in the MNAV test as the exclusion in paragraph 152-20(2)(b) of the ITAA 1997 for the personal use and enjoyment of assets only refers to individuals. Accordingly, you should include the net assets of the following entities in the calculation of the MNAV test: · You (the Trust) · X · Y · The partnership · X Trust Based on the information provided, you have calculated the MNAV test including the value of the net assets of each of the entities listed above. The value calculated is less than the $6 million MNAV threshold. Accordingly, you satisfy the MNAV test.