Private ruling: Capital gains tax
Published: March 2015
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Does the Commissioner agree that the adjustments to the purchase price either reduced the capital proceeds from the capital gains tax (CGT) event or increased the cost base? | A1: Yes. | Q2: Does the Commissioner agree that the other adjustments will not alter the capital proceeds? | A2: Yes. | Q3: Does the Commissioner agree that the capital gain is a discount capital gain within section 115-5 of the Income Tax Assessment Act 1997 (ITAA 1997) which can be reduced by the discount percentage of 50%? | A3: Yes. | Q4: Does the Commissioner agree that no Specified Entities were an affiliate of the A Trust just before the CGT event? | A4: Yes. | Q5: Does the Commissioner agree that no Specified Entities were connected with the A Trust just before the CGT event? | A5: Yes. | Q6: Does the Commissioner agree that the A Trust is a small business entity for the 2013-14 financial year? | A6: Yes. | Q7: If the answer to question 6 is no, does the Commissioner agree that the A Trust satisfied the maximum net asset value test in sections 152-15 and 152-20 of the ITAA 1997? | A7: Not required. | Q8: Does the Commissioner agree that the goodwill satisfied the active asset test in section 152-35 of the ITAA 1997? | A8: Yes. | Q9: Does the Commissioner agree that the A Trust satisfied the basic conditions in subsection 152-10(1) of the ITAA 1997? | A9: Yes. | Q10: Does the Commissioner agree that the A Trust can apply the 50% active asset reduction? | A10: Yes. | Q11: Does the Commissioner agree that the A Trust can choose to apply the small business rollover concession in Subdivision 152-E of the ITAA 1997? | A11: Yes. | Q12: Does the Commissioner agree that if the A Trust applies the 50% active asset reduction and small business rollover, the capital gain for the 2013-14 financial year will be reduced to nil (assuming that the capital gain in question was the only capital gain made by the A Trust for that financial year)? | A12: Yes. | Q13: Does the Commissioner agree that CGT event E4 will not happen in the hands of each unit holder of the A Trust when it makes a payment of an amount representing the discount amount? | A13: Yes. | Q14: Does the Commissioner agree that CGT event E4 will happen in the hands of each unit holder on the payment of amounts representing the reduction amount and the roll over amount to each unit holder? | A14: Yes. | Q15: Does the Commissioner agree that any capital gain from CGT event E4 in section 104-70 of the ITAA 1997 in the hands of a unit holder on the payment of amounts representing the reduction amount and the rollover amount will be a discount capital gain? | A15: Yes. | Q16: Does the Commissioner agree that any capital gain arising from the happening of CGT event E4 in section 104-70 of the ITAA 1997 in the hands of a unit holder on the payment by the A Trust of amounts representing the reduction amount and the rollover amount to the unit holder could be reduced or disregarded under the small business concessions? | A16: Withdrawn.

Relevant facts and circumstances: Specified Entities means any of the following entities; the C Trust, the D Trust, the E Trust, Company A, the B Trust, the F Trust, the G Trust, Individual A, Individual B, Individual C, Individual D, Company B, Company C and Company D. Company A Company A is a proprietary company. The directors of Company A are Individual D, Individual A and Individual C. The secretary of Company A is Individual A. The shareholders of Company A are: • Company C - X ordinary shares • Individual A - X ordinary shares • Individual C - X ordinary shares Company A acts as trustee of the A Trust and the B Trust. Company A does not own assets in its own capacity nor does it carry on activities in its own capacity. A Trust The A Trust is a fixed unit trust. The Trustee of the A Trust is Company A. The unit holders of the A Trust at the time of the CGT event were and continue to be the C (X units), the D Trust (X units) and the E Trust (X units). The unit holders have held their respective units for at least 12 months. The A Trust signed a contract to acquire a business in 20XX. Settlement under the contract occurred in 20YY. The seller was unrelated to the A Trust and they dealt with each other at arm's length. According to the profit and loss statement of the A Trust for the income year ended 30 June 20TT, the net operating profit of the trust was less than $2 million. In 20ZZ the A Trust entered into a contract to sell the business. B Trust The B Trust is a fixed unit trust. The trustee of the B Trust is Company A. The unit holders of the B Trust at the time of the CGT even were and continue to be the C (X units), the D Trust (X units) and the E Trust (X units). The B Trust signed a contract to acquire a business in 20XX. Settlement under the contract occurred on in 20YY. The seller under the contract was unrelated to the B Trust and they dealt with each other at arm's length. According to the profit and loss statement of the B Trust for the income year ended 30 June 20YY, the net operating profit of the trust was less than $2 million, which was distributed equally to the unit holders. During the 20ZZ financial year, the B Trust entered into a contract with to sell the business. The C Trust The C Trust is a discretionary trust. The C Trust is associated with Individual A and their spouse. The trustee and appointer of the C is Individual A. The beneficiaries of the C include Individual A and certain individuals, companies and trusts associated with them. For the income years ended 30 June 2010, 2011, 2012 and 2013 the C Trust distributed all its income to one or more of Individual A, their spouse, children and the F Trust. To the extent that the C Trust made distributions of capital for the income years ended 30 June 2010, 2011, 2012 and 2013, such distributions of capital were made to one or more of Individual A and their spouse. The D Trust The D Trust is a discretionary trust. The D Trust is associated with Individual B and their spouse Individual C. The trustee of the D Trust is Individual B. The beneficiaries of the D Trust include Individual B and Individual C and certain individuals associated with them. For the income years ended 30 June 2010, 2011, 2012 and 2013 the D Trust distributed all its income to Individual B and/or Individual C. There were no distributions of capital of the D Family Trust for the 2010, 2011, 2012 and 2013 income years. The E Trust The E Trust is a discretionary trust. The E Trust is associated with Individual D and their spouse. The trustee of the E Trust is Company C. The appointer of the E Trust is Individual D. The beneficiaries of the E Trust include Individual D and their spouse and certain individuals, companies and trust associated with them. For the income year ended 30 June 20YY the E Trust distributed all its income to one or more of Individual D and their spouse and children. There were no distributions of capital of the E Trust for the income year ended 30 June 20YY. The F Trust The F Trust is a discretionary trust. The F Trust is associated with Individual A and their spouse. The trustee for the F Trust is Company B. The appointer of the F Trust is Individual A. The beneficiaries of the F Trust include Individual A and spouse and certain individuals, companies and trust associated with them. For the income years ended 30 June 2012 and 2013 the F Trust distributed all its income to one or more of the C Trust, Individual A and a spouse. The F Trust had no income in the 20WW income year. There were no distributions of capital of the F Trust for the 2011, 2012 and 2013 income years. During the 20ZZ financial year the F Trust entered into a contract to sell a business which it carried on. The G Trust The G Trust is a discretionary trust. The G Trust is associated with Individual A and their spouse. The trustee of the G Trust is Company B. The appointer of the G Trust is Individual A. The beneficiaries of the G Trust include Individual A and their spouse and certain individuals, companies and trust associate with them. For the income years ended 30 June 2012 and 2013, the G Trust distributed all its income to one or more of the C, the F Trust, Individual A, their spouse and children. The G Trust had no income in the 20WW income year. There were no distributions of capital of the G Trust for the 2011, 2012 and 2013 income years. During the 20ZZ financial year, the G Trust entered into a contract with to sell a business which it carried on. Company C Company C is a proprietary company. Company C is associated with Individual D and their spouse. The sole director and secretary of Company C is Individual D. Company C carries on some activities unrelated to the activities carried on by the E Trust in its own capacity. Company B Company B is a proprietary company. Company B is associated with Individual A. The sole directory and secretary of Company B is Individual A. The sole shareholder of Company B is Individual A (X ordinary shares). Individual A does not beneficially own these shares. Company B does not own assets in its own capacity nor does it carry on activities in its own capacity. D Pty Ltd Company D is a proprietary company. Company D is associated with Individual B and their spouse Individual C. The directors of company D are, Individual B and Individual C. The sole secretary of company D is Individual C. The shareholders of company D are: • Individual B - X ordinary shares • Individual C - X ordinary shares Individuals Individual A does not carry on a business in their individual capacity. Individual A is the son of Individual B and Individual C. Individual B does not carry on a business in their individual capacity. Individual C does not carry on a business in their individual capacity. Individual B and Individual C are married. Individual D does not carry on a business in their individual capacity. Sale of the A Business The A Trust agreed to sell the business and the business assets. The terms of the contract contained several adjustments to the completion payment including bond amounts and transfer expenses. Others were associated with employment entitlements.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 152-A | Income Tax Assessment Act 1997 Subdivision 152-E | Income Tax Assessment Act 1997 section 104-70 | Income Tax Assessment Act 1997 subsection 104-71(4) | Income Tax Assessment Act 1997 subsection 104-185(1) | Income Tax Assessment Act 1997 section 115-5 | Income Tax Assessment Act 1997 subsection 152-10(1) | Income Tax Assessment Act 1997 subsection 152-10(2) | Income Tax Assessment Act 1997 section 152-15 | Income Tax Assessment Act 1997 section 152-20 | Income Tax Assessment Act 1997 section 152-35 | Income Tax Assessment Act 1997 section 152-40 | Income Tax Assessment Act 1997 subsection 152-40(4) | Income Tax Assessment Act 1997 section 328-125 | Income Tax Assessment Act 1997 subsection 328-125(2) | Income Tax Assessment Act 1997 paragraph 328-125(2)(a) | Income Tax Assessment Act 1997 paragraph 328-125(2)(b) | Income Tax Assessment Act 1997 subsection 328-125(7) | Income Tax Assessment Act 1997 section 328-130

Reasons for decision: Detailed Reasoning - Capital proceeds: Whatever you receive as a result of a CGT event is referred to as your 'capital proceeds'. For most CGT events, your capital proceeds are an amount of money or the value of any property you receive, or are entitled to receive. In this case, the bond amounts reduced the amount of capital proceeds the A Trust were entitled to receive. However, others such as transfer costs were incidental costs of the sale which were paid by the A Trust. These amounts should be included in the cost base. Note that the remaining adjustments will not alter the capital proceeds. | Detailed Reasoning - Discount capital gain: Use the discount method to calculate your capital gain if: • you are an individual, a trust or a complying superannuation entity • a CGT event happens to an asset you own • the CGT event happened after 11.45am (by legal time in the ACT) on 21 September 1999 • you acquired the asset at least 12 months before the CGT event, and • you did not choose to use the indexation method. The discount percentage is the percentage by which you reduce your capital gain. You can reduce the capital gain only after you have applied all the capital losses for the income year and any unapplied net capital losses from earlier years. The discount percentage is 50% for trusts. In this case, the A Trust has owned the business for more than 12 months. Therefore, they are entitled to apply the 50% discount. | Detailed Reasoning - Affiliates: An affiliate is defined by section 328-130 of the ITAA 1997 as being an individual or company who 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. Relevant factors that may support a finding that a person acts in such a manner include: • the existence of a close family relationship between the parties; • the lack of any formal agreement or formal relationship between the parties dictating how the parties are to act in relation to each other; • the likelihood that the way the parties act, or could reasonably be expected to act, in relation to each other would be based on the relationship between the parties rather than on formal agreements or legal or fiduciary obligations; and • the actions of the parties. 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. As discussed above, a trust cannot be your affiliate. Therefore, the F Trust, the G Trust, the B Trust, the C, the D Trust and the E Trust are not affiliates of the A Trust. Individual D, Individual A, Individual C and Individual B did not conduct any business activities in their individual capacities. Therefore, they are not considered affiliates of the A Trust. Company A, Company B and D did not conduct any business activities. Therefore they are not considered affiliates of the A Trust. Company C carried on an unrelated business in its own capacity. We accept, given the information provided, that this entity's business was carried on independently from the A Trust, The B Trust and each unit holder. Therefore, Company C is not an affiliate of the A Trust. | Detailed Reasoning - Connected entities: The meaning of a connected entity is defined under section 328-125 of the ITAA 1997 which states as follows: An entity is connected with another entity if: (a) either entity controls the other entity in the way described in this section; or (b) both entities are controlled in a way described in this section by the same third entity. Different control rules apply to different types of entities. That is, different control tests apply to companies, non-discretionary trusts, discretionary trusts and partnerships. | Detailed Reasoning - Connected with a company or fixed trust: The direct control rules for a non-discretionary trust and company are contained in subsection 328-125(2) of the ITAA 1997. Paragraph 328-125(2)(a) of the ITAA 1997 provides that you control a company or non-discretionary trust if you, your affiliates, or you together with your affiliates beneficially own, or have the right to acquire the beneficial ownership of, interests in the entity that carry between them the right to receive a percentage (the control percentage ) that is at least 40% of any distribution of income or capital by the entity. Paragraph 328-125(2)(b) of the ITAA 1997 provides that you control a company if you, your affiliates, or you together with your affiliates beneficially own, or have the right to acquire the beneficial ownership of, equity interests in the company that carry between them the right to exercise, or control the exercise of, a percentage (the control percentage ) that is at least 40% of the voting power in the company. | Detailed Reasoning - Connected with a discretionary trust: 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. 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. An entity can control another entity indirectly in the manner described in subsection 328-125(7) of the ITAA 1997: This 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 application of this section, controlled by the second entity. | Detailed Reasoning - The B Trust: The B Trust does not have any affiliates and does not hold any interest in the A Trust. The A Trust does not hold any interest in the B Trust. Further, we accept that there is no third entity which controls both the A Trust and the B Trust. Therefore, the B Trust is not connected with the A Trust. | Detailed Reasoning - Unit holders (the C Trust, the D Trust and the ETrust): The unit holders are not affiliates of one another (as a trust cannot be an affiliate of another entity). Each unit holders holds less than a 40% interest in the A Trust. We accept that there is no third entity which controls both the A Trust and any of the unit holders. Further we accept the trustee of each unit holder did not act, nor could have been reasonably expected to act, in accordance with the direction or wishes of the A Trust. Therefore, the unit holders are not connected with the A Trust. | Detailed Reasoning - Company A: Company A does not have any affiliates and does not hold any interest in the A Trust. The A Trust does not hold any interest in Company A. We accept that there is no third entity that controls both the A Trust and Company A. | Detailed Reasoning - Other Specified Entities: We accept that none of the remaining Specified Entities are connected with the A Trust. | Detailed Reasoning - Small business entity: You will be a small business entity if you are an individual, partnership, company or trust that is carrying on a business and has an aggregated turnover of less than $2 million. In this case, the A Trust has a turnover of less than $2 million. As discussed above, we do not consider that any of the Specified Entities are affiliates or connected with the A Trust. Therefore, the A Trust is a small business entity. | Detailed Reasoning - Question 7: As the trust satisfies the small business entity test, we have not considered the maximum net asset value test. | Detailed Reasoning - Active asset test: A requirement of the active asset test contained in section 152-35 of the ITAA 1997 is that the CGT asset must be an active asset for at least half of the period from when you acquired it until the earlier of the CGT event or when you ceased business, if the relevant business had ceased to be carried on in the 12 months before the CGT event. The meaning of an active asset is set out in section 152-40 of the ITAA 1997. It must firstly satisfy one of the 'positive tests' in subsection 152-40(1) of the ITAA 1997 and then also not be excluded by one of the exceptions in subsection 152-40(4) of the ITAA 1997. A CGT asset is an active asset if it is owned by you and is: • used or held ready for use in a business carried on (whether alone or in partnership) by you, your affiliate, your spouse or child, or an entity connected with you, or • an intangible asset for example, goodwill that is inherently connected with a business carried on (whether alone or in partnership) by you, your affiliate, your spouse or child, or another entity that is connected with you. The combined effect of sections 152-35 and 152-40 of the ITAA 1997 is that the asset will meet the active asset test if the asset was used, or held ready for use, in the course of carrying on a business for at least half of the time period it was owned, subject to the exclusions in subsection 152-40(4) of the ITAA 1997. In this case, we accept that the goodwill was inherently connected with the business carried on by the A Trust for the entire ownership period and that no exclusions apply. Therefore, it will satisfy the active asset test. | Detailed Reasoning - Basic conditions: The basic conditions for the small business CGT concessions are set out in Subdivision 152-A of the ITAA 1997. The basic conditions relevant in this case are the small business entity test and the active asset test. As discussed above, the A trust is a small business entity and the goodwill is an active asset. Therefore, the basic conditions have been satisfied. | Detailed Reasoning - Question 10: The 50% active asset reduction can apply if the basic conditions are satisfied. As discussed, the A trust has satisfied the basic conditions and is therefore entitled to apply the 50% active asset reduction. | Detailed Reasoning - Question 11: The conditions surrounding the small business rollover are contained in Subdivision 152-E of the ITAA 1997. The small business rollover allows an entity to defer all or part of a capital gain made from a CGT event happening to an active asset. If an entity chooses the rollover concession, all or part of the capital gain will not be included in their assessable income until a change in circumstances happens, for example the replacement asset is sold. Under subsection 104-185(1) of the ITAA 1997 CGT event J2 happens if an entity chooses the rollover concession and a change in circumstances happens. When the change occurs, the deferred capital gain will crystallise. When an entity disposes of a replacement asset, CGT event A1 happens in addition to CGT event J2. Any capital gain made from the A1 event on the disposal of the replacement asset may qualify for any of the small business CGT concessions if the relevant conditions are satisfied. In this case, the A Trust sold the business. The Trust can choose to apply the small business rollover concession to defer the part of the capital gain that remains after applying the 50% general discount and the 50% active asset reduction. | Detailed Reasoning - Question 12: If the A Trust applies the concessions as discussed above, the capital gain will be reduced to nil. | Detailed Reasoning - Question 13: CGT event E4 in section 104-70 happens when the trustee of a trust makes a non-assessable payment to a beneficiary in respect of the beneficiary's unit or interest in the trust (except for CGT event A1, C2, E1, E2, E6 or E7 happening in relation to it), and some or all of the payment (the non-assessable part) is not included in the beneficiary's assessable income. Subsection 104-71(4) of the ITAA 1997 details that the amount of the non-assessable part referred to in section 104-70 of the ITAA 1997 is adjusted to exclude certain amounts. Item 1 of the table in subsection 104-71(4) of the ITAA 1997 specifically excludes: So much of the amount of a discount capital gain excluded from the net capital gain of the trust making the payment because of step 3 of the method state in subsection 102-5(1) and that is reflected in the payment to the entity Therefore, the part of the payment from the A Trust that represents the discount amount will not trigger CGT event E4 for the unit holders. | Detailed Reasoning - Question 14: If a beneficiary's interest in a trust is fixed (for example, an interest in a unit trust), there are rules to deal with the situation where the trust distributes to the beneficiary an amount of capital gain that was excluded from the trust's net income because it claimed the small business 50% active asset reduction or the small business rollover concession. The distribution of the small business 50% active asset reduction amount and the small business rollover amount is a non-assessable amount under CGT event E4 in section 104-70 of the ITAA 1997. The payment of the amount will firstly reduce the cost base of the beneficiary's interest in the trust. If the cost base is reduced to nil, a capital gain may arise in respect of the beneficiary's interest in the trust. This capital gain may qualify for the CGT discount (after applying any capital losses) if the interest in the trust has been owned by the beneficiary for at least 12 months. Therefore, any amount paid by the A Trust to the unit holders that represents the active asset reduction amount and the rollover amount will give rise to CGT event E4. | Detailed Reasoning - Question 15: As discussed above, a capital gain from CGT event E4 may qualify for the CGT discount if the interest in the trust has been owned by the beneficiary for at least 12 months. In this case, the unit holders have held their interests for more than 12 months. Therefore, they are entitled to apply the general discount. | Detailed Reasoning - Question 16: This question was withdrawn. We have provided the following as general advice which may be of some assistance. Paragraph 9 of TD 2006/71 states that: The small business 50% reduction may apply to the CGT event E4 capital gain if the basic conditions in Subdivision 152-A are satisfied. In particular, paragraph 152-10(1)(a) is satisfied as CGT event E4 happens in relation to the unit in the trust. The maximum net asset value test, the active asset test (incorporating the 80% test) and the additional basic conditions (concession stakeholder tests) in subsection 152-10(2) must also be satisfied. The unit holders may be entitled to apply the small business concessions to the capital gain from CGT event E4 if they satisfy the relevant conditions.