Private ruling: Income tax - capital gains tax - small business concessions
Date of advice: 7 April 2020
Published: May 2020
Ruling period: Year ended 30 June 2018 | Year ended 30 June 2019
Date scheme commenced: 1 July 2017

Ruling: Q1: Is the small business 50% reduction under subdivision 152-C of the Income Tax Assessment Act 1997 (ITAA 1997) available for the sale of the shares? | A1: Yes. | Q2: Is the small business roll-over under subdivision 152-E of the ITAA 1997 available in relation to the new development? | A2: Yes. | Q3: Is entity A an eligible entity for the purpose of applying the lower corporate tax rate of 27.5% for the 2017-18 and 2018-19 income years? | A3: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 Division 152 | Income Tax Assessment Act 1997 Section 152-10 | Income Tax Assessment Act 1997 Subdivision 152-A | Income Tax Assessment Act 1997 Subdivision 152-C | Income Tax Assessment Act 1997 Subdivision 152-E | Income Tax Rates Act 1986 Subsection 23(2) | Income Tax Rates Act 1986 Section 23AA | Income Tax Rates Act 1986 Section 23AB

Reasons for decision: Summary: Small business capital gains tax relief and basic conditions Division 152 of the ITAA 1997 provides for CGT relief for small business. An entity makes a capital gain if the capital proceeds from the disposal of the asset are more than the asset's cost base. Subsection 152-10(1) of the ITAA 1997 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; (b) the event would have resulted in a 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 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. Additional basic conditions Subsection 152-10(2) of the ITAA 1997 provides additional conditions if the CGT asset is a share in a company (the object entity). For CGT events happening on or after 8 February 2018, subsection 152-10(2) states: (a) the CGT asset would still satisfy the active asset test (see section 152-35) if the assumptions in subsection (2A) were made; (b) if you do not satisfy the maximum net asset value test (see section 152-15) - you are carrying on a *business just before the *CGT event; (c) either: (i) the object entity would be a CGT small business entity for the income year; or (ii) the object entity would satisfy the maximum net asset value test (see section 152-15); (iii) if the following assumptions were made: (iv) the only CGT assets or *annual turnovers considered were those of the object entity, each affiliate of the object entity, and each entity controlled by the object entity in a way described in section 328-125; (v) each reference in section 328-125 to 40% were a reference to 20%; (vi) no determination under subsection 328-125(6) were in force; (d) just before the CGT event, either: (i) you are a *CGT concession stakeholder in the object entity; or (ii) CGT concession stakeholders in the object entity together have a small business participation percentage in you of at least 90%. Active asset test Subsection 152-35(1) of the ITAA 1997 provides that a CGT asset satisfies the active asset test if: (i) 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 (ii) 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 7½ years during the relevant period. Subsection 152-35(2) of the ITAA 1997 provides that the relevant period begins when you acquired the asset and ends at the CGT event. Section 152-40 of the ITAA 1997 explains the meaning of an active asset. A CGT asset is an active asset at a time if, at that time: (i) 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 (ii) 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. Subsection 152-40(3) of the ITAA 1997 provides that a CGT asset is also an active asset 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. CGT concession stakeholder and significant individual test 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. Section 152-55 of the ITAA 1997 provides that an individual is a significant individual in a company at a time, if at that, the individual has a small business participation percentage in the company of at least 20%. Section 152-60 of the ITAA 1997 provides that an individual is a CGT concession stakeholder of a company at a time if the individual is: (a) a significant individual in the company; or (b) a spouse of a significant individual in the company, if the spouse has a small business participation percentage in the company at that time that is greater than zero. Small business 50% reduction Subdivision 152-C of the ITAA 1997 tells you about the small business 50% reduction. Apart from the basic conditions as outlined above, there are no other requirements to get the small business 50% reduction. Therefore the CGT small business 50% reduction can apply when the basic conditions are met. Small business rollover 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. To qualify for the small business rollover, you must satisfy the basic conditions in Subdivision 152-A of the ITAA 1997 as outlined above. You also need to acquire a replacement asset or make a capital improvement to an existing asset within the replacement asset period. The replacement asset period starts one year before and ends two years after the last CGT event that occurs in the income year for which you choose the rollover, or a longer period that the Commissioner allows. The replacement asset needs to be an active asset at the end of the replacement asset period. The capital gain that is being rolled over cannot be more than the sum of the following: · the amount paid to acquire the replacement asset (that is, the first element of the cost base of the replacement asset) · any incidental costs incurred in acquiring that asset, which can include giving property (that is, the second element of the cost base of the replacement asset), and · the amount expended on capital improvements to one or more assets that were acquired or already owned (that is, fourth element expenditure). If the rollover conditions are not met within the replacement asset period the gain will become assessable. CGT event J6 (section 104-198 of the ITAA 1997) 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. Application to your circumstances In this case, entity A satisfies the basic conditions outlined in Subdivision 152-A of the ITAA 1997. Therefore, entity A can choose to reduce its capital gain by 50%. Entity A is also able to choose the small business rollover in Subdivision 152-E of the ITAA 1997. The new asset qualifies as a replacement asset. Company tax rate The rate of tax in respect of the taxable income of a company is 27.5% if the company is a base rate entity for a year of income (subsection 23(2) of Income Tax Rates Act 1986 (ITRA). An entity is a base rate entity under section 23AA of the ITRA for a year of income if: · no more than 80% of its assessable income for the year of income is base rate entity passive income; and · its aggregated turnover for the year of income, worked out at the end of that year, is less than $25 million for the 2017-18 income year, or less than $50 million for the 2018-19 income year. Base rate entity passive income is defined under subsection 23AB(1) of the ITRA to be assessable income that is any of the following: · a distribution by a corporate tax entity, other than a non-portfolio dividends; · an amount of a franking credit on such a distribution; · a non-share dividend by a company; · interest or payments in the nature of interest, royalties and rent; · a gain on a qualifying security; · a net capital gain; · an amount included in the assessable income of a partner in a partnership or of a beneficiary of a trust estate to the extent that the amount is referable to another amount that is base rate entity passive income as listed above. Entity A satisfies the above requirements and is therefore eligible to be taxed at 27.5%.

Relevant facts: Entity B is sole director and joint shareholder of entity A. | Entity A has been operating for many years. | Entity A entered into an agreement with entity C to create a new startup business to offer a service. | On xxxx a new company, entity D was created. Entity A held xx% shareholding in entity D having xx fully paid ordinary shares as well as xx fully paid non-voting shares. | Entity A agreed to fund entity D to develop and promote the service. This amounted to a value of approximately $xxx. | After entity D started trading and had some money, the initial investment was being repaid at the rate of $xx per month. | Entity D was operating for about x years before entity E, offered to buy it out. | After a few months of negotiation, on xxxx, entity D was offered a Share Sale Deed. The initial deal was for the amount of $xx payable at the transaction date and the second part of $xx in x years if KPI's were achieved. | There was a clause in the Deed that entity E had to pay the full amount regardless of KPIs should they get acquired. On xxxx, entity E got acquired by entity F. | As a result, by the end of xxxx, the second instalment had been paid. | Entity A had sold its shares and had received $xxx on xxxx and $xxx on xxxx. | Entity B is under 55 and may retire in the next few years. | Entity A is using the share sale proceeds to build a new asset for the betterment of certain businesses. This should be completed in xxxx. | Entity A and entity D are small business entities with an aggregated turnover of less than $2 million. | Less than 80% of the income Entity A receives is base rate entity passive income. | Entity B is a significant individual and a capital gains tax (CGT) concession stakeholder in entity A. | You and your spouse are the only two shareholders in entity A. You own xx% of the shares in entity A. | The shares satisfy the active asset test requirements under subsection 152-35(1) of the ITAA 1997. | The 80% test outlined in subsection 152-40(3) of the ITAA 1997 is satisfied.