Private ruling: Income Tax: Capital Gains Tax: Small Business Concession
Published: June 2012
Ruling period: Financial year ended 30 June 2013 | Financial year ended 30 June 2014 | Financial year ended 30 June 2015
Date scheme commenced: 1 July 2012

Ruling: Q1: Will the market value substitution rule in subsection 112-20(1) of the Income Tax Assessment Act 1997 (ITAA 1997) apply because the transferor - X Pty Ltd as trustee (the trustee) for the trust and the transferee the proposed New Corporation are related entities (will not be considered by the Commissioner to be dealing with each other at arm's length)?. | A3: Yes | Q2: Will the trustee derive a capital gain as per the valuation report (prior to application of 50% general CGT discount or any small business CGT concession) on entry into the proposed business sale agreement with New Corporation under section 100-35 of the ITAA 1997 provided that the trustee transfers the assets to the New Corporation within the period specified on the valuation report? | A4: Yes | Q3: Will the trustee be eligible for the 50% general CGT discount under Division 115 of the ITAA 1997? | A5: Yes | Q4: Will the trustee satisfy the basic conditions for the small business CGT concessions under Subdivision 152-A of the ITAA 1997 such as: a. small business entity; b. maximum net asset value test; c. active asset test? | A6: a. No b. Yes c. Yes | Q5: Will the trustee be eligible to claim small business 50% reduction under Subdivision 152-C of the ITAA 1997? | A7: Yes | Q6: Is the trustee eligible to make the choice for small business retirement exemption in respect of the remaining capital gain under Subdivision 152-D of the ITAA 1997? | A8: Yes | Q7: Can the trustee make the choice and specify in writing which of the two CGT concession stakeholders to receive 50% of the CGT exempt amount pursuant to subsection 152-315(5) of the ITAA 1997? | A9: Yes | Q8: If either stakeholder dies before the full amount of the purchase price is paid by the New Corporation in instalments to the trustee, will the executors of their estate still be entitled to apply a small business retirement exemption under Subdivision 152-D of the ITAA 1997? | A10: Yes | Q9: Can either stakeholder include an amount which is within the retirement exemption threshold each paid by the trustee into superannuation funds of which the stakeholders are members, within the CGT contributions cap, provided that the requirements under section 292-100 of the ITAA 1997 are complied with? | A11: Yes | Q10: Is there any timing requirement for payment into superannuation funds of either stakeholders, if the sale proceeds are received by the trustee in instalments and the trustee chooses to apply the small business retirement exemption under Subdivision 152-D of the ITAA 1997? | A12: No | Q11: Does the period of time over which instalment payments will be payable by the New Corporation to the trustee pursuant to the Business Sale Agreement make a difference to the answers to any of the above questions? | A13: No | Q12: If interest is charged on the vendor finance, will it make any difference to the answers to the other questions? In particular, will interest payments by the New Corporation to the trustee need to be contributed by the trustee into superannuation funds of which both stakeholders are members, in accordance with section 292-100 of the ITAA 1997? | A16: No | Q13: If the proposal is varied so that the New Corporation borrows part of the payment from an independent financial institution and borrows the balance in the form of vendor finance from the trustee payable by instalments, does this alter the answer to any of the other questions? | A17: No

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. X Pty Ltd as trustee (the trustee) for the Trading Trust (the trust) was settled several years ago. The trust is a hybrid unit trust. The appointer of the trust is stakeholder 1. The annual turnover of the business carried on by the trust was approximately $Y million for the financial year ended 30 June 20YY. Stakeholder 1 is the sole director and shareholder of the trustee. Stakeholder 1 holds 50% of the shares in the trustee and holds 50% as trustess for Stakeholder 2. The Stakeholder Family Trust (the Trust) holds 100% of the units in the trust. The trustee of the Trust is Y Pty Ltd. Y Pty Ltd presently holds 100 special income units in the trust. There are no other units presently issued in the trust. The beneficiaries of Y Pty Ltd are both Stakeholders and Holdings Pty Limited (the Holdings). Y Pty Ltd has for some years made distributions of income to both Stakeholders and the Holdings. Stakeholder 2 is the 100% shareholder of the Holdings and receives 100% of dividends from the Holdings. The only CGT asset of the trust is the generated goodwill. The maximum net asset value of the trust and the affiliates are less than 6 million at the time of the CGT event. As per previous year distribution of the trust Stakeholder 2 the significance individual's indirect Small Business Participation Percentage (SBPP) is more than Z%. Stakeholder 1's indirect SBPP is more than W%. However, because Stakeholder 1 is the spouse of a significant individual and has a participation percentage greater than zero, they will be a CGT concession stakeholder of the trust. Proposal It is proposed that the following transactions take place on or soon after 1 July 20XX (proposal). The proposal involves the business currently conducted by the trust being transferred or sold as a going concern to a newly established corporation, the New Corporation. The Proposal will involve payment of actual capital proceeds, to be paid in instalments by way of "vendor finance" that will be payable by annual instalments. The instalments of capital proceeds referred to in the previous paragraph will be paid to a complying superannuation fund of which both Stakeholders are members within 7 days after the trust receives each instalment of capital proceeds, until the retirement exemption amount is extinguished.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 6-5 | Income Tax Assessment Act 1997 Division 40 | Income Tax Assessment Act 1997 section 40-25 | Income Tax Assessment Act 1997 section 103-25 | Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 section 110-25 | Income Tax Assessment Act 1997 section 112-20 | Income Tax Assessment Act 1997 section 116-25 | Income Tax Assessment Act 1997 section 118-24 | Income Tax Assessment Act 1997 section 152-10 | Income Tax Assessment Act 1997 section 152-15 | Income Tax Assessment Act 1997 section 152-25 | Income Tax Assessment Act 1997 section 152-35 | Income Tax Assessment Act 1997 section 152-40 | Income Tax Assessment Act 1997 section 152-55 | Income Tax Assessment Act 1997 section 152-60 | Income Tax Assessment Act 1997 section 152-75 | Income Tax Assessment Act 1997 section 152-110 | Income Tax Assessment Act 1997 section 152-205 | Income Tax Assessment Act 1997 section 152-305 | Income Tax Assessment Act 1997 section 152-315 | Income Tax Assessment Act 1997 section 152-325 | Income Tax Assessment Act 1997 section 290-100 | Income Tax Assessment Act 1997 section 290-150 | Income Tax Assessment Act 1997 section 328-110 | Income Tax Assessment Act 1997 section 328-115 | Income Tax Assessment Act 1997 section 328-130

Reasons for decision: Summary: In this case the trust and the New Corporation are related entities, CGT event A1 happens when the trust transfers the business to the New Corporation. Therefore, Market value substitution rule under section 112-20 of the ITAA will apply for the cost base and reduced cost base of the business of the trust at the time of the CGT event (eg transfer of the business). | Detailed Reasoning - Detailed reasoning: Under the general cost base and reduced cost base rules, the first element of the cost base and reduced cost base of an asset is the sum of the amount paid (or required to be paid) and the market value of property given (or required to be given) in respect of acquiring it under subsections 110-25(2) and 110-55(2) of the ITAA 1997. The general rules may be modified if the market value substitution rule in section 112-20 of the ITAA 1997 applies. The market value substitution rule generally applies where parties do not deal at arms length in connection with the acquisition of an asset (paragraph 112-20(1)(c) of the ITAA 1997). If the market value substitution rule applies, the first element of the cost base or reduced cost base of a CGT asset that is acquired from another entity is its market value at the time of acquisition (subsection 112-20(1) of the ITAA 1997). However, in a non-arms length dealing involving the acquisition of an asset from an entity as a result of something done by that entity that did not constitute a CGT event happening to it, the market value is substituted only if the amount paid for the asset is more than its market value (subsection 112-20(2) of the ITAA 1997). Additionally, subsection 112-20(3) of the ITAA 1997 contains some situations in which the rule in subsection 112-20(1) of the ITAA 1997 does not apply. Whether parties have dealt at arms length is a question of fact that must be determined in any particular case. Subsection 995-1(1) of the ITAA 1997, in respect of the term arms length states that in determining whether parties deal at arms length, consider any connection between them and any other relevant circumstance. The CCH Macquarie Concise Dictionary of Modern Law , 1988, CCH Australia Ltd/Macquarie Library Pty Ltd, Sydney defines the expression at arms length as meaning that the parties to the transaction are not connected in such a way as to bring into question the ability of one to act independently of the other. It is not sufficient that the parties may be at arms length, they must deal with each other at arms length, that is, as arms length parties would normally do, so that their dealing has an outcome that is the result of normal bargaining ( The Trustee for the Estate of the late A W Furse No 5 Will Trust v. FC of T 91 ATC 4007; (1990) 21 ATR 1123 ( Furse ) and Granby Pty Ltd v. FC of T 95 ATC 4240; (1995) 30 ATR 400 ( Granby )). In Granby at ATC 4243; ATR 403 Lee J stated that the provision dealing with each other at arms length invited an analysis of the manner in which the parties conduct themselves in forming the transaction. The question is whether the parties behaved in the manner in which parties at arms length would be expected to behave in conducting their affairs and the expression means, at least, that the parties have acted severally and independently in forming their bargain. In this case the trust and the New Corporation are related entities, CGT event A1 happens when the trust transfers the business to the New Corporation. Therefore, Market value substitution rule under section 112-20 of the ITAA will apply for the cost base and reduced cost base of the business of the trust at the time of the CGT event (eg transfer of the business). | Summary: The business valuation report provided by an accredited valuer states that the market valuation is for the period from March 20XX to 30 June 20XX. Accordingly, the Commissioner will accept the market value of the goodwill of the trust only for the period from March 20XX till 30 June 20XX as per the valuation report. | Detailed Reasoning - Detailed reasoning: ATO Document "Market valuation for tax purposes" (ATO Document) states that it is usually the valuation process undertaken rather than who conducted it that governs the acceptability of the valuation. Depending on the situation, a market valuation may be undertaken by a: · registered valuer · member of a recognised professional valuation body · director, for balance sheet purposes, or · person without formal valuation qualifications whose assessment is based on reasonably objective and supportable data. The valuation process should be adequately documented. The valuation report and supporting documents should specify the valuation date, that is, the date to which the valuation relates. The valuation of goodwill is generally based on the calculation of a residual value. In basic terms, this approach requires the valuation of the net identifiable assets of the business (market-adjusted) and the valuation (market value) of the equity of the business. A residual value may be derived by subtracting the value of the net identifiable assets of the business from the value of equity of the business. As a general rule, the calculation of a residual value will be the most appropriate method for deriving goodwill. However, other methods may be accepted if they are appropriate to the circumstances. In this case the business valuation report is for a specific period as per the valuation report. Accordingly, the Commissioner will accept the market value of the goodwill of the trust only for the period as per the valuation report. | Detailed Reasoning - Question 2 b:: With the enactment of Division 40 of the ITAA 1997, depreciating assets have been generally excluded from the capital gains tax (CGT) provisions. Section 118-24 of the ITAA 1997 ensures that if an asset has been used wholly for a taxable purpose and has been depreciated under Division 40 of the ITAA 1997, it will not be subject to CGT. This effectively allows the balancing adjustment provisions in Subdivision 40-D of the ITAA 1997 to assume primary over the CGT provisions. Subsection 118-24(1) of the ITAA 1997 provides for an exemption for capital gains or losses made from a CGT event that happens to a depreciating asset or a section 73BA depreciating asset where the decline in value of the asset held was worked out under Division 40 of the ITAA 1997. However, this exemption will not apply if CGT event K7 happens. Subsection 104-235(1) of ITAA 1997 provides that a CGT event K7 happens if: (a) a balancing adjustment event occurs for a depreciating asset you held; and (b) at some time when you held the asset, you used it, or had it installed ready for use, for a purpose other than a taxable purpose. A capital gain will arise if the deductions for the decline in value of the asset are reduced under section 40-25 of the ITAA 1997 because of the use of the asset for a purpose other than a taxable purpose. Accordingly, any capital gain made from the transfer of depreciable assets to the New Corporation will be disregarded provided that the assets are not used for other than taxable purposes and did not subject to CGT event K7 under section 104-235 of the ITAA 1997. | Summary: It is considered that the trustee will make an amount of capital gain same as the valuation price on the valuation report from the transfer of the goodwill to the New Corporation provided that the CGT event A1 happens within the period specified on the valuation report. | Detailed Reasoning - Detailed reasoning: CGT event A1 in section 104-10 of the ITAA 1997 happens if there is a disposal of a CGT asset. Under subsection 104-10(2) of the ITAA 1997, a disposal of a CGT asset occurs if there is a change in ownership of the asset from one entity to another entity. Under subsection 104-10(1) of the ITAA 1997 a CGT event A1 happens if a taxpayer disposes of a CGT asset. A taxpayer "disposes of" a "CGT asset" if a change of ownership occurs from the taxpayer to another "entity", whether because of some act or event or by operation of law. The time that CGT event A1 happens is when the taxpayer enters into the contract for the disposal of the CGT asset. However, if there is no contract, the time that CGT event A1 happens is when ownership of the CGT asset changes, subsection 104-10(3) of the ITAA 1997. A taxpayer makes a "capital gain" as a result of CGT event A1 happening if the "capital proceeds" under Division 116 of the ITAA 1997 from the disposal are more than the "cost base" (indexed, if appropriate) of the CGT asset under subsection 104-10(4) of the ITAA 1997. The amount of the capital gain is the amount by which those capital proceeds exceed the cost base of the asset. Market value substitution rule under subsection 116-25 of the ITAA 1997 applies if the parties are not dealing at arms length. In this case the trust and the New Corporation are related entities therefore, the market value substitution rule is taken into consideration. The proposed sale price will be the written down value of the plant and equipment being transferred plus goodwill for the valuation price. Therefore, it is considered that the trustee will make an amount of capital gain same as the valuation price on the valuation report from the transfer of the goodwill to the New Corporation provided that the CGT event A1 happens within the period specified on the valuation report. | Detailed Reasoning - Question 4:: Section 115-10 of the ITAA 1997 provides that to be a discount capital gain the capital gain must be made by an, individual, a complying superannuation fund, a trust or a life insurance company in relation to a CGT event in respect of particular CGT assets. A capital gain is only a discount capital gain if it results from a CGT asset that was acquired at least 12 months before the CGT event that gave rise to the gain: subsection 115-25(1) of the ITAA 1997. In this case the trust is operating the business for more than 6 years. Therefore, the trust holds the assets for more than 12 months from the date of acquisition. Further, CGT event A1 happens when the asset will be transferred to the New Corporation. Therefore, the trustee is eligible for the 50% general CGT discount under Subdivision 115 - A of the ITAA 1997. | Summary: If the basic conditions are satisfied, an entity may be able to reduce its capital gains using the small business concessions under Subdivision 152-A of the ITAA 1997. The three major basic conditions are: 1. the entity must be a small business entity or a partner in a partnership that is a small business entity, or the net value of assets that the entity and related entities own must not exceed $6,000,000; 2. the CGT asset must be an active asset; 3. If the asset is a share or interest in a trust, there must be a CGT concession stakeholder just before the CGT event, and the entity claiming the concession 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 of at least 90%. The trust does not satisfy the conditions for a small business entity. However, it satisfies the maximum net asset test and the active asset test. The trust satisfies the basic conditions for the small business CGT concession under Subdivision 152-A of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: If the basic conditions are satisfied, an entity may be able to reduce its capital gains using the small business concessions under Subdivision 152-A of the ITAA 1997. The 3 major basic conditions are: 1. the entity must be a small business entity or a partner in a partnership that is a small business entity, or the net value of assets that the entity and related entities own must not exceed $6,000,000; 2. the CGT asset must be an active asset; 3. If the asset is a share or interest in a trust, there must be a CGT concession stakeholder just before the CGT event, and the entity claiming the concession 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 of at least 90%. | Detailed Reasoning - Small Business Entity: To qualify as a small business entity for an income year a taxpayer must carry on business in that year and satisfy a $2 million aggregated turnover requirement under section 328-110 of the ITAA 1997. Aggregated turnover for an income year is the sum of the relevant annual turnovers for the year of the taxpayer and certain related entities (excluding certain amounts) under section 328-115 of the ITAA 1997. In this case, the taxpayer does not satisfy subparagraph 328-110(1)(b)(i) of the ITAA 1997 as their aggregated turnover for the previous year was not less than $2 million. | Detailed Reasoning - Maximum net asset value: One of the basic conditions that must be satisfied to qualify for small business relief in Division 152 of the ITAA 1997 is the maximum net asset value test in section 152-15 of the ITAA 1997. A taxpayer will satisfy the maximum net asset value test if, just before the CGT event that results in the capital gain, the net value of the CGT assets of the taxpayer and the following entities does not exceed $6 million: a. the net value of the CGT assets of any entities connected with you, b. 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)). | Detailed Reasoning - Meaning of "Connected entity": The meaning of "connected entity" is defined in section 328-125 of the ITAA 1997. Under this definition an entity will be connected with another entity if: (a) one of the entities "controls" the other entity; or (b) the 2 entities are "controlled" by the same third entity. An entity will control another entity where the first entity or its affiliates, or the first entity and its affiliates between them, beneficially own, or have the right to acquire the beneficial ownership of, interests in the other entity that between them give the right to receive at least 40% of any distribution of either, paragraph 328-125(2)(a) of the ITAA 1997: (a) income; (b) the net income of the partnership (if the other entity is a partnership); or (c) capital. There two alternative tests to determine whether an entity controls a discretionary trust. An entity controls a discretionary trust if either: 1. for any of the four years before the current income year, at least 40% of the total amount of income or capital paid or applied by the trustee for that previous income year was paid to or for the benefit of the entity and /or its affiliates; or 2. a trustee of the trust acts, or could reasonably be expected to act, in accordance with the directions or wishes of the entity and/or its affiliates. A person who has the power to remove and replace the trustee of a discretionary trust controls the trust for those purposes. If an entity controls another entity, and the second entity (directly or indirectly) controls a third entity, the first entity is taken to control the third entity under section 328-125(7) of the ITAA 1997. Stakeholder 1 is the controlling individual of NITT. As they are the sole director and share holder of the trustee. | Detailed Reasoning - Meaning of "affiliate": "Affiliate" is defined in subsection 328-130(1) of the ITAA 1997 to mean an individual or company that acts, or could reasonably be expected to act, in accordance with the directions or wishes of the taxpayer or in concert with the taxpayer in relation to the affairs of the business of the individual or company. Note that the definition means that an individual or company cannot be an affiliate unless they are carrying on a business. Stakeholder 2 is the CGT affiliate of NITT as they holds 50% shares of the trustee. Where control is established under this rule the net value of all the CGT assets of the connected entity is taken into account for the purposes of the $6 million maximum net asset value test, even though the interest of the taxpayer in the connected entity or entities may be less than 100%. An entity can control a company under paragraph 328-125(2)(b) of the ITAA 1997 where the entity alone together with affiliates beneficially owns, or has the right to acquire beneficial ownership of, interest in the company with at least 40% of the voting power of the company. The term "the net value of the CGT assets" of an entity for the purposes of the maximum net asset value test is defined in section 152-20 of the ITAA 1997. It means the amount by which the market value of the entity's CGT assets exceeds both: § liabilities that are related to the assets; and § provisions for annual leave, long service leave, unearned income and tax liabilities. Accordingly, the "net value" of CGT assets for the purposes of the threshold test is the excess of the total market value of relevant CGT assets of the taxpayer, the taxpayer's "affiliates" and entities "connected with" the taxpayer over the total liabilities related to those assets under paragraph 152-20(1)(a) of the ITAA 1997. This applies even where such a calculation gives rise to a negative or nil amounts for any of these entities, as well as for positive amounts - but only for CGT events occurring from 1 July 2006. The maximum net asset value test will apply to a taxpayer's worldwide assets, regardless of whether the taxpayer is a resident or non-resident. Accordingly, the market value of the CGT assets of the entity at the time of CGT event will be taken into account for the calculation of the maximum net asset value. In this case the facts indicate that the market value of the CGT assets of the trust, the connected entities and CGT affiliates of the trust just before the relevant CGT events in the proposal are not expected to exceed $6 million. Therefore, the trust satisfies the maximum net asset value test. | Detailed Reasoning - Active asset test: A CGT asset is an active asset under subsection 152-40(1) of the ITAA 1997 if it is owned by a small business entity and it is: § used or held ready for use by the small business entity, a small business CGT affiliate, or an entity connected with the small business entity, in the course of carrying on a business; or § an intangible asset that is inherently connected with a business carried on by the small business entity, for example, goodwill. | Detailed Reasoning - Shares and trust interests may also be active assets: A share in a company or an interest in a trust, for example, a unit in a unit trust, is also an active asset at a given time under subsection 152-40(3) of the ITAA 1997 if: § the company or trust is an Australian resident; and § 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. This means a share in a company or an interest in a trust will be an active asset if the company or trust itself has active assets the market value of which is at least 80% of the market value of all its assets. The inclusion of capital proceeds from any recent sale of active assets in the 80% test provides some flexibility in the situation where the total market value of the active assets of the company or trust temporarily drops below 80% in between the time active assets are sold and new active assets acquired. The active asset test requires a CGT asset to have been an active asset for at least half of a particular period as outlined above. For a share in an Australian resident company, for example, to meet this requirement, the company must satisfy the 80% test for that same period. The following CGT assets cannot be active assets (even if they are used, or held ready for use, in the course of carrying on a business): § shares in companies or interests in trusts, other than those that satisfy the 80% test outlined above; § financial instruments, such as loans, debentures, bonds, futures and other contracts and share rights and options; § assets whose main use is to derive interest, an annuity, rent, royalties or foreign exchange gains (unless the main use for deriving rent was only temporary or the asset is an intangible asset that has been substantially developed or improved by the small business entity such that its market value has been substantially enhanced). In this case the main asset to be disposed by the trust to the New Corporation is the goodwill and the depreciable assets. The goodwill of the business is an active asset. The capital proceeds from the disposal of the active asset are more than 80% of the market value of the assets. The trust does not satisfy the conditions for a small business entity. However, it satisfies the maximum net asset test and the active asset test. The trust satisfies the basic conditions for the small business CGT concession under Subdivision 152-A of the ITAA 1997. | Detailed Reasoning - Question 6:: Under section 152-205 of the ITAA 1997 a capital gain is reduced by 50% if the basic conditions in Subdivision 152-A of the ITAA 1997 are satisfied. If the capital gain has already been reduced by the discount percentage under section 115-10 of the ITAA 1997, the small business 50% reduction under Subdivision 152-C of the ITAA 1997 applies to that reduced gain. In this case the trust satisfies the relevant basic conditions in Subdivision 152-A of the ITAA 1997. Therefore, the trust may reduce the capital gain it made on the disposal of the business by 50% under section 152-205 of the ITAA 1997. | Summary: An entity that is a company or trust can choose the small business retirement exemption under section 152-305 of the ITAA 1997 if the basic conditions in Subdivision 152-A of the ITAA 1997 are satisfied and the entity satisfies the significant individual test under section 152-60 of the ITAA 1997. In this case the trust satisfies the basic conditions for the small business CGT concession and the significance individual test. Further, the beneficiaries are under 55 years of age and the trustee will make the payment to a complying superannuation fund in the name of Stakeholder 1 and Stakeholder 2 who are the CGT concession stakeholders. Therefore, the trustee can make the retirement exemption choice for the remaining capital gain after CGT general discount and the small business reduction are applied. | Detailed Reasoning - Detailed reasoning: An entity that is a company or trust can choose the small business retirement exemption under section 152-305 of the ITAA 1997 if the basic conditions in Subdivision 152-A of the ITAA 1997 are satisfied and the entity satisfies the significant individual test under section 152-60 of the ITAA 1997. In this case the trust satisfies the basic conditions under Subdivision 152-A of the ITAA 1997. | Detailed Reasoning - Significant individual:: If the CGT asset is a share in a company or an interest in a trust, one of these additional basic conditions must be satisfied just before the CGT event, subsection 152-10(2) of the ITAA 1997: § the entity claiming the concession must be a 'CGT concession stakeholder' in the company or trust, or § CGT concession stakeholders in the company or trust together have a small business participation percentage in the interposed entity of at least 90% (the 90% test). An entity satisfies the significant individual test if the entity had at least one significant individual just before the relevant CGT event, section 152-50 of the ITAA 1997. An individual is a significant individual in a company or trust if they have a 'small business participation percentage' in the company or trust of at least 20%. The 20% can be made up of direct and indirect percentages. The significant individual test is not the same as the control tests used to determine if an entity is 'connected with' another entity for the purposes of the $6 million maximum net asset value test or the $2 million aggregated turnover test. Under section 152-55 of the ITAA 1997 to be a significant individual of a company or trust, the individual must have a small business participation percentage in the company or trust of at least 20%. The small business participation percentage is made up of direct and indirect percentages under sections 152-65 to 152-75 of the ITAA 1996. This means that the significant individual 20% test can be satisfied either directly or indirectly through one or more interposed entities. | Detailed Reasoning - Direct small business participation percentage:: An entity's direct small business participation percentage in a trust, where entities have entitlements to all the income and capital of the trust, is the percentage of: § the income of the trust that the entity is beneficially entitled to receive, or § the capital of the trust that the entity is beneficially entitled to receive. 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, 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. If the trust did not make a distribution of income or capital during the income year it will not have a significant individual during the income year. | Detailed Reasoning - Indirect small business participation percentage:: An entity's indirect small business participation percentage in a company or trust is calculated by multiplying together the entity's direct participation percentage in an interposed entity, and the interposed entity's total participation percentage (both direct and indirect) in the company or trust. The 90% test only applies if there is an interposed entity between the CGT concession stakeholders and the company or trust in which the shares or interests are held. The interposed entity satisfies the test if 90% of the participation percentages in that entity are held by CGT concession stakeholders of the company or trust in which the shares or interests are held. Paragraph 1.50 of the Explanatory memorandum to the Tax Laws Amendment (2006 Measures No 7) Bill 2006 states that: 1.50 The alternative requirement is the 90 per cent test. This test only applies if there is an interposed entity between the CGT concession stakeholder and the company or trust in which the shares or interests are held. The interposed entity satisfies the test if 90 per cent of the participation percentages in that entity are held by CGT concession stakeholders of the company or trust in which the shares or interests are held. | Detailed Reasoning - Example 1.14: Anna, a significant individual and a CGT concession stakeholder of Operating Company, has an 80 per cent small business participation percentage in Discretionary Trust. Bill, a CGT concession stakeholder of Operating Company, has a 15 per cent small business participation percentage in Discretionary Trust. Deborah, who is not a CGT concession stakeholder of Operating Company, has a 5 per cent small business participation percentage in Discretionary Trust. At least 90 per cent of the participation percentages in the Discretionary Trust are held by CGT concession stakeholders of Operating Company. Therefore Discretionary Trust satisfies the ownership requirement if it sells its shares in Operating Company and can access the concessions on those shares, provided that the other conditions are met In this case Stakeholder 2 the significance individual's indirect SBPP is more than 80%. Stakeholder 1's indirect SBPP is more than 15%. However, because Stakeholder 1 is the spouse of a significant individual and has a participation percentage greater than zero, they will be a CGT concession stakeholder of the trust. Accordingly, at least 90% of the SBPP of the trust is held by both Stakeholders. Therefore, the CGT concession stakeholder test is satisfied. Therefore, the trust satisfies the significance individual test and is eligible to make the small business retirement exemption choice under subdivision 152-D of the ITAA 1997. | Detailed Reasoning - Additional conditions for company or trust:: Following additional conditions in section 152-325 of the ITAA 1997 must be met in order for a company or trust to be able to choose the retirement exemption: § the company or trust must make a payment to at least one of its CGT concession stakeholders if: a. the company or trust makes a choice under the retirement exemption to disregard a capital gain from CGT event J2, J5 or J6, or b. the company or trust receives an amount of capital proceeds from a CGT event for which it makes a choice under the retirement exemption § if the company or trust receives the capital proceeds in instalments, the requirement to make a payment as above applies to each instalment in succession (up to the relevant CGT exempt amount) § if a payment is made to more than one CGT concession stakeholder, the amount of each such payment is to be worked out by reference to each individual's percentage of the relevant CGT exempt amount, and if the CGT concession stakeholder is an employee of the company or trust, the payment must be an "employment termination payment" under the ITAA 1997 § the payment must be made by: a. where the company or trust makes the choice to disregard a capital gain from CGT event J2, J5 or J6 - seven days after the company or trust makes the choice b. otherwise - the later of seven days after the company or trust makes the choice and seven days after the company or trust receives an amount of capital proceeds from the CGT event § the amount of the payment, or the sum of the amounts of the payments, required to be made must be equal to the lesser of: § either: a. where the company or trust makes the choice to disregard a capital gain from CGT event J2, J5 or J6 - the amount of the capital gain from the CGT event that the company or trust disregarded, or b. otherwise - the amount of capital proceeds received, and the relevant CGT exempt amount under subsections 152-325(1) to (5) of the ITAA 1997. If the company or trust is required to make two or more payments to a single CGT concession stakeholder (whether or not by the same time), the company or trust may meet that requirement by making one payment or by making separate payments under subsection 152-325(6) of the ITAA 1997. If a CGT concession stakeholder is under 55 years of age just before a payment is made in relation to him or her by a company or trust under subsection 152-325(7) of the ITAA 1997: a. the company or trust must make the payment to the CGT concession stakeholder by contributing it for the stakeholder to a complying superannuation fund or an Retirement Savings Account (RSA) in respect of the stakeholder, and b. the company or trust must notify the trustee of the fund or the RSA provider at the time the contribution is made that the contribution is made in accordance with section 152-325 of the ITAA 1997. A payment under paragraph (a) of subsection 152-325(7) of the ITAA 1997 (above) is treated as a contribution made by the CGT concession stakeholder, subsection 152-325(8) of the ITAA 1997. The above rules in subsections 152-325(7) and (8) of the ITAA 1997 effectively enable the contributions to the superannuation fund or RSA provider (deemed to be made by the CGT concession stakeholder) to be counted towards the CGT cap amount of the CGT concession stakeholder for the purposes of the non-concessional contributions cap under the ITAA 1997. Under the non-concessional contributions cap regime, each individual has a CGT cap amount ($1.045 million in 2008/09, indexed annually, for 2012/13 is $1.255 million). If the individual's CGT cap amount is exceeded, the excess contribution will be counted towards the individual's non-concessional contributions cap for the year. In this case the trust satisfies the basic conditions for the small business CGT concession and the significance individual test. Further, the facts indicate that the beneficiaries are under 55 years of age and the trustee will make the payment to a complying superannuation fund in the name of both Stakeholders who are the CGT concession stakeholders. Therefore, the trustee can make the retirement exemption choice for the remaining capital gain after CGT general discount and the small business reduction are applied. | Summary: Stakeholder 1 and Stakeholder 2 are the CGT concessional stakeholders. The trustee have to specify in writing the percentage of the CGT asset's CGT exempt amount applies to them that should not exceed100%. It is possible for an ETP to be paid only behalf of the CGT concessional stakeholder for whom the percentage is 100%. Once the choice is made an amount equal to the ETP must be immediately rolled over if the taxpayer was under 55 just before receiving an amount of capital proceeds. | Detailed Reasoning - Detailed reasoning: The individual, company or trust makes the choice mentioned in section 152-305 of the ITAA 1997 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 under subsection 152-310(1) of the ITAA 1997. The following additional consequences apply to a company or trust: a) any payment (or part of a payment) the company or trust makes to comply with the company and trust conditions in section 152-325 of the ITAA 1997 is exempt from income tax for the CGT concession stakeholder to whom it is made, and b) any payment (or part of a payment) the company or trust makes to comply with the company and trust conditions cannot be deducted from the company's or trust's assessable income, subsection 152-310(2) of the ITAA 1997. In all cases, where a contribution is attributable in whole or part to a capital gain from a CGT event, and: a. an individual has disregarded all or part of the capital gain under the retirement exemption and the individual was under age 55 just before choosing the retirement exemption - the individual cannot deduct the contribution to the extent that it is attributable to the capital gain, or b. a company or trust has disregarded all or part of the capital gain from the CGT event under the retirement exemption for a CGT concession stakeholder holder who was under age 55 just before the contribution was made - the company or trust cannot deduct the contribution to the extent that it is attributable to the capital gain under subsection 290-150(4) of the ITAA 1997. A taxpayer (ie an individual, company or trust) can choose to disregard all or part of each capital gain for the purposes of the retirement exemption. The amount chosen for the asset is called its CGT exempt amount under section 152-315 of the ITAA 1997. This means that the part of the capital gain not chosen is an assessable capital gain. The CGT exempt amount for a particular individual may be any amount relating to a capital gain provided the individual's lifetime CGT retirement exemption limit of $500,000 is not exceeded under section 152-315 of the ITAA 1997. The $500,000 limit is reduced by any previous amounts exempted under the small business retirement exemption. If an individual is one of two CGT concession stakeholders of a company or trust, only the individual's percentage of the CGT exempt amount of the assets counts towards that individual's CGT retirement exemption limit under section 152-320 of the ITAA 1997. The CGT exempt amount must be specified in writing by the individual, company or trust taxpayer when choosing the retirement exemption under subsection 152-315(4) of the ITAA 1997. If the company or trust choosing the retirement exemption has more than one CGT concession stakeholders, 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 the percentages must add up to 100% under subsection 152-315(5) of the ITAA 1997. To obtain the small business retirement exemption under Subdivision 152-D of the ITAA 1997, it is necessary for the taxpayer to make a choice in accordance with section 103-25 of the ITAA 1997. Section 152-315 of the ITAA 1997 allows the taxpayer to choose to disregard all or part of each capital gain to which Subdivision 152-D of the ITAA 1997 applies. Subsection 103-25(1) provides that a choice must be made: a) by the day you lodge your income tax return for the income year in which the relevant CGT event happened; or b) within a further time allowed by the Commissioner. Generally, the way the income tax return is prepared is sufficient evidence of making of the choice. However, subsection103-25(3) of the ITAA 1997 provides that in relation to small business retirement exemption, subsections 152-315(4) and (5) of the ITAA 1997 applies. Subsections 152-315(4) and (5) require a choice to be made in writing. Subsections 152-315(4) and (5) require the CGT exempt amount and the percentage of each CGT asset's CGT exempt amount that is attributable to each of those stakeholders be specified in writing. In this case Stakeholder 1 and Stakeholder 2 are the CGT concessional stakeholders. The trustee have to specify in writing the percentage of the CGT asset's CGT exempt amount applies to them that should not exceed 100%. It is possible for an ETP to be paid only behalf of the CGT concessional stakeholder for whom the percentage is 100%. Once the choice is made an amount equal to the ETP must be immediately rolled over if the taxpayer was under 55 just before receiving an amount of capital proceeds. | Detailed Reasoning - Question 9:: Paragraph 152-305(1)(a) of the ITAA 1997 allows an individual aged 55 or over at the time of choosing to choose to disregard all or part of a capital gain from a CGT event if the basic conditions for relief in Subdivision 152-A of the ITAA 1997 are satisfied for the gain. The choice must have been made by the day the individual's income tax return for the income year in which the relevant CGT event happened was lodged, or within a further time allowed by the Commissioner: subsection 103-25(1) of the ITAA 1997. On the death of a taxpayer, an executor, in effect, steps into the shoes of the deceased and winds up the deceased's personal affairs Taxation Ruling IT 2622, paragraph 2. An executor is treated as a trustee for income tax purposes under subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936), section 995-1 of the ITAA 1997. There are various provisions in the tax law that provide for or require a trustee to be answerable as taxpayer for the doing of all necessary things under the law and, in the case of the estate of a deceased person, make returns that are the same (as far as practicable) as the deceased would have made: section 254 of the ITAA 1936. Also, under section 260-140 of the Taxation Administration Act 1953 , the Commissioner may in certain circumstances deal with the trustee of a deceased estate as if the trustee were the deceased person and the deceased were still alive. As such, it is accepted that the executor of a deceased estate, when preparing outstanding income tax returns of the deceased, can make a choice to disregard under paragraph 152-305(1)(a) of the ITAA 1997 all or part of the capital gain made by the deceased before their death. Accordingly, if either Stakeholder's die before the full amount of the purchase price is paid by the New Corporation in instalments to the trustee, the executer of their estate can make the choice to disregard the capital gain that they made before their death. | Summary: Stakeholder 1 and Stakeholder 2 are less than 55 years of age. The capital gain amount that they wish to contribute to the superannuation fund is less than Small Business CGT exempt amount limit for each. Therefore, they are eligible to contribute the amount that is less than the small business CGT exempt amount limit provided that the amount is within their life time cap amount. | Detailed Reasoning - Detailed reasoning: Subsection 292-100(1) of the ITAA 1997 is the operative provision that provides for the interaction of payments and contributions relating to CGT small business concessions in Subdivision 152-B and 152-D of the ITAA 1997. It provides that a contribution is covered under this section if: § the contribution is made by you to a complying superannuation plan in respect of you in a financial year, and § the requirement in subsection (2), (4), (7) or (8) is met, and § you choose, in accordance with subsection (9), to apply this section to an amount that is all or part of the contribution. The company or trust conditions require the entity to make payments of the CGT exempt amount to at least one of its CGT concession stakeholders upon: § making the choice to apply the exemption if the relevant event is CGT event J2, J5 or J6, or § in any other case, the entity receiving an amount of capital proceeds from a CGT event for which it chooses to disregard a capital gain under the CGT retirement exemption under subsection 152-325(1) of the ITAA 1997. The payment or payments must meet the requirements of section 152-325 of the ITAA 1997 as explained in question 8 above. The above payment requirements and timelines are mandatory for access to the retirement exemption. However, there is no requirement to make the payment as a superannuation contribution if the individual or CGT concession stakeholder is not under age 55. Notwithstanding the above, contributions related to the CGT concessions made by an individual taxpayer will be counted against the CGT cap if the relevant contribution, timing and choice rules under section 292-100 of the ITAA 1997 appropriate to the CGT concession claimed are met. In this case, the company or trust must make a payment to the CGT concession stakeholder within 2 years of the CGT event and the stakeholder must make a contribution within 30 days of that payment in order for the contribution to qualify for the CGT cap amount. However, the amount of the contribution is limited to the stakeholder's control percentage of the capital proceeds up to the CGT cap amount: subsection 292-100(4) of the ITAA 1997. The amount of the contribution can be no more than the capital gain and cannot exceed the amount of this payment from the entity. The contributions covered by the CGT cap are the 'CGT exempt amount' of up to $500,000 under the retirement exemption provided in Subdivision 152-D of the ITAA 1997. Superannuation contributions made from the CGT exempt amount which is within a taxpayer's lifetime CGT cap are excluded from the person's non-concessional contributions cap. A person's CGT cap is reduced by the amount of each contribution that the person has elected to be covered by the exemption from the non-concessional contributions cap under section 292-105 of the ITAA 1997. A contribution will only count towards the CGT cap if the person notifies the superannuation fund before or when the contribution is made. This is to ensure that the superannuation fund is able to accept the contribution and the contribution is not reported against the non-concessional contributions cap, but is instead reported against the CGT cap. This also gives the person the choice as to whether all or part of a contribution is counted against the non-concessional contributions cap or the CGT cap under subsection 292-100(9) of the ITAA 1997. In this case both Stakeholders are less than 55 years of age. The capital gain amount that they wish to contribute to the superannuation fund is less than Small Business CGT exempt amount limit for each. Therefore, they are eligible to contribute the amount that is less than the small business CGT exempt amount limit provided that the amount is within their life time cap amount. | Detailed Reasoning - Question 11:: A company can choose to disregard all or part of a capital gain under the small business retirement exemption if, amongst other things, the conditions set out in section 152-325 of ITAA 1997 are satisfied. Subsection 152-325(1) of ITAA 1997 requires a company to make an eligible termination payment in relation to a CGT concession stakeholder each time it receives an amount of capital proceeds from a CGT event for which it has chosen the retirement exemption. If the company or trust receives the capital proceeds in instalments, payments must be made from each instalment in succession up to the CGT exempt amount under subsection 152-305(1A) of the ITAA 1997 provided that the company or trust satisfies the basic conditions in Subdivision 152-A of the ITAA 1997, significance individual test and the company or trust conditions under section 152-325 (as explained in question 8 above), subsection 152-305(2) of the ITAA 1997. In this case as the trustee satisfies conditions in subsection 152-305(2) of the ITAA 1997, the trustee can make the payment to the superannuation fund from each instalment in succession up to the CGT exempt amount. | Detailed Reasoning - Question 12:: The amount of the capital proceeds from a CGT event is generally the sum of the money received or receivable and the market value of any other property received or receivable as a result of the CGT event under section 116-20 of the ITAA 1997. The capital proceeds from a CGT event are defined by reference to money and property that a taxpayer has received or is entitled to receive , but a capital gain or loss arises in the income year in which the CGT event happens. Accordingly, where a CGT event happens in relation to an asset, the whole of the capital gain or loss is brought to account in the year of the CGT event, even though part or all of the capital proceeds from it are received in a later year. Further, where the capital proceeds entitled to be received involve instalment receipts, subparagraph 103-10(2)(b)(ii) of the ITAA 1997 makes it clear that the instalments are part of the capital proceeds at the time of the CGT event. Therefore, for capital gain tax purposes, the capital gain is calculated at the market value of the asset at the time of CGT event A1 happens and any capital gain made from the disposal of the asset is assessable in the financial year even though the payment is deferred. Also, for the purpose of retirement exemption, if the capital proceeds are received in instalments, payments must be made from each instalment in succession up to the CGT exempt amount under subsection 152-305(1A) of the ITAA 1997. Accordingly, the period of time over which instalment payments will be payable by the New Corporation to the trustee pursuant to the Business Sale Agreement will not make any difference to the answers to any of the above questions. | Detailed Reasoning - Question 13:: Interest received by or accrued to a resident is usually assessable income whatever its source or the form of payment, eg as a lump sum. Interest received for the differed payment of capital proceeds is not considered as CGT exempt amount under section 152-315 of the ITAA 1997. The requirement for the contribution to the superannuation fund relating to the CGT small business concession under subsection 292-100(8) are: a) just before a *CGT event, you were a *CGT concession stakeholder of an entity that could, under subsection 152-305(2), disregard all or part of a *capital gain arising from the CGT event; and b) the entity makes a payment to you that satisfies the conditions in section 152-325; and c) the contribution is equal to all or part of the capital gain arising from the CGT event (but not exceeding the amount of the payment mentioned in paragraph (b)); and d) the contribution is made within 30 days after the payment mentioned in paragraph (b) Therefore, interest charged on the vendor finance will not make any difference on the assessability of the capital gain made by the trustee from the transfer of asset to the New Corporation and the small business CGT concessions. | Detailed Reasoning - Question 14 a:: Yes. Market value substitution rule under section 112-20 of the ITAA 1997 applies as explained in question one above. The first element of the cost base of the goodwill acquired by the New Corporation is market value of the goodwill as at the date of acquisition of the asset under paragraph 110-25(2)(b) of the ITAA 1997. | Detailed Reasoning - Question 14 b:: A balancing adjustment event will occur if a taxpayer stops holding a depreciating asset. A balancing adjustment is required if the taxpayer worked out or would have worked out a decline in value for the asset under Subdivision 40-B of the ITAA 1997. For the purposes of working out a balancing adjustment under section 40-285 of the ITAA 1997, the termination value of a depreciating asset has the meaning given by section 40-300 of the ITAA 1997. Section 40-300 provides that the termination value of a depreciating asset is, in certain cases, an amount specified in the table in subsection 40-300(2) of the ITAA 1997. Item 6 of subsection 40-300(2) of the ITAA 1997 deals with a balancing adjustment event occurring where the taxpayer stops holding the asset under an arrangement and: a) there is at least one other party to the arrangement with whom the taxpayer did not deal at "arm's length" ; and b) were it not for item 6, the termination value of the asset would be less than its "market value". In this case, the termination value of the asset is its market value just before the taxpayer stopped holding it if the market value of the depreciating asset is more than the decline in value of the asset at the time the trust stop holding the asset. That is also the cost of the asset to the New Corporation who starts to hold the asset. | Detailed Reasoning - Question 15:: As explained in question 12 above, any capital gain or capital loss from a CGT event arises in the year in which the CGT event that happens and the capital proceeds the taxpayer received is the market value of the asset at the time of the CGT event of the particular asset. Therefore, if the New Corporation borrows from an independent financial institution instead of vendor finance does not make any difference to the calculation and assessability of the capital gain except the timing of the payment of the CGT exempt amount to the superannuation fund as explained in question 10 above.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Question 2 a: Does the Commissioner accept the value of the CGT asset being goodwill of the trustee as per the as per the indicative valuation report provided by the trustee (valuation report) represents the market value of the goodwill of the trustee: | (i) as at the date of the valuation; | (iii) until 30 June 2013. | Will any capital gain made from the disposal of any plant and equipment (depreciating assets) at their written down value as at 30 June 20XX by the trustee to the New Corporation be disregarded from capital gain under section 118-24 of the ITAA 1997? | Is the cost base of the business assets to be acquired by the New Corporation pursuant to the proposed business sale agreement equivalent to the market value of the goodwill as per the valuation report for purpose of Part 3-1 of the ITAA 1997? | Will the cost base of the plant and equipment acquired by the New Corporation be the adjustable value (written down value) as at the date of transfer of the assets under Subdivision 40-B of the ITAA 1997? | Does Part IVA, or any other anti-avoidance provision, apply to this ruling?: Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable. | We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. | If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply. | For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax .