Private ruling: Small business capital gains tax concessions
Published: June 2013
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Are you a CGT concession stakeholder in the company? | A1: Yes.

Relevant facts and circumstances: You are a director and shareholder in a private company. The company operates a business. You are one of only two shareholders in the company. You are considering selling all of your shares in the company to the other shareholder. The contract of sale would take place in the relevant financial year. The company has different classes of shares however all share classes hold equal entitlements to dividends, capital and voting rights. You hold more than 20% of the shares.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 152, | Income Tax Assessment Act 1997 subsection 152-10(2), | Income Tax Assessment Act 1997 section 152-15, | Income Tax Assessment Act 1997 section 152-35, | Income Tax Assessment Act 1997 section 152-55, | Income Tax Assessment Act 1997 section 152-60, | Income Tax Assessment Act 1997 section 152-65 and | Income Tax Assessment Act 1997 subsection 152-70(1).

Reasons for decision: Summary: To qualify for the small business CGT concessions, you must satisfy several conditions that are common to all the concessions. These are called the basic conditions. A capital gain that you make may be reduced or disregarded under Division 152 of the ITAA 1997 if the following basic conditions are satisfied: · A CGT event happens in relation to a CGT asset of yours in an income year, · The event would have resulted in a gain, · The CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997, and · At least one of the following applies; - you are a small business entity for the income year, - you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997, - 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, or - you do not carry on a business, but your CGT asset is used in a business carried on by a small business entity that is your affiliate or an entity connected with you. | Detailed Reasoning - Additional basic conditions for shares in a company: Under subsection 152-10(2) of the ITAA 1997, if the CGT asset is a share in a company or an interest in a trust (the object company or trust), one of these additional basic conditions must be satisfied just before the CGT event: (a) you are a CGT concession stakeholder in the object company or trust; or (b) CGT concession stakeholders in the object company or trust together have a small business participation percentage in you of at least 90%. | Detailed Reasoning - CGT concession stakeholder: As per section 152-60 of the ITAA 1997 an individual is a CGT concession stakeholder of a company or trust if they are a significant individual or the spouse of a significant individual where the spouse has a small business participation percentage in the company or trust at that time that is greater than zero. Under section 152-55 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%. This 20% can be made up of direct and indirect percentages. | Detailed Reasoning - Small business participation percentage: Under section 152-65 of the ITAA 1997 an entity's small business participation percentage in another entity at a time is the percentage that is the sum of: · the entity's direct small business participation percentage in the other entity at that time, and · the entity's indirect small business participation percentage in the other entity at that time. Under subsection 152-70(1) of the ITAA 1997 an entity's direct small business participation percentage in a company is the percentage of: · voting power that the entity is entitled to exercise · any dividend payment that the entity is entitled to receive, or · any capital distribution that the entity is entitled to receive, or · if they are different, the smallest of the three definitions above. All classes of shares (other than redeemable shares) are taken into account in determining an entity's participation percentage in a company. | Detailed Reasoning - Application to your circumstances: In this case you hold shares in a private company. Although there are several separate classes of shares, they each have equal dividend, capital and voting rights. You hold more than 20% of the shares in the company. This means you hold more than 20% of the dividend, capital and voting rights in the company. Therefore, as your small business participation percentage is greater than 20%, you are a CGT concession stakeholder in the company.