Private ruling: CGT small business concessions
Published: July 2013
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Does the trust meet the additional basic condition contained in subsection 152-10(2) of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the sale of shares in the first transaction? | A1: Yes | Q2: Does the trust meet the additional basic condition contained in subsection 152-10(2) of the ITAA 1997 in relation to the sale of shares in the second transaction? | A2: No

Relevant facts and circumstances: The trust owned X% of the shares in the company. All shares in the company carry the same income and voting rights. During the relevant financial year, the trust entered into negotiations to sell the entire X% share in the company to a third party. It was planned that this sale would occur in one transaction. Prior to contracts being drawn up for the proposed sale, it became apparent that the purchaser would not be able to purchase the full X% share in the company in one transaction due to financing issues. These issues were beyond the control of the trust. Accordingly, the shares were sold to the same third party in separate transactions. Part of the percentage share in the company was disposed of by the trust. The remaining percentage share held by the trust was sold at a later date. Z is a beneficiary of the trust and received all of the trust distributions in the relevant financial year. Neither Z nor their spouse held any direct shares in the company.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 152-10 | Income Tax Assessment Act 1997 Subsection 152-10(2) | Income Tax Assessment Act 1997 Section 152-55 | Income Tax Assessment Act 1997 Section 152-60 | Income Tax Assessment Act 1997 Section 152-65 | Income Tax Assessment Act 1997 Subsection 152-70(1) | Income Tax Assessment Act 1997 Section 152-75

Reasons for decision: Summary: In order to apply the CGT small business concessions to a capital gain, the basic conditions contained in section 152-10 of the ITAA 1997 must be met. Where the relevant CGT asset is a share in a company, an additional condition must be met. | 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 SBPP in you of at least 90%. A trust cannot satisfy the condition in paragraph (a) because a CGT concession stakeholder in the object company must be an individual. | 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 SBPP 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 SBPP 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 SBPP in another entity at a time is the percentage that is the sum of: · the entity's direct SBPP in the other entity at that time, and · the entity's indirect SBPP in the other entity at that time. Under subsection 152-70(1) of the ITAA 1997 an entity's direct SBPP in a trust where entities do not have entitlements to all the income and capital of the trust is: · where the trustee makes distributions of income during the income year (relevant year) in which the CGT event occurs - the percentage of distributions that entity was beneficially entitled to · where the trustee makes distributions of capital during the relevant year - the percentage of distributions that entity was beneficially entitled to, or · if they are different, the smallest of the two definitions above. An entity's direct small business participation percentage in a company is determined according to their entitlements just before the CGT event, rather than during the relevant year. It is the percentage of: · voting power that the entity is entitled to exercise · any dividend payment that the entity is entitled to receive · any capital distribution that the entity is entitled to receive, or · if they are different, the smallest of the three definitions above. Section 152-75 of the ITAA 1997 details that an entity's indirect SBPP 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. | Detailed Reasoning - Application to your circumstances: The sale of the shares occurred in two transactions. Each transaction on its own represents a separate CGT event. As the requirements under subsection 152-10(2) of the ITAA 1997 must be met just before the CGT event, we need to consider each of the transactions separately. | Detailed Reasoning - First transaction: Just before the shares in the company were sold in the first transaction, the trust had a SBPP in the company of X%. Z's SBPP in the trust was greater than 90% as they received all of the trust distributions during the relevant year. Immediately prior to the sale of the shares, Z held an indirect SBPP in the company of at least 20%. This is determined by multiplying his SBPP in the trust by the trust's SBPP in the company. Z did not have a direct SBPP in the company. As Z's SBPP in the company was at least 20%, they were considered to be a CGT concession stakeholder in the company at this point in time. The requirement contained in 152-10(2) of the ITAA 1997 requires CGT concession stakeholders in the company to have a SBPP in the trust of at least 90%. As Z's SBPP in the trust is greater than 90%, this requirement is satisfied in relation to the shares that were sold in the first transaction. | Detailed Reasoning - Second transaction: Following the sale of the shares in the first transaction and immediately before the sale of the shares in the second transaction, the trust's SBPP in the company had been reduced to below 20%. Z's SBPP in the company had also been reduced to below 20% and they were therefore no longer a CGT concession stakeholder in the company. At the time just before the sale of the shares in the second transaction Z was no longer a CGT concession stakeholder in the company. Accordingly, the requirement contained in subsection152-10(2) of the ITAA 1997 cannot be met in relation to the second transaction.