Private ruling: CGT Small Business Concessions and Part IVA
Published: September 2014
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Questions and Answers | 1. Do you satisfy the basic conditions necessary to be eligible for the capital gains tax (CGT) concessions for small business? | Yes | 2. Will Part IVA apply to any aspect of the transactions? | No

Relevant facts and circumstances: You are a family discretionary trust. There are two income and capital beneficiaries of the trust. You bought a business, through two transactions, the first in the XXXX financial year and the second in the YYYY financial year. The business has remained the property of the trust. You are proposing the sale of the business to a related company. The company will pay market value consideration for the business. The company will borrow some of the funding for the purchase through a commercial loan and the remaining through a loan by the trust beneficiaries. The transaction will not involve loans that are never repaid. The commercial lender has appointed a valuer to determine the market value of the business. The commercial loan will be a variable loan with the terms being principle and interest over a life of 5 years. Interest will be paid monthly in arrears and the interest rate will be market rate determined by the lender. The loan by the beneficiaries will have the same terms and conditions as the commercial loan except that loan will have a maximum life of 25 years. The proposed CGT event is in relation to a CGT asset (goodwill). The proposed CGT event will result in a capital gain. You are a small business entity. You are carrying on a business and the annual turnover of its business and that of all its grouped entities is less than $2 million. Goodwill was acquired at the time the business was purchased; goodwill has since been generated internally. At the end of the two year period the trust intends to make a payment to the CGT concession stakeholders by making a payment for the benefit of the stakeholder to a complying superannuation fund. If this does not happen on time CGT event J5 will occur. The motivation behind transferring the business into a company is to achieve the following outcomes. • The company structure makes it easier to grow the business through equity injection. • The original owners can sell down a portion of their investment over time through the sale of shares. • If the business is ever sold it allows the buyer the option of buying shares instead of the business assets.

Relevant legislative provisions: 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 Assessment Act 1997 Section 152-10 | Income Tax Assessment Act 1997 Section 152-15 | Income Tax Assessment Act 1997 Section 152-35 | Income Tax Assessment Act 1936 Part IVA | Income Tax Assessment Act 1936 Section 177A | Income Tax Assessment Act 1936 Section 177C | Income Tax Assessment Act 1936 Section 177D

Reasons for decision: Summary: As you satisfy the basic conditions for small business CGT concessions, you are entitled to the active asset reduction and the small business rollover. Part IVA would not apply to the proposed business reorganisation. | Detailed Reasoning - Small business CGT concession eligibility basic conditions: Section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997) contains the basic conditions you must satisfy to be eligible for the small business CGT concessions. These conditions are: (a) a CGT event happens in relation to a CGT asset in an income year. (b) the event would have resulted in the 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 of the ITAA 1997 (iii) you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an asset of the partnership or (iv) the conditions in subsection 152-10(1A) or (1B) of the ITAA 1997 are satisfied in relation to the CGT asset in the income year. (a) the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997. If these basic conditions are met, you are entitled to: • The small business 50% active asset reduction available under Subdivision 152-C of the ITAA 1997, unless you choose for it not to apply; and • Choose to obtain the small business rollover available under Subdivision 152-E of the ITAA1997. You have provided that: • The CGT event is in relation to a CGT asset that is an active asset. • The event will result in a capital gain. • You are a small business entity Therefore, you satisfy the basic conditions and are entitled to the small business active asset reduction and to choose the small business rollover. | Detailed Reasoning - Part IVA: Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance provision that can apply in certain circumstances if a taxpayer obtains a tax benefit in connection with a scheme, and it can be concluded that the scheme, or any part it, was entered into for the dominant purpose of enabling a tax benefit to be obtained. Part IVA is a provision of last resort. In order for Part IVA to apply, the following requirements must be satisfied: • There must be a scheme as defined by section 177A of the ITAA 1936. • There must be a tax benefit as defined by section 177C of the ITAA 1936, obtained in connection with the scheme • The scheme must be one to which Part IVA applies, as determined by section 177D of the ITAA 1936, where it would be concluded that the taxpayer (or any other person involved in the scheme) had the sole or dominant purpose of entering into the scheme to obtain the tax benefit. It is determined that Part IVA would not apply to the proposed business reorganisation.