Private ruling: CGT small business retirement exemption and Part IVA
Published: April 2015
Ruling period: Year of income ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: If the required payments (to the superannuation fund) are made within 7 days of the Trust lodging the relevant income tax return, can the Trust choose to apply the small business retirement exemption under Subdivision 152-D of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes | Q2: Is there a scheme to which Part IVA, and therefore section 177F, of the Income Tax Assessment Act 1936 (ITAA 1936) applies? | A2: No

Relevant facts and circumstances: 1. Taxpayer 1 is trustee for the Trust (a family trust). 2. The Trust currently holds the following assets: • Shares in Company S • Real Property 3. Taxpayer 1 as trustee for the Trust holds 100% of the issued shares in Company S. 4. The liabilities of the Trust include amounts relating to the acquisition of the real property, secured by mortgages over the real property in favour of the lenders. 5. The shares in Company S are post capital gains tax (CGT) shares. 6. An independent valuation has been obtained to determine the market value of the shares in Company S. 7. The trustee and family members wish to separate the holding of the real property and the shares so that the liabilities attached to the real property are not owed by the same entity that is the legal owner of the shares. Proposed transactions 8. The trustee proposes to sell the shares to a newly incorporated company, (Company A). 9. Taxpayer 1 as trustee for the A Trust holds 100% of the issued shares in Company A. 10. It is intended that Company A will only hold the shares in Company S. It will not hold other assets. 11. Company A will borrow from a commercial lender at commercial rates, in order to fund the purchase of the Company S shares. 12. It is expected that the interest payable by Company A on the loan will be funded from the anticipated dividends resulting from its shareholding in Company S. 13. Following this transaction (the transfer of shares), the Trust will continue to hold the real property and be responsible for the liabilities in relation to that real property. Company A will hold the shares, without any direct property liabilities. 14. It is stated that holding separate asset classes in separate entities, will provide asset protection benefits because the liabilities attached to the real property assets will not directly expose the share assets which are unencumbered. The trustee considers that this is a particular issue given the volatility and uncertainty in the economy generally and the real estate sector in particular. There are substantial borrowings and limited equity in the real property held by the Trust, which gives rise to significant risk should there be a downturn in the property market. 15. The parties also consider that the proposed transaction will provide future commercial flexibility for dealing with the separate assets. 16. The Trust is expected to derive a gross capital gain of $X from the disposal of the shares. 17. The net capital gain in the Trust, after allowing for all discounts and concessions is expected to be $X (based on current valuations). 18. It is intended that Company S will continue to operate its business into the foreseeable future. 19. The trustee has advised that the proposed transfer will not proceed unless the Small Business CGT concessions are available, as the tax costs that would otherwise accrue will make the proposed arrangements economically unrealistic. Alternative proposal 20. If the proposed scheme is not implemented, the Trust will continue to hold the shares in Company S for a total period of at least 15 years before disposing of them. At the time of disposal, the Trust expects to satisfy all the requirements to allow it to apply the CGT 15 year exemption and fully disregard any gain that may eventuate. CGT Small business relief matters 21. The trustee has advised that, in accordance with section 152-15 of the ITAA 1997, the maximum net asset value of the assets of the Trust, its affiliates and entities connected with it will be less than $6 million immediately before the proposed transaction occurs. 22. The trustee has advised that the shares in Company S, currently held by the Trust, are active assets, in accordance with sections 152-35 and 152-40 of the ITAA 1997. 23. The trustee has advised that both Taxpayer 1 and their spouse are CGT concession stakeholders in relation to Company S and have the required small business participation percentage in the Trust. 24. Neither Taxpayer 1 nor their spouse have utilised any part of the $500,000 lifetime limit provided for in Division 152-D of the ITAA 1997. 25. The Trust will make a payment of $500,000 to each of Taxpayer 1 and Taxpayer 1's spouse. 26. In accordance with subsection 152-355(2) of the ITAA 1997, the Trust will choose to make an election for the small business retirement concession to apply to the proposed payments no later than the day on which its income tax return is lodged for the relevant year. 27. If either Taxpayer 1 or Taxpayer 1's spouse is under 55 years of age at the time that the Trust makes the payments referred to in paragraph 25 above, the Trust will make the relevant payment to a complying superannuation fund.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 152-D | Income Tax Assessment Act 1936 Part IVA

Reasons for decision: Summary: 1. If the required payments (to the superannuation fund) are made within 7 days of the Trust lodging the relevant income tax return, the Trust can choose to apply the small business retirement exemption under Subdivision 152-D of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: 2. Subdivision 152-D of the ITAA 1997 provides a small business retirement exemption as part of the CGT small business relief provisions. If you qualify for the small business retirement exemption, all or part of a capital gain remaining after other concessions have been applied can be disregarded. 3. A trust can choose to disregard all or part of a capital gain under Subdivision 152-D of the ITAA 1997 if it: • satisfies the basic conditions for CGT small business relief (Subdivision 152-A) • satisfies the significant individual test (section 152-50) • makes a payment to each CGT concession stakeholder, worked out by reference to their percentage of the exempt amount (section 152-325) • keeps a written record of the amount that is to be disregarded (subsection 315(4)) • pays the CGT concession stakeholder by seven days after the trustee makes the choice to disregard the capital gain (paragraph 152-325(4)(b), and • makes a payment to a complying superannuation fund in respect of the CGT concession stakeholder, if they are under 55 years of age (subsection 152-325(7). 4. You have advised that the basic conditions will be satisfied. 5. An individual is a CGT concession stakeholder of a trust at a time if the individual is • a significant individual in the trust; or • a spouse of a significant individual in the trust, if the spouse has a small business participation percentage in the trust at that time that is greater than zero. (section 152-60 of the ITAA 1997) 6. You have advised that Taxpayer 1 and Taxpayer 1's spouse are CGT concession stakeholders in relation to Company S and have the required Small Business Participation Percentage in the Trust. Therefore the significant individual test is satisfied. 7. You have advised that the payments to Taxpayer 1 and their spouse will be made within seven days of the later of the date that the trustee of the Trust makes the election to utilise the Small Business Retirement Concession or the date on which the capital proceeds from the transaction are received by the Trust. 8. You have also advised that the payments to be made to the CGT Concession Stakeholders (Taxpayer 1 and their spouse) will be made to a complying superannuation fund if they are under 55 years of age at the time that the payment is required. 9. Therefore, provided that a written record is kept of the amount that the trustee chooses to disregard and each stakeholder's percentage of that amount, the Trustee may choose to apply the CGT small business retirement exemption. 10. Please note that the above discussion is based on your advice that the basic conditions for CGT small business relief set out in Subdivision 152-A of the ITAA 1997 are met. In particular, no consideration has been given to the value of all relevant assets to determine whether the maximum net asset value test in section 152-15 is in fact satisfied. | Summary: 11. The provisions of Part IVA of the ITAA 1936 will not apply. | Detailed Reasoning - Detailed reasoning: 12. Part IVA of the ITAA 1936 applies to a scheme where, having regard to a number of objective factors or matters, it would be concluded that one of the scheme participants who entered into or carried out the scheme or any part of the scheme did so for the dominant purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme. 13. The Commissioner has considered all the matters in relation to the proposed scheme and will not make a determination under subsection 177F(1) that Part IVA will apply.