In relation to small business
Scenario:
I am selling my business, which is currently held in a company structure. The trading company is 100% owned by my investment company, which in turn is owned by my family trusts (50% each). The shares in the investment company are being sold by me to the purchaser to form the sale, Can the small business tax concessions be used in this situation?
Explanation:
The small business capital gains tax (CGT) concessions can be used, if the basic conditions would need to be met, including the active asset test and either the $6 million maximum net asset value (MNAV) test or the company must be a "small business entity".
Some of the concessions require further (specific) conditions to be met. In Taxation Determination TD 2006/65, the Commissioner states that if a company owns interests in another company that satisfies the "80% test" in s 152-40(3)(b) of ITAA 1997, the test can operate successively (recursively) at each level in a chain of entities to determine the active asset status of the underlying interests. So, the shares in the investment company could be active assets of the family trusts, which satisfy the 80% test where the investment company owns 100% of the trading company, which has active assets that comprise 80% or more of the market value of the assets of the trading company.
To apply to shares in a company, significant individuals and CGT concession stakeholders (as specified in the small business CGT concessions rules) must together have a small business participation percentage of at least 90% (the 90% test) in the entity claiming the concessions. Careful examination of the distributions and proposed distributions of the trusts in the year of the capital gain (and in prior years, particularly in the case of claim of the small business 15-year exemption) is needed to ensure and verify that.
The active assets position and the $6 million MNAV test generally warrants a full due diligence of the assets and liabilities of the company, the affiliates of the company and connected entities as prescribed in Div. 152 of ITAA 1997.
As stated, distributions of the trusts would need to be carefully considered and planned to ensure the relevant beneficiaries of the family trusts qualify as significant individuals and concession stakeholders eligible for the relief.
In addition, a case why the small business CGT concessions should apply to these beneficiaries is best set out in a position paper to establish a reasonably arguable position, which can be given to the ATO in the event of an investigation of a claim of significant small business concession relief from CGT (that is an alternative to applying for the certainty of a binding private ruling of the ATO).