Contents Preface iii Abbreviations v Chapter 1 ...€¦ · x Chapter 7: Small business entity test...
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vi Contents Preface iii Abbreviations v Chapter 1: Eligibility checklist 1 ¶1-100 Determining eligibility for CGT small business relief ...................................................... 2 Pre-CGT asset ............................................................................................................... 4 Chapter 2: Some general CGT issues 5 ¶2-100 Background.................................................................................................................... 6 ¶2-105 CGT asset ...................................................................................................................... 6 ¶2-110 Pre-CGT assets.............................................................................................................. 6 ¶2-115 Special asset rules ......................................................................................................... 7 (1) Depreciating assets ............................................................................................... 7 (2) Trading stock ......................................................................................................... 7 ¶2-120 The CGT events ............................................................................................................. 8 (1) Importance of the time when a CGT event happens ............................................. 8 Relevant income year .........................................................................................8 CGT small business reliefs .................................................................................8 Commencement of amendments .......................................................................8 (2) More than one CGT event potentially happens ..................................................... 9 ¶2-125 Particular CGT events .................................................................................................... 9 (1) CGT event A1: disposal of a CGT asset ................................................................ 9 (2) CGT event C2: cancellation, surrender and similar endings ................................. 9 (3) CGT event D1: creation of contractual or other rights......................................... 10 (4) CGT event E4: capital payment for trust interest................................................. 10 (5) CGT event G1: capital payment for shares.......................................................... 11 (6) CGT event H1: forfeiture of deposit ..................................................................... 11 (7) CGT event H2: receipt for event relating to a CGT asset .................................... 11
Transcript of Contents Preface iii Abbreviations v Chapter 1 ...€¦ · x Chapter 7: Small business entity test...
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Contents
Preface iii
Abbreviations v
Chapter 1: Eligibility checklist 1
¶1-100 Determining eligibility for CGT small business relief ...................................................... 2
Pre-CGT asset ............................................................................................................... 4
Chapter 2: Some general CGT issues 5
¶2-100 Background .................................................................................................................... 6
¶2-105 CGT asset ...................................................................................................................... 6
¶2-110 Pre-CGT assets .............................................................................................................. 6
¶2-115 Special asset rules ......................................................................................................... 7
(1) Depreciating assets ............................................................................................... 7
(2) Trading stock ......................................................................................................... 7
¶2-120 The CGT events ............................................................................................................. 8
(1) Importance of the time when a CGT event happens ............................................. 8
Relevant income year .........................................................................................8
CGT small business reliefs .................................................................................8
Commencement of amendments .......................................................................8
(2) More than one CGT event potentially happens ..................................................... 9
¶2-125 Particular CGT events .................................................................................................... 9
(1) CGT event A1: disposal of a CGT asset ................................................................ 9
(2) CGT event C2: cancellation, surrender and similar endings ................................. 9
(3) CGT event D1: creation of contractual or other rights ......................................... 10
(4) CGT event E4: capital payment for trust interest................................................. 10
(5) CGT event G1: capital payment for shares.......................................................... 11
(6) CGT event H1: forfeiture of deposit ..................................................................... 11
(7) CGT event H2: receipt for event relating to a CGT asset .................................... 11
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(8) CGT event J2: change in status of small business replacement asset ............... 11
(9) CGT events J5 and J6: failure to satisfy roll-over relief conditions ..................... 11
¶2-130 Calculating net capital gain or net capital loss ............................................................ 12
(1) Net capital gain .................................................................................................... 12
(2) Net capital loss .................................................................................................... 12
¶2-135 Making choices ............................................................................................................ 13
(1) No choice ............................................................................................................. 13
(2) Change of choice? ............................................................................................... 13
(3) Executor making choice ...................................................................................... 14
(4) Extensions of time ............................................................................................... 14
Chapter 3: The recent and proposed legislative changes 15
¶3-100 Summaryofmoresignificantlegislativechanges ........................................................ 16
(1) Proposed amendments ....................................................................................... 16
Trusts and connected entity status ...................................................................16
Direct small business participation percentage ................................................17
(2) Table highlighting changes .................................................................................. 17
¶3-105 Practical implications of commencement of 2006-07 changes ................................... 22
¶3-110 Practical implications of commencement of 2007-08 changes ................................... 24
Chapter 4: Basic conditions to be met 25
¶4-100 Context ........................................................................................................................ 26
¶4-105 CGT asset other than share or trust interest ................................................................ 26
(1) Charts illustrating operation of basic conditions ................................................. 27
¶4-110 Share or trust interest .................................................................................................. 30
(1) Basic condition (b) ............................................................................................... 32
(2) Basic condition (d) ............................................................................................... 32
CGT concession stakeholder ...........................................................................32
(3) The 90% test: share or trust interest held by company or trust .......................... 33
¶4-115 CGT event D1 ............................................................................................................. 35
¶4-120 CGT event K7 .............................................................................................................. 36
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¶4-125 Passively held assets ................................................................................................... 37
(1) Special partner rule .............................................................................................. 38
(2) Transitional provisions ......................................................................................... 39
¶4-127 Proposed change: earnout arrangements ................................................................... 39
¶4-130 Case studies ................................................................................................................ 40
(1) Case study 1 ........................................................................................................ 40
Patrick ...............................................................................................................41
Muriel ................................................................................................................41
Gainco Pty Ltd ..................................................................................................42
(2) Case study 2 ........................................................................................................ 42
Chapter 5: CGT event in relation to CGT asset 43
¶5-100 The condition ............................................................................................................... 44
¶5-105 Examples ..................................................................................................................... 44
¶5-110 Special rule for CGT event D1 ..................................................................................... 45
Chapter 6: Maximum net asset value test 47
¶6-100 Context ........................................................................................................................ 48
¶6-105 The test ........................................................................................................................ 48
(1) “Just before the CGT event” ................................................................................ 49
(2) Partner ................................................................................................................. 50
¶6-110 What is net value of the CGT assets of an entity? ....................................................... 50
(1) CGT assets .......................................................................................................... 51
(2) Market value ........................................................................................................ 51
(3) Thestatutorydefinition ........................................................................................ 52
¶6-115 Disregarded assets: interest in interposed entities ...................................................... 52
¶6-120 Disregarded assets: individuals ................................................................................... 54
(1) Asset being used for personal use and enjoyment.............................................. 55
“Being used” .....................................................................................................55
Solely ................................................................................................................57
Affiliate issues ...................................................................................................57
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(2) Special main residence rule ................................................................................. 59
(3) Superannuation fund ........................................................................................... 59
(4) Interest-bearing bank account ............................................................................. 60
(5) Vacant land .......................................................................................................... 60
¶6-125 Dwellings ...................................................................................................................... 60
(1) Exclusion (a) ......................................................................................................... 61
(2) Exclusion (b) ......................................................................................................... 61
(3) Income-producing use of main residence ........................................................... 61
(4) When would interest be partly deductible? ......................................................... 62
(5) Calculation of amount to be included .................................................................. 62
(6) Use by individual .................................................................................................. 63
(7) Pre-2006-07 CGT events ..................................................................................... 63
(8) Main residence exemption deeming provisions not relevant .............................. 63
(9) Adjacent land ....................................................................................................... 64
(10) Jointly-owned dwelling ........................................................................................ 64
¶6-130 Summary of dwelling rules ........................................................................................... 64
¶6-135 Certainassetsofaffiliatesandtheirconnectedentitiesdisregarded .......................... 65
(1) Chart of operation ................................................................................................ 65
(2) Disregarding rule operates one way only............................................................. 66
(3) “Only because” .................................................................................................... 67
¶6-140 Amounts that reduce the net value of CGT assets ...................................................... 67
¶6-145 “Liabilities” and provisions ........................................................................................... 68
(1) Contingent liabilities ............................................................................................. 68
(2) Provisions taken into account .............................................................................. 69
¶6-150 When does liability relate to CGT asset? ..................................................................... 69
¶6-155 General liabilities .......................................................................................................... 70
¶6-160 Case studies ................................................................................................................ 71
(1) Case study 1 ........................................................................................................ 71
(2) Case study 2 ........................................................................................................ 72
(3) Case study 3 ........................................................................................................ 72
(4) Case study 4 ........................................................................................................ 72
(5) Case study 5 ........................................................................................................ 73
(6) Case study 6 ........................................................................................................ 73
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Chapter 7: Small business entity test 75
¶7-100 Context ........................................................................................................................ 76
(1) Relevance of small business entity test ............................................................... 76
(2) Thepresentconnectedentityandaffiliatetests .................................................. 76
¶7-105 Operation of small business entity test ........................................................................ 77
¶7-110 Small business entity ................................................................................................... 79
(1) Business must be carried on ............................................................................... 79
(2) Three possible tests ............................................................................................. 79
¶7-115 What constitutes carrying on a business? ................................................................... 79
(1) Capital asset ventured into business ................................................................... 82
(2) Company or individual ......................................................................................... 83
(3) Partnership ........................................................................................................... 83
(4) Rental property .................................................................................................... 83
(5) Winding up business ........................................................................................... 84
¶7-120 The immediately preceding income year test .............................................................. 85
¶7-125 The actual current year test ......................................................................................... 85
¶7-130 The likely current year test ........................................................................................... 85
(1) “Likely” ................................................................................................................. 86
¶7-135 Aggregated turnover .................................................................................................... 88
(1) Special rule: passively held assets ...................................................................... 89
(2) Transitional provisions ......................................................................................... 90
¶7-140 Annual turnover ............................................................................................................ 90
(1) GST excluded ...................................................................................................... 91
(2) Sales of retail fuel ................................................................................................. 91
(3) Regulations .......................................................................................................... 91
¶7-145 In ordinary course of carrying on a business ............................................................... 91
(1) Winding up a business ......................................................................................... 93
(2) Transactions with associated entities .................................................................. 93
¶7-150 Ordinary income ........................................................................................................... 93
¶7-155 Derived ......................................................................................................................... 94
¶7-160 Business not carried on for whole income year ........................................................... 96
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¶7-165 Dealings with associates.............................................................................................. 96
¶7-170 Case studies ................................................................................................................ 97
(1) Case study 1 ........................................................................................................ 97
(2) Case study 2 ........................................................................................................ 98
Chapter 8: Active assets and the active asset test 99
¶8-100 Context ...................................................................................................................... 100
¶8-105 Activeassetdefinition ................................................................................................ 100
¶8-110 CGT asset that is not a share or trust interest as an active asset ............................. 100
(1) Passively held assets: winding-up rule .............................................................. 102
(2) Intangible assets ................................................................................................ 102
(3) Earnout right ...................................................................................................... 103
(4) Held ready for use .............................................................................................. 103
(5) Connected entities ............................................................................................. 103
(6) Affiliateissues .................................................................................................... 104
(7) Transitional provision ......................................................................................... 105
¶8-115 Share or trust interest in non-widely held entity as an active asset ........................... 106
(1) Relevant assets .................................................................................................. 106
(2) Financial instruments and cash ......................................................................... 107
(3) Continuing active asset status if reasonable to conclude ................................. 107
(4) Temporary breaks .............................................................................................. 107
(5) Active asset via a further entity .......................................................................... 108
¶8-120 Share or trust interest in widely held entity ................................................................ 108
¶8-125 What cannot be an active asset? ............................................................................... 109
¶8-130 Financial instruments ................................................................................................. 109
¶8-135 Assets producing passive income ............................................................................. 110
(1) Interest ............................................................................................................... 111
(2) Annuity ............................................................................................................... 111
(3) Rent ................................................................................................................... 112
AAT decision: Carson .....................................................................................113
No business ....................................................................................................114
AAT decision: Tingari Village ...........................................................................114
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(4) Examples ........................................................................................................... 114
(5) Royalties ............................................................................................................ 114
(6) Main use ............................................................................................................ 115
¶8-140 Assetrentedtoconnectedentityoraffiliate .............................................................. 115
¶8-145 Requirements to be met for active asset test ............................................................ 115
¶8-150 The active asset test .................................................................................................. 116
(1) Interest in asset acquired at different times ....................................................... 116
(2) Cessation of business ........................................................................................ 116
(3) Acquired ............................................................................................................. 116
¶8-155 Some issues with shares and trust interests ............................................................. 118
(1) Time of CGT event happening ........................................................................... 118
Liquidation of company ..................................................................................118
Trust distribution .............................................................................................118
¶8-160 Case studies .............................................................................................................. 119
(1) Case study 1 ...................................................................................................... 119
(2) Case study 2 ...................................................................................................... 119
(3) Case study 3 ...................................................................................................... 120
(4) Case study 4 ...................................................................................................... 120
(5) Case study 5 ...................................................................................................... 121
(6) Case study 6 ...................................................................................................... 121
(7) Case study 7 ...................................................................................................... 122
(8) Case study 8 ...................................................................................................... 122
(9) Case study 9 ...................................................................................................... 123
(10) Case study 10 .................................................................................................... 123
(11) Case study 11 .................................................................................................... 124
Chapter 9: Affiliates 125
¶9-100 Context ...................................................................................................................... 126
¶9-105 Commencementofoperationofdefinitionofaffiliate ................................................ 127
¶9-110 Definitionofaffiliate ................................................................................................... 127
(1) Spouse or child under 18 ................................................................................... 128
(2) FormerdefinitionofsmallbusinessCGTaffiliate .............................................. 128
(3) Differences ......................................................................................................... 128
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¶9-115 Trusteecannotbeanaffiliate ..................................................................................... 129
¶9-120 “The affairs of the business” ...................................................................................... 129
(1) “Affairs” .............................................................................................................. 130
¶9-125 Actingindefinedmanner ........................................................................................... 131
(1) AAT decisions .................................................................................................... 133
¶9-130 Spouses and children ................................................................................................ 135
¶9-135 Thespecialspouse/childunder18affiliaterule ......................................................... 135
(1) Circumstances in which the special rule applies ............................................... 135
(2) How the special rule operates ........................................................................... 136
(3) Further consequences ....................................................................................... 139
(4) “Spouse” and “child” ......................................................................................... 140
(5) Some consequences of the rule ........................................................................ 140
(6) Scopeofthespecialspouse/childunder18affiliaterule .................................. 141
Affiliate status applies generally .....................................................................141
Capital gain made by affiliate .........................................................................142
Does the rule only have a beneficial operation? .............................................142
(7) Application and transitional provisions .............................................................. 143
¶9-140 Whetheranaffiliateisanaffiliateforallpurposes ..................................................... 143
¶9-145 Business relationships ............................................................................................... 144
“Business relationship” ...................................................................................145
¶9-150 Case studies .............................................................................................................. 145
(1) Case study 1 ..................................................................................................... 146
(2) Case study 2 ...................................................................................................... 146
(3) Case study 3 ..................................................................................................... 147
(4) Case study 4 ..................................................................................................... 148
Pre-2007-08 position ......................................................................................148
Post-2006-07 position ....................................................................................149
(5) Case study 5 ...................................................................................................... 149
CGT event pre-2007-08 ..................................................................................149
CGT event post 2006-07 ................................................................................150
(6) Case study 6 ...................................................................................................... 151
Pre-2009 amendments ...................................................................................151
Post-2009 amendments .................................................................................151
(7) Case study 7 ...................................................................................................... 152
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Pre-2009 amendments ...................................................................................152
Post-2009 amendments .................................................................................152
(8) Case study 8 ...................................................................................................... 153
Chapter 10: Connected entities 155
¶10-100 Context ...................................................................................................................... 156
¶10-105 Implications of present connected entity rules .......................................................... 156
¶10-110 “Connected” depends on “control” ........................................................................... 157
¶10-115 Indirect control rule .................................................................................................... 158
(1) No indirect control through certain public entities ............................................. 160
¶10-120 Controlbyaffiliates .................................................................................................... 160
¶10-125 Relevant control rules ................................................................................................ 160
¶10-130 Control of company ................................................................................................... 161
(1) The right to distribution control rule ................................................................... 161
(2) The voting power control rule ............................................................................ 162
Equity interests carrying right to exercise voting power .................................163
(3) Rights carried by shares relevant ...................................................................... 163
(4) Right to acquire ................................................................................................. 164
(5) Beneficialownership .......................................................................................... 164
¶10-135 Control percentage between 40% and 50% ............................................................. 166
(1) Indirect control ................................................................................................... 167
(2) Construction of s 328-125(6) ITAA97 ................................................................. 167
(3) Explanatory memorandum ................................................................................ 169
(4) ATO Advanced Guide ........................................................................................ 169
(5) Overriding discretion ......................................................................................... 171
(6) No application for exercise of discretion needed .............................................. 171
(7) Negative discretion ............................................................................................ 171
(8) Review of exercise of discretion ........................................................................ 171
(9) Potential effect on active asset status ............................................................... 172
(10) Reform of the discretion? .................................................................................. 172
¶10-140 Control of partnership ................................................................................................ 172
¶10-145 Control of trust ........................................................................................................... 174
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¶10-150 What is a discretionary trust? .................................................................................... 174
¶10-155 Non-discretionary trusts ............................................................................................ 176
¶10-160 Discretionary trusts .................................................................................................... 177
(1) Historical context ............................................................................................... 177
CGT events before 2007-08 ...........................................................................177
Pattern of distributions control rule ................................................................178
¶10-165 The trustee reasonable to expect to act control rule ................................................. 178
¶10-170 The pattern of distributions control rule ..................................................................... 180
(1) Exempt entity or deductible gift recipient .......................................................... 181
¶10-175 Pattern of distributions: control percentage between 40% and 50% ....................... 181
¶10-180 Example of operation of pattern of distributions control rule .................................... 181
¶10-185 Loss year controllers .................................................................................................. 183
(1) Transitional provisions ....................................................................................... 184
(2) Example ............................................................................................................. 185
(3) Nomination ......................................................................................................... 186
(4) Precedent ........................................................................................................... 186
¶10-190 Distributions after close of income year .................................................................... 187
¶10-195 Income and capital distributions to be considered separately .................................. 188
(1) Distinction between income and capital ............................................................ 189
¶10-200 Some practical aspects of the pattern of distributions control rule ........................... 190
(1) Any kind of entity ............................................................................................... 190
(2) Reasons for utilising the rule.............................................................................. 190
(3) Control in what income years? .......................................................................... 190
(4) Relevant distribution .......................................................................................... 191
(5) Distribution resolution ........................................................................................ 192
¶10-205 Case studies .............................................................................................................. 192
(1) Case study 1 ...................................................................................................... 192
(2) Case study 2 ...................................................................................................... 193
(3) Case study 3 ...................................................................................................... 193
(4) Case study 4 ...................................................................................................... 194
(5) Case study 5 ...................................................................................................... 194
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Chapter 11: Significant individuals and CGT concession stakeholders 195
¶11-100 Context ...................................................................................................................... 196
¶11-105 Thesignificantindividualtest ..................................................................................... 196
¶11-110 Significantindividual .................................................................................................. 196
¶11-115 CGT concession stakeholder ..................................................................................... 197
¶11-120 Small business participation percentage ................................................................... 197
¶11-125 Direct small business participation percentage: company ........................................ 198
(1) Redeemable shares ........................................................................................... 199
(2) Voting power ...................................................................................................... 200
(3) Any dividend, any distribution ........................................................................... 201
(4) Company in liquidation ...................................................................................... 202
(5) Holding legal and equitable interests................................................................. 203
“Holding” ........................................................................................................203
“Legal and equitable interests” .......................................................................203
¶11-130 Directsmallbusinessparticipationpercentage:fixedtrust ....................................... 205
¶11-135 Direct small business participation percentage: other trusts ..................................... 207
(1) Distributions “during” income year .................................................................... 207
(2) What is a distribution? ....................................................................................... 208
(3) Operation of a default income provision ............................................................ 208
(4) Some practical points ........................................................................................ 209
¶11-140 Indirect small business participation percentage ...................................................... 210
¶11-145 Examples from explanatory memorandum ................................................................ 211
¶11-150 Case studies .............................................................................................................. 214
(1) Case study 1 ...................................................................................................... 214
(2) Case study 2 ...................................................................................................... 214
(3) Case study 3 ...................................................................................................... 215
(4) Case study 4 ...................................................................................................... 215
Chapter 12: The 15-year exemption 217
¶12-100 Context ...................................................................................................................... 218
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(1) Retirement ......................................................................................................... 218
(2) Retirement exemption limit unaffected .............................................................. 218
(3) Capital losses not absorbed .............................................................................. 218
(4) Superannuation contributions ........................................................................... 218
¶12-105 Conditions to be met for individuals .......................................................................... 219
(1) Permanent incapacity ........................................................................................ 219
(2) Where certain CGT roll-over relief applies ......................................................... 219
¶12-110 Conditions to be met where CGT asset is share or trust interest .............................. 219
¶12-115 Conditions to be met for companies and trusts ........................................................ 220
(1) Permanent incapacity ........................................................................................ 221
(2) Morethanonesignificantindividual .................................................................. 221
(3) Non-fixedtrust:lossyear ................................................................................... 221
(4) Amendments ...................................................................................................... 221
(5) Where certain CGT roll-over relief applies ......................................................... 221
¶12-120 Ordinary income and other statutory income of company or trust ............................ 222
¶12-125 Identifying the relevant asset ..................................................................................... 222
¶12-130 Interests in CGT asset acquired at different times ..................................................... 223
¶12-135 Change in majority underlying interests ..................................................................... 224
¶12-140 “In connection with retirement” ................................................................................. 224
(1) “In connection with” .......................................................................................... 224
(2) Retirement ......................................................................................................... 224
(3) CGT event after retirement ................................................................................ 225
(4) CGT event before retirement ............................................................................. 225
(5) Further ATO examples ....................................................................................... 225
¶12-145 Permanent incapacity ................................................................................................ 226
¶12-150 Companiesandtrusts:flow-throughofconcessiontoCGT
concession stakeholders ........................................................................................... 228
¶12-155 Amountsthatcanqualifyforflow-throughconcession ............................................. 228
(1) Exempt amount ................................................................................................. 229
(2) Change in underlying interests in pre-CGT asset .............................................. 229
¶12-160 Howflow-throughconcessionworks ........................................................................ 229
(1) Extension of two-year period ............................................................................. 230
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(2) Payment ............................................................................................................. 230
¶12-162 Where distribution is made by a discretionary trust .................................................. 231
¶12-165 CGT events E4 and G1 .............................................................................................. 232
¶12-170 Indirect payments ...................................................................................................... 232
¶12-175 What payments can qualify? ...................................................................................... 233
¶12-180 Prudent to pay early ................................................................................................... 234
¶12-185 Case studies .............................................................................................................. 234
(1) Case study 1 ...................................................................................................... 234
(2) Case study 2 ...................................................................................................... 235
Chapter 13: Small business 50% reduction 237
¶13-100 The reduction ............................................................................................................. 238
¶13-105 Other concessions and capital losses ....................................................................... 238
¶13-110 The reduction is optional............................................................................................ 238
¶13-115 Making the choice ...................................................................................................... 239
¶13-120 Trustee: concession reversed .................................................................................... 239
¶13-125 Obtainingbenefitofreductionamount ...................................................................... 239
Chapter 14: Retirement exemption 241
¶14-100 Context ...................................................................................................................... 242
(1) Retirement not necessary .................................................................................. 243
(2) Individual ............................................................................................................ 243
(3) Company or trust ............................................................................................... 243
(4) Choice cannot be altered ................................................................................... 243
¶14-105 Changes: 2006-07 and 2007-08 ................................................................................ 243
(1) Individuals and retirement exemption ................................................................ 244
(2) Company or trust: no retirement necessary ..................................................... 244
(3) CGT concession stakeholder............................................................................. 244
(4) Actual capital proceeds ..................................................................................... 244
(5) ETP and RBL ..................................................................................................... 244
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¶14-110 Actual capital proceeds not required ........................................................................ 245
¶14-115 Retirement exemption and CGT events J2, J5 and J6 .............................................. 245
¶14-120 How CGT small business retirement exemption operates for individuals ................. 246
¶14-125 When individual taxpayer may choose retirement exemption ................................... 248
(1) Amount available for retirement relief ................................................................ 248
(2) Limitation on amount ......................................................................................... 249
(3) Taxpayer under 55 years of age ......................................................................... 249
(4) Taxpayer 55 years of age or more ..................................................................... 249
(5) Making the choice ............................................................................................. 249
(6) Consequences of choice ................................................................................... 249
¶14-130 Specifying amount chosen (CGT-exempt amount) .................................................... 250
(1) Precedentchoiceandspecification................................................................... 250
¶14-135 CGT retirement exemption limit ................................................................................. 251
¶14-140 Capital gain disregarded for individuals ..................................................................... 251
¶14-145 Procedure for individuals under 55 years of age ....................................................... 251
(1) Time of contribution ........................................................................................... 252
(2) Capital proceeds received in instalments .......................................................... 252
(3) Contractual provisions ....................................................................................... 252
(4) Transfer of real property ..................................................................................... 253
¶14-150 CGT small business concessions and superannuation contributions ....................... 253
(1) Eligible contributions ......................................................................................... 253
(2) Making the choice ............................................................................................. 254
(3) CGT cap amount ............................................................................................... 254
(4) Transitional arrangements .................................................................................. 255
¶14-155 How CGT small business retirement exemption operates for companies
and trusts ................................................................................................................... 255
¶14-160 When company or trust may choose retirement exemption ...................................... 257
¶14-165 Individuals for whom retirement exemption can be chosen ...................................... 258
¶14-170 Specifying CGT-exempt amount and stakeholder percentages ............................... 259
(1) Making the choice ............................................................................................. 259
(2) Precedentchoiceandspecification................................................................... 259
¶14-175 Capital gain disregarded for companies and trusts ................................................... 261
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¶14-180 Special company and trust conditions ...................................................................... 261
(1) Company or trust must make a payment .......................................................... 261
(2) Time of making of payment ............................................................................... 262
(3) Market value substitution rule ............................................................................ 262
(4) Capital proceeds received in instalments .......................................................... 263
(5) Amount of payment ........................................................................................... 263
(6) Joint or separate payments ............................................................................... 263
(7) Nature of payment ............................................................................................. 263
(8) Stakeholder under 55 years of age .................................................................... 264
(9) No allowable deduction ..................................................................................... 265
¶14-185 Operation of deemed dividend provisions ................................................................. 265
(1) Section 109 ITAA36 ........................................................................................... 266
(2) Division 7A ITAA36 ............................................................................................. 267
Chapter 15: Roll-over relief 269
¶15-100 Context ...................................................................................................................... 270
(1) 2006-07 amendments ........................................................................................ 270
(2) Transitional provisions ....................................................................................... 271
¶15-105 How CGT small business roll-over relief works ......................................................... 271
¶15-110 Choosing roll-over relief ............................................................................................. 272
(1) Amount available for roll-over ............................................................................ 273
(2) Deferring a capital gain ...................................................................................... 274
(3) Making the choice ............................................................................................. 274
¶15-115 Retriggering of rolled-over capital gain ...................................................................... 274
¶15-120 Replacement asset period ......................................................................................... 275
(1) Discretion to extend period ............................................................................... 275
(2) Increase of capital proceeds .............................................................................. 276
¶15-125 Fourth element expenditure ....................................................................................... 276
¶15-130 CGT event J5 ............................................................................................................. 277
(1) Share or trust interest: additional requirement .................................................. 277
(2) Time of event ..................................................................................................... 279
(3) Capital gain ........................................................................................................ 279
(4) Concessions available ....................................................................................... 279
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¶15-135 What can qualify as a replacement asset? ................................................................ 280
¶15-140 CGT event J6 ............................................................................................................. 280
(1) Time of event ..................................................................................................... 281
(2) Capital gain ........................................................................................................ 281
(3) What CGT concessions are available? .............................................................. 281
¶15-145 CGT event J2 ............................................................................................................. 282
(1) CGT event J2 and farmer roll-over provisions ................................................... 282
(2) Share or trust interest ........................................................................................ 283
(3) Other CGT event may also happen ................................................................... 283
(4) Time of event ..................................................................................................... 283
(5) Capital gain ........................................................................................................ 283
(6) Other concessions ............................................................................................. 284
¶15-150 Death of individual .................................................................................................... 284
¶15-155 Small business reliefs and CGT events J2, J5 and J6 .............................................. 285
¶15-160 What if the taxpayer ceases to exist during the replacement asset period? ............. 286
¶15-165 How the rolled-over capital gain is applied against replacement assets
or expenditure ............................................................................................................ 287
¶15-170 Using roll-over relief as a deferral mechanism ........................................................... 288
(1) Maximum net asset value test/small business entity ........................................ 289
(2) How a rolled-over capital gain is applied........................................................... 289
¶15-175 Transitional issues ...................................................................................................... 289
(1) Choosing retirement relief .................................................................................. 290
(2) CGT events J2, J5 and J6 ................................................................................. 290
¶15-180 Case studies .............................................................................................................. 291
(1) Case study 1 ...................................................................................................... 291
(2) Case study 2 ...................................................................................................... 292
Chapter 16: Company distributions 293
¶16-100 Context ...................................................................................................................... 294
¶16-105 Treatment of non-taxed amount ................................................................................ 294
(1) 15-year exempt amount .................................................................................... 294
(2) Retirement exemption amount .......................................................................... 294
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(3) 50% reduction amount ...................................................................................... 294
(4) Roll-over amount ............................................................................................... 296
Chapter 17: Trust distributions 297
¶17-100 Context ...................................................................................................................... 298
(1) Terminology ........................................................................................................ 298
¶17-105 Capital gain may or may not be reduced to nil .......................................................... 298
(1) Capital gain reduced to a lesser amount ........................................................... 299
Position for 2010-11 and later income years ..................................................299
Specific entitlement ........................................................................................300
Adjusted Division 6 percentage ......................................................................300
Example ..........................................................................................................301
Position for 2009-10 and earlier income years ...............................................302
(2) Capital gain reduced to nil ................................................................................. 303
(3) CGT event J2, J5 or J6 ..................................................................................... 303
¶17-110 Distribution of 15-year exempt amount ..................................................................... 304
¶17-115 Distribution of discount or reduction amount ............................................................ 304
(1) Discretionary trust distribution ........................................................................... 304
(2) Unit trust ............................................................................................................ 305
(3) CGT event C2 .................................................................................................... 305
(4) CGT event E4 ..................................................................................................... 305
Circumstances in which CGT event E4 will happen .......................................305
Consequences of CGT event E4 happening ..................................................306
Time of CGT event E4 .....................................................................................306
The non-assessable part ................................................................................306
CGT event E4 and a reduction amount ..........................................................307
CGT event E4 capital gain and the CGT concessions ...................................307
¶17-120 CGT event E4 v CGT event C2 .................................................................................. 308
¶17-125 Trustee assessed under s 99A ITAA36 ....................................................................... 308
(1) 2010-11 and later income years ........................................................................ 308
(2) 2009-10 and earlier income years ..................................................................... 309
(3) Rolled-over capital gain ..................................................................................... 309
(4) Section 98(3) or 98(4) ITAA36 ............................................................................ 309
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¶17-130 Case study ................................................................................................................ 309
(1) Fred .................................................................................................................... 310
2010-11...........................................................................................................310
2011-12...........................................................................................................311
(2) Ticktock Pty Ltd ................................................................................................. 312
2010-11...........................................................................................................312
2011-12...........................................................................................................312
Chapter 18: Partnerships and partners 315
¶18-100 What is a partnership? ............................................................................................... 316
¶18-105 Some fundamental propositions ................................................................................ 316
¶18-110 Is a partnership an entity?.......................................................................................... 317
(1) Tax law partnership ............................................................................................ 318
¶18-115 Basic conditions: issues for assets used by partnerships ......................................... 319
(1) Asset a partnership asset .................................................................................. 319
(2) Asset owned by a partner .................................................................................. 320
(3) Asset owned by entity that is not a partner ....................................................... 320
(4) Former rule ......................................................................................................... 321
¶18-120 Small business entity issues ...................................................................................... 321
¶18-125 Active asset issues..................................................................................................... 322
¶18-130 Affiliateissues ............................................................................................................ 323
¶18-135 Connected entity issues............................................................................................. 325
¶18-140 Case studies .............................................................................................................. 326
(1) Case study 1 ...................................................................................................... 326
(2) Case study 2 ...................................................................................................... 327
(3) Case study 3 ...................................................................................................... 328
(4) Case study 4 ...................................................................................................... 328
(5) Case study 5 ...................................................................................................... 329
(6) Case study 6 ...................................................................................................... 329
(7) Case study 7 ...................................................................................................... 329
(8) Case study 8 ...................................................................................................... 330
(9) Case study 9 ...................................................................................................... 330
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Position before the 2009 amendments ..........................................................331
Position after the 2009 amendments ..............................................................331
Chapter 19: Deceased estates 333
¶19-100 Context ...................................................................................................................... 334
(1) Roll-over relief .................................................................................................... 334
¶19-105 CGT event within two years of death rule .................................................................. 335
(1) When can the rule operate? ............................................................................... 335
(2) How the rule operates........................................................................................ 335
(3) Commencement ................................................................................................ 336
(4) Making choices .................................................................................................. 336
(5) Devolution to legal personal representative ....................................................... 336
(6) Passingtoabeneficiary ..................................................................................... 336
(7) Testamentary trust ............................................................................................. 337
(8) Joint tenants ...................................................................................................... 337
(9) What CGT events? ............................................................................................. 337
(10) CGT event within two years .............................................................................. 337
(11) Discretion to extend two-year period ................................................................ 338
(12) Situations where an asset does not pass under will .......................................... 338
(13) What reliefs? ...................................................................................................... 338
(14) Deceased’s position immediately before death ................................................. 339
(15) Ordinary CGT small business relief rules ........................................................... 339
¶19-110 Asset owned by joint tenants ..................................................................................... 340
¶19-115 Applying ordinary CGT small business relief rules to deceased estates ................... 341
¶19-120 Some other consequences of death for CGT small business reliefs ......................... 342
¶19-125 Case studies .............................................................................................................. 342
(1) Case study 1 ...................................................................................................... 342
(2) Case study 2 ...................................................................................................... 343
(3) Case study 3 ...................................................................................................... 343
(4) Case study 4 ...................................................................................................... 344
(5) Case study 5 ...................................................................................................... 344
(6) Case study 6 ...................................................................................................... 345
(7) Case study 7 ...................................................................................................... 345
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Chapter 20: Superannuation funds and members 347
¶20-100 Superannuation funds and CGT small business relief ............................................... 348
¶20-105 Exclusion from net value of CGT assets .................................................................... 349
¶20-110 Case study ................................................................................................................. 349
Chapter 21: Tips and traps 351
¶21-100 Context ...................................................................................................................... 352
¶21-105 Impact of recent changes .......................................................................................... 352
¶21-110 Existing arrangements must be monitored ................................................................ 353
¶21-115 General anti-avoidance provisions (Pt IVA) ................................................................ 354
(1) Making choices .................................................................................................. 354
¶21-120 CGT merits of different kinds of entities .................................................................... 354
¶21-125 Active asset test ......................................................................................................... 355
(1) “Just before” ...................................................................................................... 355
(2) “Use or holding ready for use”........................................................................... 356
(3) Period of time .................................................................................................... 356
(4) Connected entity ............................................................................................... 357
(5) Affiliate ............................................................................................................... 357
(6) Rent-producing use ........................................................................................... 357
¶21-130 Maximum net asset value test ................................................................................... 358
(1) Alternative test ................................................................................................... 358
(2) Threshold ........................................................................................................... 358
(3) “Just before” ...................................................................................................... 358
(4) Effect of what has been done in the past .......................................................... 358
(5) Connected entities ............................................................................................. 358
(6) Exempt assets ................................................................................................... 359
(7) Dividend ............................................................................................................. 359
(8) Incurring of liability ............................................................................................. 359
(9) Borrowing to acquire shares or units ................................................................. 360
(10) Entityconnectedbecauseofaffiliate ................................................................. 360
(11) Timing issues involved ....................................................................................... 360
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¶21-135 Small business entity test .......................................................................................... 360
(1) Alternative test ................................................................................................... 360
(2) Small business entity ......................................................................................... 361
(3) Annual turnover .................................................................................................. 361
(4) Use of small business entity test ....................................................................... 362
¶21-140 Affiliateissues ............................................................................................................ 362
(1) Relevanceofaffiliatestatus ............................................................................... 362
(2) Definitionofaffiliate ........................................................................................... 362
(3) Spouse/child under 18 years of age .................................................................. 362
¶21-145 “Connected” entity issues ......................................................................................... 363
(1) Relevance of connected entity rules .................................................................. 363
(2) Control percentage less than 50% .................................................................... 364
(3) Right to distribution control rule ........................................................................ 364
(4) Discretionary trusts ............................................................................................ 364
(5) Controlbecauseofaffiliates .............................................................................. 365
(6) Income and capital ............................................................................................ 365
¶21-150 Significantindividualissues ....................................................................................... 366
(1) Trusts and small business participation percentage.......................................... 366
(2) Discretionary trusts ............................................................................................ 366
(3) Income and capital ............................................................................................ 366
¶21-155 CGT 15-year small business exemption .................................................................... 367
(1) Company or trust ............................................................................................... 367
¶21-160 CGT small business 50% reduction .......................................................................... 367
(1) Choice for reduction not to apply ...................................................................... 367
(2) Individual and discretionary trust ....................................................................... 367
(3) Consequence of choice ..................................................................................... 367
¶21-165 CGT small business retirement exemption ................................................................ 368
(1) Actual proceeds not necessary ......................................................................... 368
(2) No actual retirement required ............................................................................ 368
(3) Excessive retiring allowance – company ........................................................... 368
(4) Under 55 years of age ....................................................................................... 369
(5) Division 7A ITAA36 ............................................................................................. 369
¶21-170 CGT small business roll-over relief ............................................................................ 369
(1) Automatic disregarding of capital gain .............................................................. 369
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(2) Replacement asset: kind ................................................................................... 370
(3) Replacement asset: share or trust interest ........................................................ 370
(4) Improvements .................................................................................................... 370
(5) Rolled-over gain remade ................................................................................... 370
(6) Retirement exemption or roll-over relief ............................................................ 370
(7) Roll-over of part of gain ..................................................................................... 371
¶21-175 Deceased estates ...................................................................................................... 371
(1) CGT event within two years of death................................................................. 371
(2) Ordinary CGT rules ............................................................................................ 371
(3) Changes resulting from death ............................................................................ 371
(4) Joint tenants ...................................................................................................... 371
¶21-180 Company and trust structuring .................................................................................. 372
¶21-185 Partnership structuring .............................................................................................. 373
¶21-190 Passive asset issues .................................................................................................. 373
(1) Passive asset ..................................................................................................... 373
(2) What tests need to be met ................................................................................ 374
(3) Formerlimitedspouseaffiliaterule .................................................................... 374
¶21-195 Deferring capital losses .............................................................................................. 375
¶21-200 Case study ................................................................................................................. 375
Index 377
