In a recent Federal Court decision, the taxpayers being a husband and wife had sold their shares in a company and claimed the 15 year retirement exemption with respect to the capital gain each of them had made in relation to their shareholding in the company. The husband held 30% of the issued capital of the Company and the wife held 28.2% of the issued capital of the Company.
One of the requirements to access the small business CGT concessions is that the relevant taxpayer must satisfy the maximum net asset value test.
In this case, the question was whether or not for the purposes of satisfying this test, the taxpayers had to include the value of the assets of the Company or whether it was sufficient, as the taxpayers had done, to only include the value of their shares in the Company. If it was the former, they would have failed the test but not if it was the latter.
For the purposes of the maximum net asset value test, in broad terms the provisions treat the small business, and all of its related entities, as a single economic unit. This means that not only the net value of the assets of the taxpayer are included in the calculation but also the net value of assets owned by other entities connected with the taxpayer.
The husband and the wife between them held more than 40% of the capital of the Company. Under the provisions that applied at the time and even under the current provisions, but for a specific exclusionary provision referred to below, this would result in the assets of the Company being required to be included in the maximum net asset value test calculation.
There is an exclusionary provision that excludes certain assets that would otherwise be included in the calculation of the net asset value if those assets were used, or held ready for use, in the carrying on of a business by an entity that was “connected with” the taxpayer “only because” of the taxpayer’s “small business CGT affiliate” (or under the current legislation “affiliate”). The husband was a small business CGT affiliate of the wife and the wife was small business CGT affiliate of the husband.
The Court held that this particular provision focuses on the fact or facts which gave rise to the “connection” between the taxpayer and the other entity whose assets would otherwise be included in the maximum net asset value test calculation. If that connection between the taxpayer and that other entity arises only because of the relationship between the taxpayer and the “affiliate” (or at the time as the provisions then read between the taxpayer and the “small business CGT affiliate”) then the assets of that other entity will be excluded.
In this case the Company was only connected with the husband because of the wife’s shareholding in the Company and the wife was only connected with the Company because of the husband’s shareholding in the Company. Therefore the connection of the Company with the taxpayer only arose because of the taxpayer’s affiliate. This meant that the assets of the Company were required to be excluded from the maximum net asset value test calculation.