Taxation Determination

TD 2004/46

Income tax: consolidation: capital gains: is the controlling individual condition in paragraph 152-305(2)(b) of the Income Tax Assessment Act 1997 (one of the conditions for the small business retirement exemption) applied to the head company of a consolidated group?

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FOI status:

may be released

1. Yes. The effect of the single entity rule in section 701-1 of the Income Tax Assessment Act 1997 (ITAA 1997) is that the controlling individual condition in paragraph 152-305(2)(b) of the ITAA 1997 is applied to the head company of the consolidated group.

2. An entity wishing to apply the small business retirement exemption to a capital gain from an active asset must satisfy the controlling individual condition in paragraph 152-305(2)(b) of the ITAA 1997. That condition is satisfied if the entity has at least one controlling individual just before the CGT event that gave rise to the capital gain.

3. Under the single entity rule, subsidiary members of a consolidated group are taken to be parts of the head company (and not separate entities) for the group's income tax purposes. A CGT event, for example, the sale of an asset by a subsidiary member, is taken to happen to the head company of the consolidated group and any capital gain or loss is therefore made by the head company.

4. Accordingly, the head company of a consolidated group must satisfy the controlling individual condition in paragraph 152-305(2)(b) of the ITAA 1997 before it can choose the small business retirement exemption to reduce a capital gain that it has made.

5. An individual is a controlling individual of a company at a time if, at that time, the individual holds the legal and equitable interest in shares, other than redeemable shares, that carry the right to exercise at least 50% of the voting power in the company and receive at least 50% of any dividend and 50% of any distribution of capital the company may pay (subsection 152-55(1) of the ITAA 1997).

Example

6. All the shares in H Co are owned by an individual. H Co is the head company of a consolidated group consisting of H Co and Sub Co. Sub Co carries on a business.

7. In the 2004 income year Sub Co sold an asset. For the purposes of working out H Co's liability to income tax for that income year, H Co is taken to have sold the asset and made a capital gain. H Co wishes to treat the capital gain as exempt under the small business retirement exemption in Subdivision 152-D of the ITAA 1997. H Co satisfies all of the basic conditions in section 152-10 of the ITAA 1997.

8. As a result of the single entity rule, the controlling individual test is applied to the group's head company with the result, in this case, that H Co will be able to claim the small business retirement exemption in relation to the capital gain made on the disposal of the asset if the other conditions for the exemption are satisfied.

Date of effect

9. This Determination applies to years commencing both before and after its date of issue. However, it does not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of the Determination (see paragraphs 21 and 22 of Taxation Ruling TR 92/20).

Commissioner of Taxation
6 October 2004

Previously issued in draft form as TD 2004/D16

References

ATO references:
NO 2004/13838

Related Rulings/Determinations:

TR 92/20

Subject References:
capital gains tax
CGT event
consolidated group
controlling individual
entry history rule
head company
single entity rule
small business relief
small business 15 year exemption
small business retirement exemption
subsidiary member

Legislative References:
TAA 1953 Pt IVAAA
ITAA 1997 152-10
ITAA 1997 152-55(1)
ITAA 1997 152-305(2)(b)
ITAA 1997 Subdiv 152-D
ITAA 1997 701-1