Taxation Determination

TD 2006/71

Income tax: capital gains: small business concessions: is the part of a payment which is a small business 50% reduction amount a non-assessable part under CGT event E4 in section 104-70 of the Income Tax Assessment Act 1997?

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This publication (excluding appendixes) is a public ruling for the purposes of the Taxation Administration Act 1953. A public ruling is an expression of the Commissioner's opinion about the way in which a relevant provision applies, or would apply, to entities generally or to a class of entities in relation to a particular scheme or a class of schemes. If you rely on this ruling, we must apply the law to you in the way set out in the ruling (or in a way that is more favourable for you if we are satisfied that the ruling is incorrect and disadvantages you, and we are not prevented from doing so by a time limit imposed by the law). You will be protected from having to pay any underpaid tax, penalty or interest in respect of the matters covered by this ruling if it turns out that it does not correctly state how the relevant provision applies to you.

[Note: This is a consolidated version of this document. Refer to the Tax Office Legal Database (http://law.ato.gov.au) to check its currency and to view the details of all changes.]

Ruling

1. Yes. The part of a payment which is a small business 50% reduction amount is a non-assessable part under CGT event E4 in section 104-70 of the Income Tax Assessment Act 1997 (ITAA 1997).[1]

Example 1

2. The Trustee of the Gillies Family Unit Trust carries on a business. All of the trust's assets have always been active assets. Gilbert and the only other beneficiary have each owned one unit in the trust for ten years (so they are both significant individuals). The sum of net assets of Gilbert, the trust and any other relevant entities does not exceed $6 million. The trustee makes a capital gain of $4,000 (capital proceeds $9,000 less cost base $5,000) from the disposal of an active asset owned for eight months. The trust satisfies the conditions for the small business 50% active asset reduction and the gain is reduced to $2,000. The net income of the trust is $2,000. The trustee distributes the capital proceeds of $9,000 equally to Gilbert and the other beneficiary in the income year in which the capital gain is made. The tax consequences for Gilbert are:

Gilbert's trust net income under section 97 of the Income Tax Assessment Act 1936 (ITAA 1936) $1,000

Gilbert calculates his capital gain under Subdivision 115-C:

Gross-up trust gain under paragraph 115-215(3)(b) ($1,000 x 2) $2,000
less: SB 50% reduction under paragraph 115-215(4)(b) $1,000
Capital gain $1,000
Gilbert's deduction under subsection 115-215(6) $1,000

Gilbert calculates his non-assessable part under CGT event E4:

Payment of capital proceeds made by trustee $4,500
less: trust net capital gain assessed under section 97 of the ITAA 1936 $1,000
Non-assessable part of payment $3,500

The cost base of Gilbert's unit in the trust is $500. Since the non-assessable part of the payment is more than the cost base, Gilbert reduces the cost base of his unit to nil and makes a capital gain under CGT event E4:

Non-assessable part of payment $3,500
less: cost base $500
Capital gain under CGT event E4 $3,000

As Gilbert has owned his unit for more that 12 months he satisfies the conditions for the CGT discount. Gilbert is also eligible for the small business 50% reduction because he satisfies all the basic conditions in Subdivision 152-A (see paragraph 9 of this Determination). His CGT event E4 capital gain can be reduced to:

Capital gain under CGT event E4 $3,000
less: 50% CGT discount $1,500
$1,500
less: small business 50% reduction $750
Reduced capital gain $750

The net tax result for Gilbert is that he is taxed on a net capital gain of $1,750 ($1,000 capital gain under Subdivision 115-C plus $750 CGT event E4 capital gain).

Example 2

3. Assume the same facts in Example 1, except that the active asset has been owned by the trust for more than 12 months and the capital gain can be reduced by the 50% CGT discount and the 50% small business reduction. The tax consequences for Gilbert are:

Gilbert's trust net income under section 97 of the ITAA 1936 $500

Gilbert calculates his capital gain under Subdivision 115-C:

Gross-up trust gain under paragraph 115-215(3)(c) ($500 x 4) $2,000
less: CGT discount reduction under paragraph 115-215(4)(a) $1,000
$1,000
less: SB 50% reduction under paragraph 115-215(4)(b) $500
Capital gain $500
Gilbert's deduction under subsection 115-215(6) $500

Gilbert calculates his non-assessable part under CGT event E4:

Payment of capital proceeds made by trustee $4,500
less: trust net capital gain assessed under section 97 of the ITAA 1936 $500
$4,000
less: CGT discount adjustment (subsection 104-71(4) table item 1) $1,000
Non-assessable part $3,000

The cost base of Gilbert's unit in the trust is $500. Since the non-assessable part of the payment is more than the cost base, Gilbert reduces the cost base of his unit to nil and makes a capital gain under CGT event E4:

Non-assessable part of payment $3,000
less: cost base $500
Capital gain under CGT event E4 $2,500

Gilbert satisfies the conditions for the CGT discount. He is also eligible for the small business 50% reduction because he satisfies all the basic conditions in Subdivision 152-A (see paragraph 9 of this Determination). His CGT event E4 capital gain can be reduced to:

Capital gain under CGT event E4 $2,500
less: 50% CGT discount $1,250
$1,250
less: SB 50% reduction $625
Reduced capital gain $625

The net tax result for Gilbert is that he is taxed on a net capital gain of $1,125 ($500 capital gain under Subdivision 115-C plus $625 CGT event E4 capital gain).

Date of effect

4. This Determination applies to years commencing both before and after its date of issue. However, the Determination 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 issue of the Determination (see paragraphs 75 and 76 of Taxation Ruling TR 2006/10).

Note 1

4A. The amendments applied to this consolidated Determination apply to CGT events happening in the 2007-08 income year or later income years.

Commissioner of Taxation
15 November 2006

Appendix 1 - Explanation

Exclamation This Appendix is provided as information to help you understand how the Commissioner's view has been reached. It does not form part of the binding public ruling.

Explanation

5. CGT event E4 in section 104-70 happens when the trustee of a trust makes a non-assessable payment to a beneficiary in respect of the beneficiary's unit or interest in the trust (except for CGT event A1, C2, E1, E2, E6 or E7 happening in relation to it), and some or all of the payment (the non-assessable part) is not included in the beneficiary's assessable income.

6. A non-assessable part under CGT event E4 may include amounts associated with the small business 50% reduction, frozen indexation, building allowance and accounting differences in income. Subsection 104-70(1) indicates that, in working out what part of the payment is included in your assessable income, you disregard your share of the trust's net income that is subject to the rules in subsection 115-215(3). This means you disregard the amount by which the capital gain was increased under those rules.

7. A non-assessable part excludes payments listed under section 104-71 such as the payment of a CGT discount amount (item 1 subsection 104-71(4)) and a small business 15-year exemption amount (paragraph 104-71(1)(g) and section 152-125).

8. CGT event E4 applies to reduce the cost base and reduced cost base of the beneficiary's unit or interest in the trust, but it cannot give rise to a capital loss. If the cost base is reduced to nil, a capital gain may arise (subsections 104-70(4), 104-70(5) and 104-70(6)). This gain may be reduced by applying the CGT discount and the small business 50% reduction if the relevant conditions are satisfied.

9. The small business 50% reduction may apply to the CGT event E4 capital gain if the basic conditions in Subdivision 152-A are satisfied. In particular, paragraph 152-10(1)(a) is satisfied as CGT event E4 happens in relation to the unit in the trust. The maximum net asset value test, the active asset test (incorporating the 80% test) and the additional basic conditions (concession stakeholder tests) in subsection 152-10(2) must also be satisfied.

Note 2

9A. CGT event E4 does not happen to payments made to certain beneficiaries: see Taxation Determination TD 2003/28.

Note 3 CGT event E4 does not happen to payments made to certain beneficiaries: see Taxation Determination TD 2003/28.

10. As noted in the Treasurer's Press Release No. 38 of 2006 (9 May 2006), the Board of Taxation's report on its Post-Implementation Review of the small business CGT concessions contains a number of administrative recommendations. This Taxation Determination is part of the Commissioner's response to Recommendation 11.1 of the Board's report.

Footnotes


All references are to the ITAA 1997 unless otherwise stated.

Previously issued in draft form as TD 2006/D33

References

ATO references:
NO 2006/8999

ISSN: 1038-8982

Related Rulings/Determinations:

TR 2006/10
TD 2003/28

Subject References:
CGT 50% individual discount
CGT event E1-E9 - trusts
small business 50% reduction

Legislative References:
ITAA 1936 97
ITAA 1997 104-70
ITAA 1997 104-70(1)
ITAA 1997 104-70(4)
ITAA 1997 104-70(5)
ITAA 1997 104-70(6)
ITAA 1997 104-71
ITAA 1997 104-71(1)(g)
ITAA 1997 104-71(4)
ITAA 1997 Subdiv 115-C
ITAA 1997 115-215(3)
ITAA 1997 115-215(3)(b)
ITAA 1997 115-215(3)(c)
ITAA 1997 115-215(4)(a)
ITAA 1997 115-215(4)(b)
ITAA 1997 115-215(6)
ITAA 1997 Subdiv 152-A
ITAA 1997 152-10(1)(a)
ITAA 1997 152-10(2)
ITAA 1997 152-125
TAA 1953

Other References:
Treasurer's Press Release No. 38 of 2006 (9 May 2006)

TD 2006/71 history
  Date: Version: Change:
  15 November 2006 Original ruling  
  29 October 2008 Consolidated ruling Addendum
You are here 31 October 2008 Consolidated ruling Addendum