Edited version of private ruling

Authorisation Number: 1011589000083

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Ruling

Would the sale of a commercial property by the taxpayer be eligible for the small business 15-year exemption in accordance with section 152-110 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes.

This ruling applies for the following period:

Year ending 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

In the 1987 - 88 income year, the taxpayer, which is a discretionary family trust, purchased a hotel in the name of the trustee as trustee for the family trust.

The taxpayer operated the hotel from date of purchase for approximately seven years.

The property was then leased to an unrelated third party at arms length.

The lessee closed its operations as it got into some financial difficulties.

The taxpayer recommenced operation of the hotel in the name of a different trustee as trustee for a unit trust, the sole unit holder of which is the original trustee of the family trust which originally bought the hotel.

The taxpayer is anticipating a sale of the property not earlier than October 2010.

The family trust is a discretionary trust and there is only one specified beneficiary who has 100% entitlement of any distribution of income and capital that the trustee may make to which it is beneficially entitled.

The sole beneficiary of the family trust is over 55 years of age and is looking at selling the hotel and permanently retiring from all business activities.

The applicant advised that the net value asset of the business is not more than $6,000,000 and the taxpayer does not have other connected or related entities

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 152-110(1)

Income Tax Assessment Act 1997 Subsection 152-10(1)

Income Tax Assessment Act 1997 Section 152-15

Income Tax Assessment Act 1997 Section 152-35

Income Tax Assessment Act 1997 Section152-55

Income Tax Assessment Act 1997 Section 152-65

Income Tax Assessment Act 1997 Subsection 152-70(1)

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA of the ITAA 1936, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for Decision

Summary

The taxpayer is eligible for the small business 15-year exemption and can therefore disregard any capital gain arising from the sale of the hotel.

Detailed reasoning

Subsection 152-110(1) of the ITAA 1997 provides that an entity that is a company or trust can disregard any capital gain arising from a CGT event if all of the following conditions are satisfied:

(a) the basic conditions in Subdivision 152-A of the ITAA 1997 are satisfied for the gain

(b) the entity continuously owned the CGT asset for the 15-year period ending just before the CGT event

(c) the entity had a significant individual for a total of at least 15 years (even if the 15 years was not continuous and it was not always the same significant individual) during which the entity owned the CGT asset

(d) an individual who was a significant individual of the company or trust just before the CGT event either:

(i) was 55 or over at that time and the event happened in connection with the individual's retirement; or

(ii) was permanently incapacitated at that time.

Subsection 152-10(1) of the ITAA 1997 provides the basic conditions for relief as follows:

A capital gain (except a capital gain from CGT event K7) you make may be reduced or disregarded under this Division if the following basic conditions are satisfied for the gain:

(a) a CGT event happens in relation to a CGT asset of yours in an income year;

(b) the event would (apart from this Division) have resulted in the gain;

(c) at least one of the following applies:

(i) you are a small business entity for the income year;

(ii) you satisfy the maximum net asset value test;

(iii) you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an interest in an asset of the partnership;

(iv) the conditions mentioned in subsection (1A) or (1B) are satisfied in relation to the CGT asset in the income year;

(d) the CGT asset satisfies the active asset test.

Section 152-15 of the ITAA 1997 states that you satisfy the maximum net asset value test if, just before the CGT event, the sum of the following amounts does not exceed $6,000,000:

(a) the net value of the CGT assets of yours;

(b) the net value of the CGT assets of any entities connected with you;

(c) the net value of the CGT assets of any affiliates of yours or entities connected with your affiliates (not counting any assets already counted under paragraph (b)).

Subsection 152-35(1) of the ITAA 1997 provides that a CGT asset satisfies the active asset test if:

(a) you have owned the asset for 15 years or less and the asset was an active asset of yours for a total of at least half of the period specified in subsection (2); or

(b) you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of at least 7½ years during the period specified in subsection (2).

Subsection 152-35(2) of the ITAA 1997 specifies that he period:

(a) begins when you acquired the asset; and

(b) ends at the earlier of:

(i) the CGT event; and

(ii) if the relevant business ceased to be carried on in the 12 months before that time or any longer period that the Commissioner allows - the cessation of the business.

Section 152-55 of the ITAA 1997 provides that an individual is a significant individual in a company or a trust at a time if, at that time, the individual has a small business participation percentage in the company or trust of at least 20%.

Section 152-65 of the ITAA 1997 states that an entity's small business participation percentage in another entity at a time is the percentage that is the sum of:

(a) the entity's direct small business participation percentage in the other entity at that time; and

(b) the entity's indirect small business participation percentage in the other entity at that time.

Subsection 152-70(1) of the ITAA 1997 specify that an entity holds a direct small business participation percentage at the relevant time in an entity equal to the percentage worked out as follows:

Conclusion

The taxpayer continuously owned the hotel for more than 15 years and is currently operating the hotel until it is sold.

The specified beneficiary of the discretionary trust is over 55 years of age and has 100% entitlement of any distribution of income and capital that the trustee may make to which the beneficiary is beneficially entitled. The beneficiary is looking at selling the hotel and permanently retiring from all business activities.

We are advised that the net value asset of the business is not more than $6,000,000 and the taxpayer does not have other connected or related entities

The taxpayer owned the hotel for more than 15 years and the asset was an active asset for a total of at least seven and a half years from the time the hotel was purchased until it is sold.

Therefore, the Commissioner considers that the taxpayer will have met the conditions in subsection 152-110(1) of the ITAA 1997 and can disregard any capital gain arising from the sale of the hotel provided all of the above conditions are satisfied.

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