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Ruling

Subject: small business capital gains tax concessions

Question 1

Can the unit trust apply the 50% active asset reduction to the capital gain made from the sale of the business?

Answer

Yes.

Question 2

Can the unit trust apply the small business retirement exemption to the capital gain made from the sale of the business?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

The unit trust has operated a business for more than 15 years.

The business is a small business entity with a turnover of less than $2 million.

The unit trust owns property which they use to carry on the business.

The Family Trust owns a percentage of the units in the unit trust.

Individual A and individual B are significant individuals on the Family Trust.

In the 2010-11 financial year, individual A received X% of the income from the Family Trust and individual B received X% of the income.

Another Family Trust owns a percentage of the units in the unit trust.

Individual C and individual D are significant individuals of the Family Trust.

In the 2010-11 financial year, individual C received X% of the income from the Family Trust and individual D received X% of the income.

The proceeds from the capital gain will be contributed into a complying superannuation fund for individuals A, B, C and D.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-10(1),

Income Tax Assessment Act 1997 paragraph 152-40(1)(a),

Income Tax Assessment Act 1997 subsection 152-40(4),

Income Tax Assessment Act 1997 Subdivision 152-D,

Income Tax Assessment Act 1997 subsection 152-305(2),

Income Tax Assessment Act 1997 section 152-320,

Income Tax Assessment Act 1997 section 152-60,

Income Tax Assessment Act 1997 section 152-55,

Income Tax Assessment Act 1997 section 152-70, and

Income Tax Assessment Act 1997 section 152-75.

Reasons for decision

Question 1

Summary

The unit trust satisfies the basic conditions for the small business capital gains tax concessions. Therefore, the unit trust is entitled to apply the 50% active asset reduction to any capital gain made on the sale of the business and property.

Detailed reasoning

Basic conditions

Under subsection 152-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997), a capital gain you make may be reduced or disregarded if certain basic conditions are satisfied. The basic conditions (relevant to this case) are the small business entity test, and the active asset test.

Small business entity

You will be a small business entity if you are an individual, partnership, company or trust that is carrying on a business and has an aggregated turnover of less than $2 million.

In this case, the information provided is that the unit trust is a small business entity.

Active asset test

This test requires the CGT asset to be an active asset for:

· 7 years, if owned for more than 15 years, or

· half of the ownership period if owned for 15 years or less (section 152-35 of the ITAA 1997).

An active asset may be a tangible asset or an intangible asset. A tangible or intangible asset is a CGT active asset if it is used or held ready for use in the course of carrying on a business by:

· the taxpayer

· the taxpayer's spouse or child under 18 years

· the taxpayer's affiliate, or

· an entity connected with the taxpayer (paragraph 152-40(1)(a) of the ITAA 1997).

Assets which cannot be active assets

The following assets cannot be active assets (subsection 152-40(4) of the ITAA 1997):

· interests in a connected entity (other than those satisfying the 80% test);

· shares in companies and interests in trusts (other than those satisfying the 80% test);

· shares in widely held companies unless they are held by a CGT concession stakeholder of the company;

· shares in trusts that are similar to widely held companies unless they are held by a CGT concession stakeholder of the trust or other exceptions for trusts with 20 members or less apply;

· financial instruments, including loans, debentures, bonds, promissory notes, futures contracts, forward contracts, currency swap contracts, rights and options;

· an asset whose main use in the course of carrying on the business is to derive interest, an annuity, rent, royalties or foreign exchange gains. However, such an asset can still be an active asset if it is an intangible asset that has been substantially developed, altered or improved by the taxpayer so that its market value has been substantially enhanced or its main use for deriving rent was only temporary.

50% active asset reduction

Division 152-C of the ITAA 1997 applies the small business 50% active asset reduction provided the basic conditions are satisfied.

Application to your circumstances

In this case, the unit trust owns a business and property. The business and property has been owned for more than 15 years and used in the unit trust's business for the entire period. The business and property will satisfy the active asset test.

The unit trust satisfies the basic conditions for the small business capital gains tax concessions. Therefore, the unit trust is entitled to apply the 50% active asset reduction to any capital gain made on the sale of the business and property.

Question 2

Summary

The unit trust satisfies the basic conditions and the significant individual test. Therefore, the unit trust is entitled to apply the retirement exemption.

Detailed reasoning

Small business retirement exemption.

Subdivision 152-D of the ITAA 1997 contains the small business retirement exemption. You may choose to disregard all or part of a capital gain under the small business retirement exemption if you satisfy certain conditions.

If you are a company or trust, other than a public entity, you can choose to disregard all or part of a capital gain where you meet all the following conditions contained in subsection 152-305(2) of the ITAA 1997:

· you satisfy the basic conditions;

· you satisfy the significant individual test under 152-50 of the ITAA 1997;

· you keep a written record of the amount you choose to disregard (the exempt amount) and, if there are more than one CGT concession stakeholders, each stakeholder's percentage of the exempt amount;

· you make a payment to at least one of your CGT concession stakeholders worked out by reference to each individual's percentage of the exempt amount;

· the payment is equal to the exempt amount or the amount of capital proceeds, whichever is less; and

· where you receive the capital proceeds in instalments, you make a payment to a CGT concession stakeholder for each instalment in succession.

If a CGT concession stakeholder is under 55 years old just before receiving a payment, an amount equal to that payment must be immediately paid to a complying superannuation or retirement savings account on their behalf. There is no requirement to make this contribution if the stakeholder was 55 years old or older.

CGT retirement exemption limit

The amount of the capital gain that you choose to disregard must not exceed your CGT retirement exemption limit or, in the case of a company or trust, the CGT retirement exemption limit of each CGT concession stakeholder receiving a payment.

Under section 152-320 of the ITAA 1997, an individual's lifetime CGT retirement exemption limit is $500,000 reduced by any previous CGT exempt amounts the individual has disregarded under the retirement exemption.

A company or trust may determine the percentage of the exempt amount attributable to each stakeholder, having regard to each stakeholder's retirement exemption limit (or remaining limit).

CGT concession stakeholder

Under section 152-60 of the ITAA 1997, an individual is a CGT concession stakeholder of a company or trust if they are a significant individual or the spouse of a significant individual where the spouse has a small business participation percentage in the company or trust at that time that is greater than zero.

This participation percentage can be held directly or indirectly through one or more interposed entities. The percentages are worked out in the same way as for the significant individual test.

Significant individual test

Under 152-55 of the ITAA 1997, an individual is a significant individual in a company or trust if they have a small business participation percentage in the company or trust of at least 20%. This 20% can be made up of direct and indirect percentages. A company or trust satisfies the significant individual test if it had at least one significant individual just before the CGT event.

Under section 152-70 of the ITAA 1997, an entity's direct small business participation percentage in a trust is the percentage of:

· distributions of income that the entity is beneficially entitled to during the income year; or

· distributions of capital that the entity is beneficially entitled to during the income year; or

· if the two percentages above apply, then the smaller of the two.

An entity's indirect small business participation percentage in a company (or trust), as per section 152-75 of the ITAA 1997, is calculated by multiplying together an entity's direct participation percentage in an interposed entity and the interposed entity's total participation percentage (both direct and indirect) in the company or trust.

Application to your circumstances

In this case, two separate family trusts each hold a percentage interest in the unit trust. To determine the beneficiaries' (of the family trust) participation percentage in the unit trust, it is necessary to multiply their direct participation percentage in their respective family trusts by the family trust's total participation percentage in the unit trust.

Individual A, B and C all hold an indirect small business participation percentage of more than 20% in the unit trust.

Therefore, individual A, B and C are all significant individuals of the unit trust as they hold a small business participation percentage of more than 20%. These individuals will also be CGT concession stakeholders in the unit trust.

Individual D will be a CGT concession stakeholder of the unit trust as they are the spouse of a significant individual (individual C) and they have a small business participation percentage in the unit trust of more than 0%.

As discussed in question one, the unit trust satisfies the basic conditions. The unit trust also satisfies the significant individual test as they will have at least one significant individual just before the CGT event. It has been noted that the payments will be contributed to a complying superannuation fund on behalf of the CGT concession stakeholders.

Therefore, the unit trust is entitled to apply the retirement exemption provided that a written record is kept detailing the amount disregarded (the exempt amount) and each stakeholder's percentage of the exempt amount.

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