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Ruling

Subject: CGT Small business concessions

Questions:

1. Do you satisfy the significant individual test for the purposes of the capital gains tax (CGT) small business concessions?

Answer: Yes.

2. Are you entitled to the CGT small business 15 year exemption concession, in relation to the property A, where the CGT event happened in connection with the retirement of the significant individual?

Answer: Yes.

3. Are you entitled to the CGT small business 15 year exemption concession in relation to the property B?

Answer: No.

4. Are you entitled to the CGT small business retirement exemption concession?

Answer: Yes.

This ruling applies for the following period

Year ending 30 June 2013

Year ending 30 June 2014

Year ending 30 June 2015

The scheme commenced on

1 July 2012

Relevant facts

The trust was established by deed in the 1997-98 financial year and is a discretionary family trust.

The original trustee of the trust was XYZ and the primary beneficiaries of the trust are the children of XYZ.

The trustees were subsequently changed to the children of XYZ in 2003 by deed of variation.

The trust acquired farm land, known as property A, in the 1997-98 financial year.

The trust acquired more farm land, known as property B, in the 2002-03 financial year.

The properties were actively worked as part of a family business activity from the date of acquisition until the main operation ceased in the 2007-08 financial year.

From the cessation of the business activity to now, the properties have been sub-let to one of the beneficiaries who then leased the properties to a third party.

The trustee was again changed to just one of the children of XYZ in the 2009-10 financial year by deed of variation.

The trustee now wishes to vest the properties to one of the general beneficiary under the trust.

The trustee and the general beneficiary are both over 55 years of age.

The trust minutes show a consistent distribution pattern up until 30 June 2008, with at least one beneficiary receiving 20% or more of the income of the trust.

No distributions were made in the 2008-09, 2009-10 and 2010-11 financial years as the trust derived no assessable income.

The trust did make an income distribution to the general beneficiary in the 2011-12 financial year.

The trust meets the basic conditions for the small business CGT concessions.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Division 152

Income Tax Assessment Act 1997 - Subdivision 152-A

Income Tax Assessment Act 1997 - Subdivision 152B

Income Tax Assessment Act 1997 - Subdivision 152-D

Income Tax Assessment Act 1997 - Section - 152-50

Income Tax Assessment Act 1997 - Section - 152-55

Income Tax Assessment Act 1997 - Section - 152-60

Income Tax Assessment Act 1997 - Section - 152-65

Income Tax Assessment Act 1997 - Section - 152-70

Income Tax Assessment Act 1997 - Section - 152-110

Income Tax Assessment Act 1997 - section 152-205

Income Tax Assessment Act 1997 - Section 152-315

Income Tax Assessment Act 1997 - Section 152-320

Reasons for decision

You can disregard a capital gain from a CGT event happening to a CGT asset you have owned for at least 15 years if you:

if you are a company or trust:

In your case, you have stated that the trust meets the basic conditions for the small business CGT concessions.

The trust property A was purchased in the 1997-98 financial year and has now been held by the trust for more than 15 years.

However, the second trust property B was purchased in the 2002-03 financial year, less than 10 years ago, and is not eligible for the 15 year exemption.

Significant individual

A company or trust satisfies the significant individual test if it had at least one significant individual just before the CGT event. 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%. The 20% can be made up of direct and indirect percentages.

Total small business participation percentage

An entity's small business participation percentage in another entity at a time is the percentage that is the sum of:

Direct small business participation percentage

An entity's direct small business participation percentage in a trust, where entities have entitlements to all the income and capital of the trust, is the percentage of:

An entity's direct small business participation percentage in a trust, where entities do not have entitlements to all the income and capital of the trust, and the trust makes a distribution of income or capital, is the percentage of:

In this case, the trust is a discretionary trust therefore beneficiaries do not have entitlements to all the income and capital of the trust.

Discretionary trusts with tax losses or no net income

Legislative amendments to Division 152 of the ITAA, introduced in March 2012, allow an entity another method to work out their small business participation percentage in a discretionary trust if, in the CGT event year, the trustee of the trust:

The entity's direct small business participation percentage at the relevant time is worked out using the percentage of the distributions the entity was beneficially entitled to in the last income year before the CGT event year in which the trustee made a distribution.

In your case, the trust minutes show a consistent distribution pattern up until 30 June 2008, with at least one beneficiary receiving 20% or more of the income of the trust. No distributions were made in the 2008-09, 2009-10 and 2010-11 financial years as the trust derived no assessable income. However, the trust did make an income distribution to one beneficiary in the 2011-12 financial year.

Therefore, it is accepted that the trust had a 'significant individual' for the 15 years it held the property known as 'Orana' farmlands and the 'significant individual' in the 2011-12 financial year is over 55 years of age.

The trust now wishes to vest the property to the beneficiary of the trust; a CGT event.

The trust will be entitled to the CGT small business concession 15 year exemption in relation to property A where the CGT event happens in connection with the retirement of the significant individual.

Whether a CGT event happens in connection with an individual's retirement depends on the particular circumstances of each case. There would need to be at least a significant reduction in the number of hours the individual works or a significant change in the nature of their present activities to be regarded as a retirement. However, it is not necessary for there to be a permanent and everlasting retirement from the workforce.

Retirement exemption

As already stated above, the second trust property, property B, was purchased in the 2002-03 financial year, less than 10 years ago, and is not eligible for the 15 year exemption.

Under subdivision 152-C of the ITAA 1997, the trust can choose to disregard part of the capital gain from the disposal of a CGT asset, up to the CGT retirement exemption limit. It is not essential to receive actual capital proceeds from the CGT event to be able to choose the retirement exemption.

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.

When choosing this exemption, the following conditions must be met:

As already stated, the trust meets basic conditions for the small business CGT concessions and had least one significant individual just before the CGT event to satisfy the significant individual test.

Section 152-315 of the ITAA 1997 requires that the trust evidence its choice to apply this concession by specifying in writing the CGT exempt amount and the percentage of the exempt amount attributable to each stakeholder.

Where the stakeholder is 55 years old or older, when making the choice to access the retirement exemption, there is no requirement to pay any amount to a complying superannuation fund or retirement savings account. However, in order to access the exemption on a gain made by a company or trust for which there are no actual proceeds, the company or trust must make a payment of the disregarded capital gain to at least one of its CGT concession stakeholders. A significant individual is a CGT concession stakeholder.

Therefore, the trust can choose to disregard part of the capital gain from the disposal of this CGT asset under the CGT retirement exemption, up to the CGT retirement exemption limit.

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