Edited version of your private ruling

Authorisation Number: 1012529755740

Ruling

Subject: CGT and the small business concessions

Question

Is the Trust eligible for the CGT small business retirement concession?

Answer

Yes.

This ruling applies for the following period(s)

Year ended 30 June 2013

The scheme commences on

1 July 2012

Relevant facts and circumstances

Individual A is a partner in a primary production partnership. The partnership activity commenced over 15 years ago.

Additional farming land, used in the partnership business, was also purchased by the discretionary Trust.

The Trust property was used in the partnership business for more than 7.5 years.

Individual A has been the only beneficiary of the Trust to receive any distribution in the past 12 years.

Due to family issues, the Trust property has now been sold with capital gain being made.

Individual A is over 55 years of age.

The Trust satisfies the maximum net assets test for the purposes of the capital gains tax (CGT) small business concessions.

Relevant legislative provisions

Income Tax Assessment Act 1997 - section 103-25

Income Tax Assessment Act 1997 - section 115-10

Income Tax Assessment Act 1997 - section 115-15

Income Tax Assessment Act 1997 - section 115-20

Income Tax Assessment Act 1997 - section 115-25

Income Tax Assessment Act 1997 - section 115-100

Income Tax Assessment Act 1997 - subdivision 152A

Income Tax Assessment Act 1997 - subdivision 152C

Income Tax Assessment Act 1997 - subdivision 152D

Income Tax Assessment Act 1997 - section 152-15

Income Tax Assessment Act 1997 - section 152-35

Income Tax Assessment Act 1997 - section 152-40

Income Tax Assessment Act 1997 - section 152-50

Income Tax Assessment Act 1997 - section 152-205

Income Tax Assessment Act 1997 - section 152-305

Income Tax Assessment Act 1997 - section 152-325

Income Tax Assessment Act 1997 - section 328-125

Income Tax Assessment Act 1997 - section 328-130

Reasons for decision

To qualify for the small business CGT concessions, you must satisfy several conditions that are common to all the concessions. These are called the 'basic conditions'.

The basic conditions are contained in subdivision 152-A - Income Tax Assessment Act 1997 (ITAA 1997).

STEP 1

You must first satisfy one of the following:

· you are a small business entity

· you do not carry on business (other than as a partner) but your asset is used in a business carried on by a small business entity that is your affiliate or an entity connected with you (passively-held assets)

· you are a partner in a partnership that is a small business entity, and the CGT asset is

o an interest in a partnership asset (partnership assets), or

o an asset you own that is not an interest in a partnership asset (partner's assets)

· you satisfy the maximum net asset value test.

STEP 2

The asset in question must satisfy the active asset test

STEP 1

In this case, the Trust has never carried on a business activity. The Trust property has always been a passively held asset, being leased to the partnership to use in its primary production business activity. The partnership cannot be an affiliate and it is not an entity connected with the Trust. However, the Trust does satisfy the maximum net asset test.

STEP 2

A CGT asset is an active asset if it is used or held ready for use in a business carried on (whether alone or in partnership) by the asset owner, an affiliate of the asset owner, or an entity connected with the asset owner.

Connected with

An entity is connected with another entity if either entity controls the other entity.

With a discretionary trust, the level of actual distributions made by the trust is used to determine who controls the trust. A beneficiary is taken to control a discretionary trust only if, for any of the four income years before the year for which relief is sought for a CGT event:

· the trustee paid to, or applied for the benefit of, the beneficiary or their affiliates, or both the entity and any of it's affiliates, any of the income or capital of the trust, and

· the amounts paid or applied were at least 40% (the control percentage) of the total amount of income or capital paid or applied for that income year (subject to the Commissioner's discretion where the control percentage is between 40% and 50%).

In this case, the Trust is a discretionary trust and Individual A is the only beneficiary of the Trust to receive a distribution in the past 12 years. As a result, Individual A is considered to control the trust and is therefore connected with the trust. As the Trust property was used in a business carried on, in partnership, with a connected entity (Individual A), the property is considered to be an active asset.

Active asset test

The active asset test is satisfied if:

· the asset has been owned for 15 years or less and the asset was an active asset for a total of at least half of the test period detailed below, or

· the asset has been owned for more than 15 years and the asset was an active asset for a total of least 7.5 years during the test period.

In this case, the Trust property has been an active asset for more than 7.5 years and therefore satisfies the active asset test.

Discount capital gain

The Trust will be eligible for the discount capital gains where:

· the CGT event happened after 21 September 1999

· the capital gain has been calculated without any reference to indexation of the cost base; and

· the CGT asset was acquired more than 12 months before the CGT event.

The discount percentage is 50%.

Where a capital gain meets these requirements, that capital gain is a discount capital gain. Generally, the discount percentage is applied to the discount capital gain, to arrive at your net capital gain.

Based on the facts, the Trust is eligible for the discount capital gains of 50%.

50% active asset reduction

The small business 50% active asset reduction applies automatically if the basic conditions are satisfied, unless you choose for it not to apply.

In this case, as already discussed above, the Trust satisfies the basic conditions and the small business 50% active asset reduction will apply, further reducing the discount capital gain.

Retirement exemption

Under subdivision 152-D of the ITAA 1997, the Trust can choose to disregard the remaining capital gain, up to the CGT retirement exemption limit, where the proceeds are used in connection with retirement. 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:

1. the basic conditions of Subdivision 152A (as discussed above)

2. the significant individual test

3. a valid choice to apply the retirement exemption is made; and

4. a payment to or on behalf of at least one CGT concession stakeholder is made within the required timeframe equal to the amount of the gain disregarded.

Condition 1

The Trust satisfies the basic CGT small business concession conditions as already discussed above.

Condition 2

Under subdivision 152-A of the ITAA 1997, the Trust is required to have at least one significant individual just before the CGT event to satisfy the significant individual test.

As it is a discretionary trust, any individual who receives at least 20% of the income or capital distributions (whichever is smaller) of the Trust for the year in which the CGT event occurred will be considered a significant individual of the Trust.

In this case, Individual A has received 100% of the distributions in the past 12 years. Therefore, Individual A is considered to be a significant individual of the Trust.

Condition 3

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.

For the purposes of this exemption, the latest date on which the choice may be made is the date of lodgement of the relevant tax return of the Trust (section 103-25 of the ITAA 1997).

The Trust has chosen to apply the retirement exemption to the remaining capital gain and has not yet lodged the relevant income tax return. Therefore this condition has been met.

Condition 4

This condition requires that a payment be made to a CGT concession stakeholder. The definition of a CGT concession stakeholder includes a significant individual and, as already discussed, Individual A is a significant individual of the Trust.

The Trust is required to make the payment within seven days of making the choice to apply this exemption (subsection 152-325(4) of the ITAA 1997).

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 fund or retirement savings account (RSA) on their behalf. The trust must notify the trustee of the fund or the RSA at the time of the contribution that the contribution is being made in accordance with the requirements of the retirement exemption. If the stakeholder was 55 years old or older there is no requirement to make this contribution.

Individual A is over 55 years of age and the payment can be made directly to him/her.

The payment must have been made within seven days of making the choice.

Conclusion

Based on the above analysis, the Trust will be entitled to disregard the remaining capital gain under the small business retirement exemption.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).