Edited version of your private ruling

Authorisation Number: 1012613973025

Ruling

Subject: CGT - small business concessions

Question 1

Do the blocks of land meet the requirements for the 50% active asset reduction to apply?

Answer

Yes

Question 2

Can the trust choose to apply the 15 year exemption in relation to the interests in the land that were acquired more than 15 years ago?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 2014

Year ending 30 June 2015

The scheme commenced on:

1 July 2013

Relevant facts and circumstances

The trust progressively acquired land for use in its business.

Apart from a residence that was constructed on the land, the entire property has not been used for any purpose, other than in the trust's business.

The trust realigned the boundaries of the property to create more practical blocks of land.

At least one of the newly formed blocks consists of land that was acquired by the trust at different times.

All of the blocks are being actively marketed for sale. The ideal outcome would be for all of the blocks to be sold in one transaction; however the trust will accept the sale of one or more of the blocks separately if required. The option remains open for the farming operation to be sold as a going concern if buyers are interested.

If the blocks are sold separately, all remaining blocks will continue to be actively marketed for sale until they are all sold.

In previous financial years, has received more than 20% of any distributions made by the trust.

The trust has always made distributions unless the trust had no net income or a tax loss in the relevant year.

The trust will make distributions in the 2013-14 and 2014-15 financial years unless the trust has no net income or a tax loss in those years.

X will receive more than 20% of any distributions made by the trust in the 2013-14 and 2014-15 financial years.

X is over 55 years of age.

X will effectively retire following the sale of the land.

The trust is a small business entity.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 112-25(2)

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

Income Tax Assessment Act 1997 Section 152-55

Income Tax Assessment Act 1997 Section 152-70

Income Tax Assessment Act 1997 Section 152-35

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

Income Tax Assessment Act 1997 Section 152-205

Reasons for decision

Basic conditions

In order to be eligible for the small business capital gains tax (CGT) concessions, a number of basic conditions must be satisfied. The basic conditions for the small business CGT concessions are outlined in subsection 152-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997):

(a) a CGT event happens in relation to an asset that the taxpayer owns

(b) the event would otherwise have resulted in a capital gain

(c) one or more of the following applies

(i) the taxpayer satisfies the maximum net asset value test

(ii) the taxpayer is a "small business entity" for the income year

(iii) the asset is an interest in an asset of a partnership which is a small business entity for the income year, and the taxpayer is a partner in that partnership, or

(iv) the special conditions for passively held assets in sub-sections 152-10(1A) or 152-10(1B)are satisfied in relation to the CGT asset in the income year, and

(d) the asset satisfies the active asset test.

In this case a CGT event (or events) will occur when a contract of sale is entered into for one or more of the blocks. The CGT event will result in a capital gain if the capital proceeds exceed the cost base of the asset. Additionally, the trust is a small business entity.

Active asset test

The active asset test is contained in section 152-35 of the ITAA 1997. The active asset test is satisfied if:

• 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 test period detailed below, or

• you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of least 7.5 years during the test period.

The test period:

• begins when you acquired the asset, and

• ends at the earlier of

• the CGT event, and

• when the business ceased, if the business in question ceased in the 12 months before the CGT event (under subparagraph 152-35(2)(b)(ii) of the ITAA 1997 the Commissioner can allow a longer period than 12 months).

A CGT asset is an active asset if it is owned by you and is used or held ready for use in a business carried on (whether alone or in partnership) by you, your affiliate, your spouse or child, or an entity connected with you.

The effect of the boundary realignment

If you subdivide a block of land, each block that results is registered with a separate title. For capital gains tax (CGT) purposes, the original land parcel is divided into two or more separate assets. Subdividing land does not result in a CGT event if you retain ownership of the subdivided blocks (subsection 112-25(2) of the ITAA 1997). The subdivided properties will retain the same acquisition date as the original property.

Accordingly, when applying the active asset test to each of the newly formed blocks, the use of the property over the entire ownership period is taken into account. In this case, all of the blocks have been used in the trust's business for the entire period of ownership. The active asset test will therefore be satisfied in relation to all four of the blocks.

Accordingly, the trust meets the basic conditions in relation to all four of the blocks of land.

Active Asset Reduction

The 50% active asset reduction applies automatically to reduce an eligible capital gain if the basic conditions are met (section 152-205 of the ITAA 1997). However, a taxpayer can choose not to apply the 50% active asset reduction.

As the trust meets the basic conditions in relation to all four blocks of land, the active asset reduction will apply to any capital gain made from their disposal.

Small business 15 year exemption

For a company or trust to be eligible for the small business 15-year exemption you must satisfy the basic conditions and three further conditions contained in subsection 152-110(1) of the ITAA 1997:

• you continuously owned the CGT asset for the 15-year period ending just before the CGT event happened.

• you had a significant individual for a total of at least 15 years of the whole period of ownership (even if it was not the same significant individual during the whole period), and

• the individual who was a significant individual just before the CGT event was

• at least 55 years old at that time and the event happened in connection with their retirement, or

• was permanently incapacitated at that time.

Under section 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.

An entity's direct small business participation percentage in a discretionary trust is the percentage of:

• distributions of income that the entity is beneficially entitled to during the income year

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

• if they are different, the smallest of the two definitions above.

Ordinarily, if a trust did not make a distribution of income or capital during an income year it will not have a significant individual. However, recent amendments contained in section 152-70 of the ITAA 1997 allow an entity another method to work out their small business participation percentage in a discretionary trust.

For the purposes of determining if a trust has had a significant individual for at least 15 years, subsection 152-70(5) of the ITAA 1997 may apply. It provides that if a discretionary trust did not make a distribution in an income year, an entity's small business participation percentage in that year (the relevant year) is worked out using the percentage of the distributions that entity was entitled to in the CGT event year or the last income year before the CGT event year that the trustee made a distribution provided that:

• the trust had no net income for the relevant year, or

• the trust had a tax loss for the relevant year.

Whether a CGT event happens in connection with an individual's retirement depends on the particular circumstances of each case. A CGT event may be in connection with your retirement even if it occurs at some time before retirement. It would however, need to be shown that the CGT event was integral to the significant individual's retirement plans.

Application to your circumstances

In this case, as at least one of the newly formed blocks of land contains land that was acquired by the trust at various times. As discussed, the subdivided properties will retain the same acquisition date as the original interest in the property. Accordingly, the trust will have multiple separate interests in one or more of the blocks of land. When a block is disposed of, any resulting capital gain or loss should be calculated separately for each interest.

Accordingly, the 15 year exemption will only be considered for the interests in the property that were acquired by the trust more than 15 years ago. In relation to those interests we consider that the requirements of subsection 152-110(1) of the ITAA 1997 have been met due to the following:

• the trust meets the basic conditions as discussed above

• the trust has held the relevant interests for more than 15 years

• as a result of the application of subsection 152-70(5) of the ITAA 1997, the trust has had a significant individual for at least 15 years of the ownership period

• X is over 55 years of age and will be a significant individual of the trust just before the CGT event; and

• we consider that the event will occur in connection with X's retirement.

Accordingly, the trust can choose to apply the 15 year exemption to any capital gain made on the disposal of interests in the blocks of land that were acquired more than 15 years ago.

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).