Edited version of your written advice

Authorisation Number: 1012724103802

Ruling

Subject: Capital gains tax

Question 1

Will the small business 15-year exemption in section 152-110 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to allow the trust to disregard any capital gain from the sale of the land?

Answer

Yes.

Question 2

Can the trust make a payment of the exempt amount to Individual 1 and Individual 2 in accordance with their capital gains tax (CGT) concession stakeholder control percentage?

Answer

Yes.

This ruling applies for the following period

Year ending 30 June 2015

The scheme commences on:

1 July 2014

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.

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

• the application for private ruling, and

• the summary of trust distributions.

The Trustee for the trust has owned the land for more than 15 years.

The trust has used the land in carrying on a farming business for at least 7.5 years during the ownership period.

The trust and its connected entities and small business CGT affiliates have a turnover of less than $2 million for the relevant years. The trust is a small business entity.

There has been a significant individual of the trust for at least 15 years.

The significant individuals of the trust just before the CGT event are Individual 1 and Individual 2. Both individuals are over 55 years of age.

The CGT event, being the disposal of farming rural land, will happen in connection with the retirement of Individual 1 and Individual 1 in the relevant financial year.

Individual 1 and Individual 2 will each receive 50% of the income of the trust (that is 50% of the income and capital) in the relevant financial year.

The Trust will make a payment of the exempt amount in the relevant financial year.

Relevant legislative provisions

Income Tax Assessment Act 1997 subdivision 152-A

Income Tax Assessment Act 1997 subdivision 152-B

Income Tax Assessment Act 1997 section 152-110

Income Tax Assessment Act 1997 section152-35

Income Tax Assessment Act 1997 section 152-40

Income Tax Assessment Act 1997 section 152-60

Income Tax Assessment Act 1997 section 152-70

Income Tax Assessment Act 1997 section 152-125

Reasons for decision

Question 1

Subdivision 152-B of the ITAA 1997 provides a small business 15-year exemption as part of the CGT small business relief provisions. If you qualify for the small business 15-year exemption, the capital gain is entirely disregarded and it is unnecessary to apply any other concessions.

Under section 152-110 of the ITAA 1997, you can disregard any capital gain arising from the disposal of your industrial unit, 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)  you continuously owned the CGT asset for the 15-year period ending just before the CGT event

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

(d)   an individual who was a significant individual of yours just before the CGT event was:

(i)  at least 55 years old at that time and the event happened in connection with their retirement or 

(ii)   permanently incapacitated at that time.

Condition (a)

The basic conditions for the small business capital gains tax concessions in Subdivision 152-A of the ITAA 1997 (as 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.

Active asset test

A requirement of the active asset test contained in section 152-35 of the ITAA 1997 is that the CGT asset must be an active asset for at least half of the period from when you acquired it until the earlier of the CGT event or when you ceased business, if the relevant business had ceased to be carried on in the 12 months before the CGT event.

The meaning of an active asset is set out in section 152-40 of the ITAA 1997. It must firstly satisfy one of the 'positive tests' in subsection 152-40(1) of the ITAA 1997 and then also not be excluded by one of the exceptions in subsection 152-40(4) of the ITAA 1997.

Under subsection 152-40(1) of the ITAA 1997 a CGT asset is an active asset (subject to the exclusions) if it is owned and used, or held ready for use, in the course of carrying on a business by you or your small business CGT affiliate or another entity that is connected with you under paragraph 152-40(1)(c) of the ITAA 1997.

The combined effect of sections 152-35 and 152-40 of the ITAA 1997 is that the asset will meet the active asset test if the asset was used, or held ready for use, in the course of carrying on a business for at least half of the time period it was owned, subject to the exclusions in subsection 152-40(4) of the ITAA 1997.

In this case, the information provided is that the trust is a small business entity. The CGT asset has been used by the trust in the course of carrying on a business for more than half the ownership period. Therefore, the trust will satisfy the basic conditions.

Condition (b)

The trust will have continuously owned the land for the 15-year period ending just before the CGT event. Therefore, this condition will be satisfied.

Condition (c)

Significant individual

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.

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:

• 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 two different percentages apply, then the smaller of the two.

Section 152-70 of the ITAA 1997 allows another method to work out an entity's small business participation percentage in a discretionary trust, if in the CGT event year, the trustee of the trust:

• did not make a distribution of income or capital during the income year, and

• had no net income or had a tax loss for the income year.

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 this case, the trustee has made distributions to Individual 1 and Individual 2 of at least 20% in the financial years where it had assessable income. Therefore, the trust has had a significant individual for a total of at least 15 years during the ownership period of the land.

Condition (d)

It has been stated that the sale of the land will happen in connection with the retirement of both Individual 1 and Individual 2. As both Individual 1 and Individual 2 were the significant individuals of the trust just prior to the CGT event, be at least 55 years old at that time, and the event will happen in connection with their retirement, this condition will be satisfied.

The trust satisfies all of the conditions for the small business 15-year exemption in Subdivision 152-B of the ITAA 1997, and can disregard any capital gain made from the sale of the land.

Question 2

Section 152-125 of the ITAA 1997 provides that, if a capital gain made by a trust is disregarded under the small business 15 year exemption, any distribution made by the trust of that exempt amount to a CGT concession stakeholder is not included in the assessable income of the CGT concession stakeholder, if the following conditions are satisfied:

a) the trust must make a payment within two years after the CGT event that resulted in the capital gain or, in appropriate circumstances, such further time as allowed by the Commissioner,

b) the payment must be made to an individual who was a CGT concession stakeholder of the trust just before the CGT event and

c) the total payments made to each CGT concession stakeholder must not exceed an amount determined by multiplying the CGT concession stakeholders control percentage by the exempt amount.

Condition (a)

Provided that the trust makes the payment of the exempt amount of the capital gain from the sale of the unit to Individual 1 and Individual 2 within two years after the sale, or any further time as allowed by the Commissioner, this condition will be satisfied.

Condition (b)

Section 152-60 of the ITAA 1997 provides the meaning of CGT concession stakeholder. An individual is a CGT concession stakeholder of a trust at a time if the individual is:

(a) a significant individual in the trust or

(b) a spouse of a significant individual in the trust, if the spouse has a small business participation percentage in the trust that is greater than zero.

As discussed in question 1, Individual 1 and Individual 2 will be a significant individuals of the trust just before the CGT event, being the sale of the land. Therefore, Individual 1 and Individual 2 will also be CGT concession stakeholders of the trust just before the CGT event.

Condition (c)

For a discretionary trust, the CGT concession stakeholders control percentage is worked out using the number of CGT concession stakeholder of the trust just before the CGT event.

Individual 1 and Individual 2 will be the only CGT concession stakeholders of the trust just before the CGT event. Therefore, the trust is able to pay half of the exempt amount to Individual 1 and the other half of the exempt amount to Individual 2.

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