Edited version of your written advice

Authorisation Number: 1012787044508

Ruling

Subject: All small business concessions

Questions and Answers:

1. For the year ended 30 June 2014, would you have satisfied the basic conditions in section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997) for small business relief if you sold your Building?

Yes.

2. For the year ended 30 June 2014, would you have been able to obtain the small business 50% reduction (in Subdivision 152-C of the ITAA 1997) and an additional discount capital gain (in section 115-25 of the ITAA 1997) if you sold your building?

Yes.

3. For the year ended 30 June 2014, would you have been able to choose the small business retirement exemption (Subdivision 152-D of the ITAA 1997) for Jack and Jill if you sold your building?

Yes.

4. If you moved Business 'A' out of the Building and kept Business 'B' operating in the Building, will Jack still continue to be a 'significant individual' for the purpose of the small business retirement exemption?

Yes.

5. If Business 'B' continues operating in the Building and you sublet a portion of the Building to another entity not connected to Jack, will Jack continue to hold 'significant individual' status?

Yes.

6. If the answer is 'yes' for question 5, will the above small business relief concessions still apply?

Yes.

7. If you were to sell the Building after 15 year of ownership (and if you continue to meet the basic conditions in section 152-10, such as the $2 million turnover test or the $6 million maximum net asset value test), does the 15-year exemption automatically become available to you?

Yes.

8. If yes, can you still choose to apply the discounts mentioned above?

No (since the 15-year exemption exempts all income tax therefore applying discounts becomes redundant).

9. If you chose the 15-year exemption, do the exempt payments made to your CGT concessional stakeholders have to be placed into a superannuation fund?

No.

This ruling applies for the following periods:

Year ending 30 June 2015

Year ending 30 June 2016

Year ending 30 June 2017

Year ending 30 June 2018

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

During the year ended 30 June 200X, you purchased the Building.

From the date of purchase to the present, Pty Ltd Business 'A' has been operating in the Building.

From the date of purchase to 30 June 200X, Business 'A' was owned equally by your beneficiaries Jack and Jill (date of births 1 January 19XX).

From 1 July 200X to the present, a third party took over Jill's ownership interest in Business 'A'.

From 1 July 20XX until the present, Jack has operated a second Pty Ltd Business 'B' in the Building as a 50% shareholder.

For the year ended 30 June 20XX, the turnover for Business 'A' was around $X and for Business 'B' around $X.

Currently, the Building has a market value of around $X million and the businesses around $X.

For each income year since 1 July 200X, an individual has received at least 20% of your distributions.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 152-10

Income Tax Assessment Act 1997 Section 152-15

Income Tax Assessment Act 1997 Section 152-20

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 152-55

Income Tax Assessment Act 1997 Section 152-60

Income Tax Assessment Act 1997 Section 152-110

Income Tax Assessment Act 1997 Section 328-110

Income Tax Assessment Act 1997 Section 328-115

Income Tax Assessment Act 1997 Section 328-125

Income Tax Assessment Act 1997 Section 328-130

Reasons for decision

Small business entity

Section 328-110 of the ITAA 1997 provides you are a small business entity for an income year (the current year) if you carry on a business in the current year and your aggregated turnover for the previous year was less than $2 million or your aggregated turnover for the current year is likely to be less than $2 million.

Subsection 328-115(2) of the ITAA 1997 provides your relevant annual turnover is the combined annual turnover for the income year of you, of any entity (a relevant entity) that is connected with you at any time during the income year and of any entity (a relevant entity) that is an affiliate of yours at any time during the income year.

However, subsection 328-115(3) of the ITAA 1997 excludes from your aggregated turnover for an income year any amounts that are dealings between connected and/or affiliated entities.

Basic conditions for relief

Section 152-10 of the ITAA 1997 provides the basic conditions for small business relief are:

(a) a CGT event happens in relation to a CGT asset of yours in an income year;

(b) the event would (apart from this Division) have resulted in the gain;

(c) at least one of the following applies:

(i) you are a small business entity for the income year;

(ii) you satisfy the maximum net asset value test (see section 152-15);

(iii) you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an interest in an asset of the partnership;

(iv) the conditions mentioned in subsection (1A) or (1B) are satisfied in relation to the CGT asset in the income year;

(d) the CGT asset satisfies the active asset test (see section 152-35).

Section 152-15 of the ITAA 1997 provides you satisfy the maximum net asset value test if, just before the CGT event, the sum of the net value of the CGT assets of yours, of any entities connected with you and/or of any affiliates of yours or entities connected with your affiliates does not exceed $6 million.

Subsection 152-20(2) of the ITAA 1997 excludes, from the maximum net asset value test, items such as: (i) assets used solely for the personal use and enjoyment of the individual or the individual's affiliate; (ii) the market value of a dwelling that is the individual's main residence (including any relevant adjacent land); (iii) a right to assets of a superannuation fund; and (iv) a policy of insurance on the life of an individual.

Subsection 152-10(1A) states the conditions in this subsection are satisfied in relation to the CGT asset in the income year if:

(a) your affiliate, or an entity that is connected with you, is a small business entity for the income year; and

(b) you do not carry on a business in the income year (other than in partnership); and

(c) if you carry on a business in partnership - the CGT asset is not an interest in an asset of the partnership; and

(d) in any case - the small business entity referred to in paragraph (a) is the entity that, at a time in the income year, carries on the business (as referred to in subparagraph 152-40(1)(a)(ii) or (iii) or paragraph 152-40(1)(b)) in relation to the CGT asset.

Subsection 328-125(1) of the ITAA 1997 explains an entity is 'connected' with another entity if:

(a) either entity controls the other entity in a way described in this section; or

(b) both entities are controlled in a way described in this section by the same third entity.

In brief, section 328-125 of the ITAA 1997provides an entity 'controls' another entity if it, its affiliates, or it together with its affiliates owns, or has the right to acquire the ownership of, interests in the other entity that carry between them the right to receive at least 40% of any distribution of income or capital by the other entity .

In relation to a discretionary trust, section 328-125 of the ITAA 1997 provides two ways in which an entity (the first entity) can control a discretionary trust:

• where the trustee of the trust acts, or could reasonably be expected to act, in accordance with the directions or wishes of the first entity, its affiliates or the first entity together with its affiliates (subsection 328-125(3)); or

• where, for any of the 4 income years before that year, the trustee of the trust paid to the first entity and/or any of its affiliates at least 40% of the total amount of income or capital paid by the trustee for that year (subsection 328-125(4)).

The term 'affiliate' is defined in section 328-130 of the ITAA 1997 and includes an individual who acts, or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you (in relation to the affairs of a business) and includes family, close personal relationships and relationships created through links such as common directors or shareholders. However, the term 'affiliate' does not include a family trust.

Section 152-35 of the ITAA 1997 provides a CGT asset satisfies the active asset test where you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of at least 7½ years during the period that begins when you acquired the asset and ends at the CGT event (at the latest).

Section 152-40 of the ITAA 1997 provides a CGT asset is an active asset at a time if, at that time, you own the asset and it is used or held ready for use in the course of carrying on a business that is carried on by you, your affiliate or another entity that is connected with you.

15 year exemption

Section 152-110 of the ITAA 1997 provides an entity that is a trust can disregard any capital gain arising from a CGT event if all of the following conditions are satisfied:

(a) the basic conditions in Subdivision 152-A are satisfied for the gain;

(b) the entity continuously owned the CGT asset for the 15-year period ending just before the CGT event;

(c) the entity had a significant individual for a total of at least 15 years (even if the 15 years was not continuous and it was not always the same significant individual) during which the entity owned the CGT asset;

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

(i) was 55 or over at that time and the event happened in connection with the individual's retirement; or

(ii) was permanently incapacitated at that time.

Section 152-50 of the ITAA 1997 states an entity satisfies the significant individual test if the entity had at least one significant individual just before the CGT event.

Section 152-55 of the ITAA 1997 provides an individual is a significant individual in a company or trust at a time if, at that time, the individual has a small business participation percentage in the trust of at least 20%, which includes the percentage of the distributions to which the entity was beneficially entitled.

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. (Refer to page 40 of the Tax Office publication Advanced guide to capital gains tax concessions for small business 2013-14 for relevant examples).

Payment of exempt capital gain to CGT concession stakeholder

Section 152-60 of the ITAA 1997 states an individual is a CGT concession stakeholder of a company or trust at a time if the individual is: (a) a significant individual in the company or trust; or (b) a spouse of a significant individual in the company or trust, if the spouse has a small business participation percentage in the company or trust at that time that is greater than zero.

Page 43 of the Tax Office publication Advanced guide to capital gains tax concessions for small business 2013-14 (NAT 3359 06.2014) states:

If a capital gain made by a company or trust is disregarded under the small business 15-year exemption…, any distributions made by the company or trust of that exempt amount to a CGT concession stakeholder is:

• not included in the assessable income of the CGT concession stakeholder, and

• not deductible to the company or trust

if certain conditions are satisfied.

The conditions are:

• the company or 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

• the payment must be made to an individual who was a CGT concession stakeholder of the company or trust just before the CGT event, and

• the total payments made to each CGT concession stakeholder must not exceed an amount determined by multiplying the CGT concession stakeholder's control percentage by the exempt amount.

The CGT concession stakeholder's participation percentage is:

• for a company or a trust (where entities have entitlements to all the income or capital of the trust) the stakeholder's small business participation percentage in the company or trust just before the CGT event, and

• for a trust (where entities do not have entitlements to all the income or capital of the trust), the amount, expressed as a percentage, worked out using the formula:

_____________________________100_________________________________

(number of CGT concession stakeholders of the trust just before the CGT event)

Conclusion

In your case, at the current time, you satisfy the basic conditions for small business relief because:

1. The combined turnover of you, Business 'A' and 'Business 'B' (excluding transactions between each other, such as rent) is less than $2 million.

2. The conditions mentioned in subsection 152-10(1A) are satisfied, namely, you are connected to the companies that carry on a business because both you and the companies are controlled by the same entity, namely, Jack, in that Jack receives more than 40% of income from both the companies and you.

3. The Building is an active asset in that it has always been used in the course of carrying on a business that is carried on by another entity that is connected with you.

4. If you sublet the Building it will still be an active asset because it was used for a total of at least 7½ years in the course of carrying on a business that is carried on by another entity that is connected with you. It follows any amount of subletting or letting will not affect your qualification for the small business relief concessions.

Further, currently, Jack and Jill will be a significant individuals and CGT concession stakeholders of you because they each receive over 20% of your trust distributions.

Therefore, if you sell the property after 15 years in connection with the retirement of one or both of your significant individuals (and you continue to satisfy the basic conditions in section 152-10 and if Jack and Jill continue to be a significant individuals and CGT concession stakeholders), the 15 year exemption will be available to you.

For the 15 year exemption, the legislation does not require your CGT concession stakeholders to place the exempt amount into a superannuation fund.

However, the exempt amount must be paid to the significant individual 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.

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