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Edited version of your written advice
Authorisation Number: 1051250877529
Date of advice: 17 July 2017
Ruling
Subject: CGT - small business 15 year exemption
Question
Are you entitled to access the small business 15 year exemption on the sale of the CGT asset?
Answer
No
This ruling applies for the following period:
Year ended 30 June 2017
The scheme commences on:
1 July 2016
Relevant facts and circumstances
You purchased a CGT asset, it was not used in your own business.
You leased the asset in two portions, 50% of the property to Partnership A and the remaining 50% to Partnership B.
Partnership A paid an annual lease. They were an unrelated third party, you did not have any ownership interest in the partnership.
Partnership B consisted of your child and their spouse. They paid a token lease only. They were involved in improving the asset.
You did not have any ownership interest in the Partnership B.
You held the CGT asset for more than 15 years, and have now disposed of it.
Relevant legislative provisions
Income Tax Assessment Act 1997 subsection 152-10(c),
Income Tax Assessment Act 1997 subsection 152-10(1A),
Income Tax Assessment Act 1997 subsection 328-125(1) and
Income Tax Assessment Act 1997 subsection 328-130(1).
Reasons for decision
Basic conditions
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.
One of the basic conditions (paragraph 152-10(1)(c) of the ITAA 1997) requires that at least one of the following applies:
● you are a small business entity (SBE) for the income year
● you satisfy the maximum net asset value test
● you are a partner in a partnership that is a SBE for the income year and the capital gains tax (CGT) asset is an interest in an asset of the partnership; or
● the conditions mentioned in subsection 152-10(1A) or (1B) of the ITAA 1997 are satisfied in relation to the CGT asset in the income year that the CGT event occurs
In this case, you were not carrying on a business; however you may still qualify for the small business concessions if your CGT asset was used in a business carried on by a small business entity that is your affiliate or an entity connected with you.
Passively held assets
This passively held asset condition allows you to access the concessions for a CGT asset you own where you are not carrying on a business, but that CGT asset is used in the business of your affiliate or an entity connected with you (subsection 152-10(1A) of the ITAA 1997). The following conditions must be satisfied:
● Your affiliate, or entity connected with you, is a small business entity for the income year, that is the income year in which the CGT event happens to your CGT asset
● You do not carry on a business in the income year other than in partnership
● If you carry on a business in partnership, the CGT asset is not an interest in an asset of the partnership
● Your affiliate or entity that is connected with you at a time in the income year is the same small business entity that carries on the business and uses the asset at that time and the asset is the same asset that also meets the active asset test at that time.
Affiliate
Subsection 328-130(1) of the ITAA 1997 defines the meaning of an affiliate as an individual or company that, in relation to their business affairs, acts or could reasonably be expected to act in accordance with your directions or wishes, or in concert with you.
Trusts, partnerships and superannuation funds cannot be your affiliates. However a trust, partnership or superannuation fund may have an affiliate who is an individual or company.
Connected with
Subsection 328-125(1) of the ITAA 1997 states that an entity is connected with another entity if either entity controls the other entity, or both entities are controlled by the same third entity.
Generally speaking an entity controls another entity if it owns interests in the other entity that give the right to receive at least 40% of any distribution of income, the control percentage.
Application to your circumstances
Your property was leased in two portions to two different parties. Partnership A leased 50% of the property, they were an unrelated third party and you had no ownership interest in the partnership. They are not considered to be your affiliates, nor a connected entity.
Partnership B leased the remaining 50% of the property. Partnership B consisted of your child and their spouse. As stated above, a partnership cannot be your affiliate, therefore Partnership B cannot be your affiliate. Further, you did not have any ownership interest in the partnership, therefore they cannot be a connected entity.
As the CGT asset was not used in the business of an affiliate, or an entity connected with you, you do not meet the passively held asset condition. Therefore you do not qualify to apply any of the small business CGT concessions on the sale of the land.
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