Edited version of your written advice

Authorisation Number: 1051273104143

Date of advice: 11 September 2017

Ruling

Subject: Capital gains tax – small business concessions

Question

Are you eligible for the capital gains tax (CGT) small business concessions on the disposal of your remainder interest in the property

Answer

No

This ruling applies for the following period:

30 June 20XX

The scheme commences on

1 July 20XX

Relevant facts and circumstances

The deceased passed away in YYYY.

The deceased acquired land (the property) prior to 20 September 1985 (pre-CGT) and it was used by them in a primary production business activity up until their death.

The deceased left a life interest in the property to individual A, provided they continued the financial responsibilities and maintain structural improvements, and on their death the property was to go to you.

Individual A continued to run his/her own primary production business activity on the land up until his/her death in YYYY.

You commenced a primary production business activity on the property after individual A’s death through a related family trust.

You are a trustee and a beneficiary of the family trust.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152-40

Income Tax Assessment Act 1997 section 152-47

Income Tax Assessment Act 1997 section 328-125

REASONS FOR DECISION

Small business CGT concessions

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. Subdivision 152-C of the ITAA 1997 applies the small business 50% active asset reduction provided the basic conditions are satisfied.

A capital gain that you make may be reduced or disregarded under Division 152 of the ITAA 1997 if the following basic conditions are satisfied:

● A CGT event happens in relation to a CGT asset of yours in an income year,

● The event would have resulted in a gain,

● The CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997, and

● At least one of the following applies;

○ you are a small business entity for the income year,

○ you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997,

○ 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, or

○ you do not carry on a business, but your CGT asset is used in a business carried on by a small business entity that is your affiliate or an entity connected with you.

Active asset test

A capital gains tax (CGT) asset will satisfy the active asset test if:

(a) 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, or

(b) 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 test period.

The test period beings when you acquired the asset and ends at the earlier of the CGT event and if the relevant business ceased to be carried on in the 12 months before that time – the cessation of the business.

Subsection 152-40(1) of the ITAA 1997 details that a CGT asset is an active asset at a time if it is used, or held ready for use, in the course of carrying on a business that is carried on by you, or your affiliate, or another entity that is connected with you.

In your case, you acquired an interest in the property under the deceased’s will.

Section 128-15 of the ITAA 1997 sets out what happens if a CGT asset a deceased owned just before dying passes to a beneficiary of the deceased’s estate. Subsection 128-15(2) of the ITAA 1997 states that the beneficiary is taken to have acquired the asset on the date the deceased died.

You are taken to have acquired the property on the date of the deceased’s death in 1991. Therefore, you have owned the property for more than 15 years. Under the active asset test, the property would need to have been an active asset for at least 7½ years. To be an active asset, the property needed to be used in the course of carrying on a business that is carried on by you, or your affiliate, or another entity that is connected with you

Affiliate

An affiliate is defined by section 328-130 of the ITAA 1997 as being an individual or company 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 the individual or company.

There is nothing to suggest that individual A was your affiliate during the period he/she used the property in his/her own primary production business activity.

Connected entity

An entity is connected with another entity if either entity controls the other entity, or both entities are controlled by the same third entity. Under subsection 328-125(2) of the ITAA 1997, an entity controls a partnership company or trust (except a discretionary trust) if it:

● beneficially owns or has the right to acquire beneficial ownership of, interest in the other entity that give the right to receive at least 40% of any distribution of income or capital by the other entity, or

● if the other entity is a company, beneficially owns, or has the right to acquire beneficial ownership of, equity interests in the company that give at least 40% of the voting power in the company.

Connected entity – discretionary trust

Under subsection 328-125(3) of the ITAA 1997 an entity controls a discretionary trust if the trustee either acts, or might reasonably be expected to act, in accordance with the directions or wishes of the entity or the entity’s affiliates.

Some factors which might be considered include:

● the way in which the trustee has acted in the past

● the relationship between the trustee and the entity or its affiliates, and the relationship the trustee has with both the entity and its affiliates

● the amount of any property or services transferred to the trust by the entity or its affiliates, or both the entity and its affiliates

● any arrangement or understanding between the entity and any person who has benefited under the trust in the past.

This entity may control a discretionary trust in addition to any beneficiary with control.

You were not connected to individual A’s primary production business activity but you may be connected to the family trust that began using the property in a primary production business activity after individual A’s death in YYYY. However, to satisfy the active asset test, the property would need to have been used in the business operated by the family trust for at least 7½ years but this was not the case. Therefore you do not satisfy the basic conditions to be entitled to the CGT small business concessions in your own right.

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