Edited version of your written advice

Authorisation Number: 1051276183226

Date of advice: 30 August 2017

Ruling

Subject: Capital gains tax - Small Business Concession

Question 1

Will any gain made from the sale of the properties (the properties) be a gain made from the mere realisation of a capital asset and a capital gain pursuant to subsection 104-10(4) of the Income Tax Assessment Act 1997 (ITAA 1997). Will section 118-20 of the ITAA 1997 apply to reduce any capital gain?

Answer

The sale of the properties is a mere realisation of a capital asset and any gain made from the disposal will be capital gain pursuant to subsection 104-10(4) of the ITAA 1997. Section 118-20 of the ITAA 1997 will not apply to reduce any capital gain.

Question 2

Does the proposed sale of the properties satisfy the basic conditions under section 152-10 of Subdivision 152-A of the ITAA 1997?

Answer

Yes

Question 3

Will the small business 15-year exemption in section 152-110 of Subdivision 152-B of the ITAA 1997 apply to allow The Trust to disregard any capital gain from the sale of the Properties where the Capital Gains Tax (CGT) event happened in connection with the retirement of the significant individual?

Answer

Yes

This ruling applies for the following period

Year ending 30 June 2018

The scheme commences on

1 July 2017

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.

Entity X is a sole trustee of The Trust.

A is the sole director and shareholder of Entity X and is over 55 years of age.

A’s spouse is B, who is over 55 years of age.

A and B equally own shares in a related entity.

B is the sole director of the related entity.

The Trust owns several properties. Some of them are occupied by the related entity to run its business from.

A intends to retire.

The Trust’s and Related entity’s income and projected income for the relevant periods is below $2 million.

The Trust made trust distributions in the relevant income years.

The Trust will make trust distribution of at least 40% of both income and capital to either A or B in future income years.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 10-5

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 subsection 104-10(1)

Income Tax Assessment Act 1997 subsection 104-10(4)

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 118-20

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 Subdivision 152-B

Income Tax Assessment Act 1997 section 152-10

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

Income Tax Assessment Act 1997 paragraph 152-10(1)(c)

Income Tax Assessment Act 1997 subparagraph 152-10(1)(c)(i)

Income Tax Assessment Act 1997 subsection 152-10(1A)

Income Tax Assessment Act 1997 paragraph 152-10(1A)(d)

Income Tax Assessment Act 1997 subsection 152-10(1AA)

Income Tax Assessment Act 1997 subsection 152-35(1)

Income Tax Assessment Act 1997 subsection 152-35(2)

Income Tax Assessment Act 1997 section 152-40

Income Tax Assessment Act 1997 subsection 152-40(1)

Income Tax Assessment Act 1997 subparagraph 152-40(1)(a)(ii)

Income Tax Assessment Act 1997 subparagraph 152-40(1)(a)(iii)

Income Tax Assessment Act 1997 paragraph 152-40(1)(b)

Income Tax Assessment Act 1997 subsection 152-40(4)

Income Tax Assessment Act 1997 paragraph 152-40(4)(e)

Income Tax Assessment Act 1997 paragraph 152-40(4A)(b)

Income Tax Assessment Act 1997 section 152-55

Income Tax Assessment Act 1997 section 152-110

Reasons for decision

These reasons for decision accompany the Notice of private ruling for Entity X as trustee for The Trust.

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Unless otherwise stated, all legislative references are to the Income Tax Assessment Act 1997.

Question 1

Summary

The sale of the Properties is a mere realisation of a capital asset and any gains made from the disposal will be a capital gain pursuant to subsection 104-10(4). As the properties were not acquired for development business, section 118-20 will not apply to disregard the capital gain.

Detailed reasoning

Section 6-5 provides that an amount is assessable income if it is income according to ordinary concepts (ordinary income).

Under section 6-10 assessable income also includes some amounts that are not ordinary income but that are included in assessable income by provisions about assessable income (statutory income). These provisions are listed in the table in section 10-5.

The table in section 10-5 includes section 102-5. Under section 102-5, net capital gains are included in the assessable income of a taxpayer. A net capital gain as worked out in accordance with the method outlined in that section arises where capital gains made during the income year are more than the sum of capital losses made during the income year and unapplied net capital losses from earlier income years.

Pursuant to subsection 104-10(4), a capital gain is made from the disposal of a capital gains tax (CGT) asset if the capital proceeds are more than the asset’s cost base. However if the CGT asset is used in carrying on a business section 118-20 will apply to disregard any capital gain on disposal of the asset.

Section 108-5 defines a CGT asset as any kind of property; or a legal or equitable right that is not property. Land and buildings is listed as an example of a CGT asset in Note 1 to that section.

In this case they did not run a business nor were they in a business of property development. Therefore the disposal will be a mere realisation of a capital asset and any gains made from the disposal will be a capital gain pursuant to subsection 104-10(4). Section 118-20 will not apply to disregard the capital gain.

Question 2

Summary

The Trust will satisfy the basic conditions for relief under section 152-10 of Subdivision 152 - A in relation to the sale of the properties.

Detailed reasoning

Basic Conditions

Division 152 includes a number of concessions that provide relief from CGT. The basic conditions for relief from CGT are specified in subsection 152-10(1):

All of the basic conditions specified in subsection 152-10(1) are satisfied as explained below.

Basic condition (a) – a CGT event happens

Subsection 104-10(1) provides that CGT event A1 happens if you dispose of a CGT asset. ‘CGT asset’ is defined in section 108-5 and includes any kind of property.

CGT event A1 will happen with the sale of the properties. Basic condition (a) will be satisfied.

Basic condition (b) – the event results in a capital gain

Subsection 104-10(4) states you make a capital gain if the capital proceeds from the disposal are more than the asset’s cost base.

The capital proceeds of The Trust will exceed the cost base. This condition is satisfied.

Basic condition (c) – one of the requirements listed is satisfied

Paragraph 152-10(1)(c) states that one of the requirements listed at (i) to (iv) must be satisfied. The Trust is a small entity under subparagraph 152-10(1)(c)(i).

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.

All of the requirements of subsection 152-10(1A) are satisfied.

Basic condition (d) – CGT asset satisfies the active asset test

Active asset

To satisfy this basic condition, the CGT asset must be an ‘active asset’ and it must satisfy the ‘active asset test’.

Section 152-40 provides that 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.

As stated above, the properties are owned by The Trust, is a CGT asset and it is an active asset because it has been used by a Related entity, an entity connected with The Trust, in carrying on its business.

In accordance with subsection 152-35(2) the period begins when the asset is acquired and ends at the earlier of the CGT event or the cessation of the business.

Meaning of active asset

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

The Trust has granted a right to related entity to occupy the properties from the date they were acquired to run its business. Therefore, the properties will not be excluded by paragraph 152-40(4)(e) from being an active asset of the taxpayer and therefore meets this condition.

Question 3

Summary

Section 152-110 of Subdivision 152-B will apply to disregard any capital gain arising from the disposal of the properties.

Detailed reasoning

Under section 152-110 of Subdivision 152-B, an entity that is a company or 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 the same significant individual) during which the entity owned the CGT asset; and

d. an individual who was a significant individual if the company or 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.

Condition (a)

The Trust will meet the basic conditions in Subdivision A as explained under Question 2 above.

Condition (b)

The Trust will have continuously owned the properties till its disposal, for more than 15-years period ending just before the CGT event. Therefore, this condition will be satisfied.

Condition (c)

Significant individual

As per section 152-55 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 (section 152-65).

The Trustee made a distribution to the relevant entities as per the legislative requirements. Therefore, The Trust has had a significant individual for a total of at least 15 years during the ownership period of the properties.

Condition (d)

The proposed sale of the properties will happen in connection with the retirement of the significant individuals of The Trust just prior to the proposed CGT event, be at least 55 years old at that time, and the event will happen in connection with a retirement, this condition will be satisfied.

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

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