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Edited version of your written advice
Authorisation Number: 1051292828944
Date of advice: 21 December 2017
Ruling
Subject: Small business concessions
Question
Can you apply the small business 15-year exemption to disregard the capital gain you make on the disposal of the property?
Answer
Yes.
This ruling applies for the following periods:
Year ended 30 June 2018
The scheme commences on:
1 July 2016
Relevant facts and circumstances
You (the trust) own a property.
The land was purchased, and then planted with a forestry plantation in over 15 years ago. There are no buildings or improvements in the land.
The property is held passively by trust for the use in the small business of a related entity.
The property owned by the trust has passed the basic conditions.
In recent years the trust income has been from distributions from the related entity.
The previous year income distributions for the trust were as follows:
Beneficiary A |
Beneficiary B |
Beneficiary C |
Total | |
20XX |
70% |
30% |
100% | |
20XX |
50% |
50% |
100% | |
20XX |
100% |
100% |
The trust made losses up until the year they started distributing.
The trust will make a profit in the year the property is sold. The beneficiaries will receive 20% or more of the income during that year
The trust has never made any capital distributions.
The income from the land and forestry plantation is intended to be used by the beneficiaries of the trust to fund their retirement.
The beneficiaries of the trust intend to sell the property to a yet to be established self-managed super fund.
The combined net assets of the beneficiaries, and their connected entities and affiliates, is below $6,000,000. The combined turnover of beneficiaries and their connected entities and affiliates is below $2,000,000.
The beneficiaries are over 55 years of age.
As part of selling the property the beneficiaries will be transitioning to part time work.
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
Reasons for decision
You can disregard a capital gain from a CGT event happening to a CGT asset you have owned for at least 15 years if you:
● satisfy the basic conditions for the small business CGT concessions
● continuously owned the CGT asset for the 15 year period ending just before the CGT event happened; and
if you are a company or trust:
● you had a significant individual for a total of at least 15 years of the whole period of ownership, and
● the individual who was a significant individual just before the CGT event was at least 55 years old at that time and the event happened in connection with their retirement.
In your case, you have stated that the trust meets the basic conditions for the small business CGT concessions.
The trust property was purchased over 15 years ago and has now been held by the trust for more than 15 years.
Significant individual
A company or trust satisfies the significant individual test if it had at least one significant individual just before the CGT event. 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.
Total small business participation percentage
An entity’s small business participation percentage in another entity at a time is the percentage that is the sum of:
● the entity’s direct small business participation percentage in the other entity at that time, and
● the entity’s indirect small business participation percentage in the other entity at that time.
Direct small business participation percentage
An entity’s direct small business participation percentage in a trust, where entities have entitlements to all the income and capital of the trust, is the percentage of:
● the percentage of any distribution of income that the trustee may make to which the entity would be beneficially entitled; or
● the percentage of any distribution of capital that the trustee may make to which the entity would be beneficially entitled.
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.
In this case, the trust is a discretionary trust therefore beneficiaries do not have entitlements to all the income and capital of the trust.
Discretionary trusts with tax losses or no net income
Legislative amendments to Division 152 of the ITAA 1997, introduced in March 2012, allow an entity another method to work out their small business participation percentage in a discretionary trust where the trust had no net income or had a tax loss in an income year.
Where the trustee of the trust made a distribution in the CGT event year, the entity's direct small business participation percentage during a loss year is worked out via item 3 in the table in subsection 152-70(1) of the ITAA 1997 using the percentage of the distributions the entity was beneficially entitled to in the CGT event year. This is achieved by treating, if the trustee made a distribution in the CGT event year, the references in that item to the 'relevant year' as being references to the CGT event year (subsections 152-70(4) and (5) of the ITAA 1997).
In your case, the trust had made losses up until the 20XX income year. The trust made a profit during the CGT event year and the beneficiaries will receive 20% or more of the income of the trust in that year.
Therefore, it is accepted that the trust had a significant individual for at least 15 years it held the property. The significant individuals are over 55 years of age and are transitioning from full-time to part-time work as part of selling the property. Consequently, the trust will be eligible for the small business 15-year exemption in section 152-110 of the ITAA 1997 in relation to the property and the capital gain made on its disposal can be disregarded.
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