Edited version of private advice

Authorisation Number: 1051922284014

Date of advice: 15 November 2021

Ruling

Subject: Capital gains tax small business concessions

Question 1

Does Trust 1 meet the basic conditions under Division 152-10 of the Income Tax Assessment Act (ITAA 1997) to apply the small business capital gains tax (CGT) concessions?

Answer

Yes.

Question 2

Does Trust 1 meet the conditions under section 152-110 of the ITAA 1997 to apply the small business 15 year exemption to disregard the capital gain made on the disposal of intangible asset 1?

Answer

Yes.

Question 3

Does Trust 2 meet the basic conditions under Division 152-10 of the ITAA 1997 to apply the small business CGT concessions?

Answer

Yes.

Question 4

Does Trust 2 meet the conditions under section 152-110 of the ITAA 1997 to apply the small business 15 year exemption to disregard the capital gain made on the disposal of property 1?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 September 20XX

Relevant facts and circumstances

Person A is the trustee and a beneficiary of Trust 1.

Person A received more than 20% of the distribution from Trust 1 in the 20XX-XX income year.

Company 1 was established in 19XX with Person A being the sole director and sole shareholder.

Person A is over the age of 55.

Trust 1 has had a significant individual for the past 15 years.

Company 1 conducts two separate business activities (business activity A and business activity B).

Person A is the trustee and a beneficiary of Trust 2.

Company 1 received more than 20% of the distributions from Trust 2 in the 20XX-XX income year.

Trust 2 holds 2 commercial properties:

Property 1 acquired in April 20XX and used by Company 1 to conduct business activity A since acquisition.

Trust 2 intends to sell property 1.

Property 2 acquired by Trust 2 used by Company 1 to conduct business activity B since acquisition.

Trust 2 has had a significant individual for the past 15 years.

Trust 1 holds intangible asset 1.

Company 1 has built intangible asset 1 through business activity A since commencement.

Company 1 has a written agreement with Trust 1 to lease intangible asset 1.

Trust 1 disposed of intangible asset 1 in 20XX.

Person A has little to do with Company 1 business activity B as there is one employee who manages this business.

Upon disposal of intangible asset 1, Personal A significantly reduced their hours of work.

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 152-50

Income Tax Assessment Act 1997 section 152-55

Income Tax Assessment Act 1997 section 152-60

Income Tax Assessment Act 1997 section 152-65

Income Tax Assessment Act 1997 section 152-70

Income Tax Assessment Act 1997 section 152-75

Income Tax Assessment Act 1997 section 152-110

Reasons for decision

Question 1

Does Trust 1 meet the basic conditions under Division 152-10 of the Income Tax Assessment Act (ITAA 1997) to apply the small business capital gains tax (CGT) concessions?

Question 2

Does Trust 1 meet the conditions under section 152-110 of the ITAA 1997 to apply the small business 15 year exemption to disregard the capital gain made on the disposal of intangible asset 1?

Question 3

Does Trust 2 meet the basic conditions under Division 152-10 of the ITAA 1997 to apply the small business CGT concessions?

Question 4

Does Trust 2 meet the conditions under section 152-110 of the ITAA 1997 to apply the small business 15 year exemption to disregard the capital gain made on the disposal of property 1?

Detailed reasoning

Basic conditions

Section 152-10 of the Income Tax Assessment Act (ITAA 1997) contains the basic conditions that must be satisfied to be eligible to apply the CGT small business concessions. These conditions are:

(a)    a CGT event happens in relation to a CGT asset 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 in section 152-15 of the ITAA 1997

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

(iv)          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.

(d)    the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997.

Active Asset Test

Section 152-35 of the ITAA 1997 states that a CGT asset satisfies the active asset test if 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 if:

                     •            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 period owned; or

                     •            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 7.5 years.

Section 152-40 of the ITAA 1997 explains the meaning of an active asset. 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 or if the asset is intangible asset, you own it and it is inherently connected with a business that is carried on by you, your affiliate, or another entity that is connected with you.

15-year exemption

Subsection 152-110(1) of the ITAA 1997 provides that 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 are satisfied;

(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)  the individual who was the significant individual of the company or trust just before the CGT event either:

                              i.        was 55 or over at the time of the CGT event and the event happens in connection with your retirement; or

                             ii.        was permanently incapacitated at the time of the CGT event.

Significant Individual

Section 152-50 of the ITAA 1997 provides that an entity satisfies the significant individual test if the entity had a 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% (section 152-55 of the ITAA 1997). The 20% can be made up of direct or indirect percentages.

Subsection 152-70(1) of the ITAA 1997 provides that an entity holds a direct small business participation percentage at the relevant time in an entity equal to the percentage worked out as below:

A trust (where entities have entitlements to all the income and capital of the trust) is the percentage of any distribution of:

         •            income of the trust that the entity is beneficially entitled to, or

         •            capital of the trust that the entity is beneficially entitled to.

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, it is the percentage of:

         •            distributions of income that the entity is beneficially entitled to during an income year, or

         •            distributions of capital that the entity is beneficially entitles to during an income year, or

         •            if two different percentages apply, then the smaller of the two.

An indirect small business participation percentage in a company or a trust is calculated by multiplying together the entity's direct participation percentage in an interposed entity, and the interposed entity's total participation percentage (both direct and indirect) in the company or trust.

Application to Trust 1 circumstances

Basic Conditions

Upon disposal of intangible asset 1, CGT event A1 triggered which resulted in a capital gain. Trust 1 does not carry on a business, however intangible asset 1 is used in business activity A of Company 1, which is a small business entity that is connected to Trust 1.

Section 152-40 of the ITAA 1997 provides the meaning of an active asset to include intangible assets that are inherently connected with your business. Intangible asset 1 is an intangible asset that has grown throughout the period Company 1's business activity A has been operating and is inherently connect with that business. Intangible asset 1 as a whole is considered to be an asset.

Trust 1 has held intangible asset 1 for more than 15 years and intangible asset 1 has been an active asset for more than 7.5 of those years, therefore the active asset test is satisfied.

As such Trust 1 meets the basic conditions under section 152-10 of the ITAA 1997 to apply the CGT small business concessions.

15 year exemption

To apply the small business 15 year exemption, additional conditions need to be met. Trust 1 has met the basic conditions, Trust 1 has held intangible asset 1 for more than 15 years and Trust 1 has had a significant individual for at least 15 years satisfying paragraphs 152-110(1)(a), 152-110(1)(b) and 152-110(1)(c) of the ITAA 1997.

Paragraph 152-110(1)(d) requires the individual who was the significant individual of the company or trust just before the CGT event to be 55 years or over and the event to occur in connection with the individual's retirement.

Section 152-55 of the ITAA 1997 sets out that an individual is a significant individual in a company at a time if, at that time, the individual has a small business participation percentage in the company of at least 20%.

Person A received more than 20% distribution of income and capital from Trust 1 in the 20XX income year, therefore Person A's small business participation percentage is more than 20%. As Person A has a small business participation percentage of more than 20%, Person A is a significant individual for Trust 1 in the 20XX income year.

Person A is over 55 years and the disposal of intangible asset 1 will be considered to be in connection with Person A's retirement as Person A has significantly reduced their hours following the disposal of intangible asset 1.

As such Trust 1 has satisfied the additional conditions required to apply the small business 15 year exemption to disregard the capital gain made from the disposal of intangible asset 1.

Application to Trust 2 circumstances

Basic Conditions

Upon disposal of property 1, CGT event A1 will happen and it is expected that a capital gain will result. Trust 2 does not carry on a business, however property 1 is used in business activity A of Company 1, which is a small business entity connected to Trust 2.

Trust 2 has held property 1 for more than 15 years and has been used by Company 1 in business activity 1 for more than 7.5 of those years, therefore satisfying the active asset test.

Upon disposal of property 1, Trust 2 will meet the basic conditions under section 152-10 of the ITAA 1997 to apply the CGT small business concessions.

15 year exemption

To apply the small business 15 year exemption, additional conditions need to be met. Trust 2 will meet the basic conditions upon disposal of property 1, Trust 2 has held the property for more than 15 years and Trust 2 has had a significant individual for at least 15 years satisfying paragraphs 152-110(1)(a), 152-110(1)(b) and 152-110(1)(c) of the ITAA 1997.

Paragraph 152-110(1)(d) requires the individual who was the significant individual of the company or trust just before the CGT event to be 55 years or over and the event to occur in connection with the individual's retirement.

Section 152-55 of the ITAA 1997 sets out that an individual is a significant individual in a company at a time if, at that time, the individual has a small business participation percentage in the company of at least 20%.

The small business participation percentage for an individual can be either direct or indirect according to section 152-65 of the ITAA 1997. Section 152-75 of the ITAA 1997 provides how to work out the indirect small business participation percentage for an entity. An entity's indirect small business participation percentage in a company or trust is calculated by multiplying together the entity's direct participation percentage in an interposed entity and the interposed entity's total participation percentage (both direct and indirect) in the company or trust.

In this case, Person A is the sole shareholder of Company 1 and Company 1 received more than 20% of the distributions from Trust 2 in the 20XX income year.

To find Person A's participation percentage in the Trust 2 in the 20XX income year, we multiply together Person A's direct participation percentage in Company 1 (100%) and Company 1's total participation percentage in Trust 2 (more than 20%), i.e.:

100% x >20% = >20%

As Person A has a participation percentage in Trust 2 of more than 20%, Person A would be considered a significant individual in the 20XX income year. As long as Company 1 receives a distribution of more than 20% of the income and capital from Trust 2 in the income year property 1 is disposed of, Person A will be considered a significant individual at the time of the disposal of property 1.

Person A is over 55 years and the disposal of property 1 will be considered to be in connection with Person A's retirement as Person A has significantly reduced their hours following the disposal of business activity 1 by Company 1 that was using property 1 as its business premises.

As long as Person A has a small business participation percentage of more than 20% in the 20XX income year (year of disposal) then Trust 2 will satisfy the additional conditions required to apply the small business 15 year exemption to disregard the capital gain made upon the disposal of property 1.

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