Edited version of private advice

Authorisation Number: 1052212816523

Date of advice: 20 February 2024

Ruling

Subject: CGT - 15-year-exemption

Question 1

Can the Trustee of Family Trust A disregard the capital gain arising from the disposal of the Properties under section 152-110 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Are the payments relating to the capital gain disregarded under section 152-110 of the ITAA 1997 by the Trustee of Family Trust A to Individuals X and Y exempt under section 152-125 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period:

1 July 20xx - 30 June 20xx

The scheme commenced on:

1 July 20xx

Relevant facts and circumstances

Company A is the Trustee of Family Trust A (Trustee A).

Company B is the Trustee of Family Trust B (Trustee B).

Individual X is the director of Trustee A and Trustee B.

Individual Y is X's spouse.

Trustee A acquired a property after 19 September 1985 (Property).

In the income year 20xx Trustee A entered into a contract for the sale of the Property.

Trustee A would make a capital gain on the disposal of the Property.

Trustee A had owned the Property for more than 15 years continuously at the time the Property was sold.

Trustee A did not carry on a business.

The net value of CGT assets owned by Trustee A and its connected entities and affiliates exceed $X million.

Trustee B carried on a business (Business).

Trustee B used the Property for its Business for more than 7½ years from the date of acquisition of the Property to the date of sale.

Individual Y was over 80 years of age at the time the Property was sold. Individual Y suffered a stroke and had been in full-time nursing home care for a number of years due to the extent of dementia.

For the 15 income years prior to the income year 20xx Trustee A distributed 50% of income and capital to each of Individual X and Individual Y.

For the 4 income years prior to the income year 20xx Trustee B distributed 50% of income and capital to each of Individual X and Individual Y.

The aggregated turnover of Trustee B was below $X million.

Trustee A will distribute the capital gain made on the disposal of the Property to Individual X and Individual Y within 2 years from the date of the sale contract.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 152-10

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

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

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

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152-40

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

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 subsection 152-70(1)

Income Tax Assessment Act 1997 subsection 152-70(4)

Income Tax Assessment Act 1997 subsection 152-70(5)

Income Tax Assessment Act 1997 subsection 152-70(6)

Income Tax Assessment Act 1997 section 152-50

Income Tax Assessment Act 1997 section 152-110

Income Tax Assessment Act 1997 section 152-125

Income Tax Assessment Act 1997 section 328-110

Income Tax Assessment Act 1997 section 328-115

Income Tax Assessment Act 1997 section 328-125

Income Tax Assessment Act 1997 subsection 328-125(1)

Income Tax Assessment Act 1997 subsection 328-125(3)

Income Tax Assessment Act 1997 subsection 328-125(4)

Does Part IVA apply to this private ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidancerule for income tax'.

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated.

Division 152 provides CGT relief to some small business taxpayers. In determining whether an entity can reduce or disregard a capital gain, the basic conditions under Subdivision 152-A are required to be satisfied first.

Subdivision 152-A - the basic conditions

Subsection 152-10(1) states that a capital gain may be reduced or disregarded if the following basic conditions are satisfied:

(a) a CGT event happens in relation to a CGT asset of yours 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 CGT small business entity for the income year;

(ii) you satisfy the maximum net asset value (MNAV) test (see section 152-15);

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

(iv) the conditions mentioned in subsection 152-10(1A) or 152-10(1B) are satisfied in relation to the CGT asset in the income year;

(d) the CGT asset satisfies the active asset test (see section 152-35).

Each of the above conditions is considered below.

(a)    A CGT event happens in relation to a CGT asset in an income year:

Section 108-5 defines a CGT asset to include 'any kind of property' and provides an example of land and buildings as CGT assets. The Property, therefore, was a CGT asset of the Trustee A.

CGT event A1 under section 104-10 happened in the income year ended 30 June 20xx when Trustee A entered into a contract for the sale of the Property in this year.

Paragraph 152-10(1)(a) is satisfied.

(b)   The event would (apart from this Division) have resulted in the gain

Paragraph 152-10(1)(b) is satisfied as the Trustee A would make a capital gain on the disposal of the Property.

(c)    Additional conditions under paragraph 152(10)(1)(c)

Paragraph 152(10)(1(c) requires that at least one of the conditions listed is met. Relevant for the purpose of this ruling is subparagraph 152(10)(1)(c)(iv), which requires that the conditions mentioned in subsection 152-10(1A) or 152-10(1B) for passively held assets are satisfied.

Subsection 152-10(1A) is for passively held assets used by affiliates or connected entities and is relevant.

The conditions in subsection 152-10(1A) are satisfied if you do not carry on a business and your affiliate or an entity that is connected with you is a small business entity and carries on the business in relation to the CGT assets.

Trustee A did not carry on a business as the activities of holding the Properties for use by its related party do not amount to the carrying on of a business. Therefore, Trustee A is not a small business entity.

Connected entity

As Trustee B used the Property directly in a business of its own it is necessary to establish that Trustee B is connected with Trustee A.

Under subsection 328-125(1) an entity is connected to another entity if:

(a)  either entity controls the other entity in a way described in section 328-125; or

(b)  both entities are controlled in a way described in section 328-125 by the same third entity.

Subsection 328-125(3) states that an entity (the first entity) controls a discretionary trust if a trustee of the trust acts, or could reasonably be expected to act, in accordance with the directions or wishes of the first entity, its affiliates or both.

Individual X, as the director of Trustee A controls Trustee A in accordance with subsection 328-125(3) as Trustee A acts, or could reasonably be expected to act, in accordance with Individual X's directions or wishes.

Individual X, as the director of Trustee B, also controls Trustee B in accordance with subsection 328-125(3) for the same reason.

Therefore, Trustee B is connected with Trustee A as both entities are controlled in a way described in subsections 328-125(3) by the same entity.

CGT Small business entity

Subsection 152-10(1A) requires Trustee B, being an entity that is connected with Trustee A, to be a CGT small business entity and carries on a business in relation to the Property.

Subsection 328-110(1) provides that you are a small business entity for an income year if:

(a)  you carry on a business in the current year; and

(b)  one or both of the following applies:

(i)    you carried on a business in the income year (the previous year) before the current year and your aggregated turnover for the previous year was less than $10 million;

(ii)      your aggregated turnover for the current year is likely to be less than $10 million.

As Trustee B has been carrying on a business paragraph (a) is satisfied.

For the purpose of the small business relief in Division 152 the reference in section 328-110 to $10 million is taken to be a reference to $2 million as stated in paragraph 152-10(1AA)(b).

'Aggregated turnover' for an income year is defined in section 328-115 as the sum of your annual turnover for the income year; and the annual turnover of any entity connected with you and any entity that is an affiliate of yours at any time during the income year, excluding amounts derived from dealing between each other.

The aggregated turnover of Trustee B for the income years ended 30 June 20xx and the prior year was less than $X million.

Accordingly, Trustee B has met the conditions of subsection 328-110(1) and is a small business entity. It is also a CGT small business entity due to paragraph 152-10(1AA)(a).

Therefore, Trustee A has satisfied the conditions in subsection 152-10(1A) because it does not carry on a business and Trustee B, being a connected entity, is a CGT small business entity and carries on the business in relation to the Property.

As the conditions in subsection 152-10(1A) are met, Trustee A has satisfied paragraph 152(10)(1)(c).

(d)   The CGT asset satisfies the active asset test

Under subsection 152-35(1) a CGT asset satisfies the active asset test if:

(d)    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 from the acquisition of the asset or the earlier of the CGT event or the cessation of the business, or

(e)    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 this period.

As Trustee A owned the Property continuously for more than 15 years at the time of the disposal paragraph 152-35(1)(b) is relevant.

Subsection 152-40(1) provides 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.

Trustee A owned the Property and it was used in the course of carrying on a business by Trustee B for more than 7½ years during the period from the acquisition of the Property to the CGT event. Accordingly, Trustee A satisfies the active asset test in section 152-35.

Paragraph 152-10(1)(d) is therefore, satisfied.

Accordingly, Trustee A has satisfied the basic conditions in subsection 152-10(1) in Subdivision 152-A.

Subdivision 152-B - the 15-year exemption

Section 152-110 provides the small business 15-year exemption for companies and trusts. Under subsection 152-110(1), a company or trust can disregard the capital gain from the disposal of a CGT asset if:

(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 always the same significant individual) during which the entity owned the CGT asset; and

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

(i) at least 55 years old at that time and the event happened in connection with their retirement; or

(ii) permanently incapacitated at that time.

Trustee A has satisfied paragraphs (a) and (b).

Paragraphs (c) and (d) are considered below:

(f)     The entity had a significant individual for a total of at least 15 years

Under section 152-50 an entity satisfies the significant individual test if the entity had at least one significant individual just before the CGT event.

Section 152-55 provides the meaning of significant individual

An individual is a significant individual in a company or a trust at a time, if at that time, the individual has a small business participation percentage in the company or trust of at least 20%.

Under section 152-65 'small business participation percentage' is the sum of direct small business participation percentage and indirect small business participation percentage.

For a non-fixed trust where entities do not have entitlements to all the income and capital of the trust, Item 3 of the table in subsection 152-70(1) applies and provides that an entity's direct small business participation percentage in the trust at the relevant time is either:

•         the percentage of distribution of income that the trustee makes during an income year to which the entity was beneficially entitled, or

•         the percentage of distribution of capital that the trustee makes during an income year to which the entity was beneficially entitled, or

•         if they are different, the smaller percentage.

In this case, Trustee A had a significant individual for a total of 15 years as Individual X and Individual Y each received 50% of distributions of income and capital for 15 years prior to the sale of the Property. Therefore. Trustee A satisfies the requirement of paragraph 152-110(1)(c).

(d)   an individual who was a significant individual of the company or trust just before the CGT event was either 55 years old at that time and the event happened in connection with their retirement or permanently incapacitated at that time

In the 20xx income year Individual X's and Individual Y's direct small business participation percentage was 50% each as each received 50% of distribution of income and capital. Therefore, Individual X and Individual Y were significant individuals just before the CGT event.

Individual Y was over 80 years of age at the time of the CGT event. Individual Y suffered a stroke a number of years ago and has dementia. Individual Y has been in full-time nursing home care for several years due to the extent of dementia.

Individual Y, therefore, was permanently incapacitated just before the CGT event.

Paragraph 152-110(1)(d) is satisfied.

Conclusion:

Trustee A can disregard the capital gain arising from the disposal of the Property as it has satisfied all the conditions in subsection 152-110(1).

The capital gain derived from the disposal of the Property is neither assessable income nor exempt income in accordance with subsection 152-110(2).

Question 2

Section 152-125 allows payments made to company's or trust's CGT concession stakeholders to be exempt.

Subsection 152-125(1) states that:

152-125(1) This section applies if:

(a)  one or more of the following applies:

(i)    under section 152-110, a capital gain (the exempt amount) of a company or trust is disregarded;

....

(b)  the company or trust makes one or more payments relating to the exempt amount to an individual (whether directly or indirectly through one or more interposed entities) before the later of:

(i)    2 years after the relevant CGT event;

.....

(c)    the individual was a CGT concession stakeholder of the company or trust just before the relevant CGT event.

Section 152-60 states that and individual is a CGT concession stakeholder of a company or trust at a time if the individual is:

(a)    a significant individual in the company or trust; ...

In this case:

•         the capital gain Trustee A made from the disposal of the Property is disregarded under section 152-110 and is an exempt amount;

•         Trustee A will make payments relating to the exempt amount to Individual X and Individual Y within 2 years after the relevant CGT event;

•         Individual X and Individual Y was each a CGT concession stakeholder at the time of the CGT event.

Accordingly, the payment relating to the capital gain made from the disposal of the Property to Individual X and Individual Y by Trustee A within 2 years of the CGT event is exempt under section 152-125.

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