Edited version of private advice

Authorisation Number: 1052385160574

Date of advice: 20 May 2025

Ruling

Subject: CGT - small business relief

Question 1

Do Individual 1 and Individual 2 satisfy the necessary preconditions under Subdivision 152-A of the ITAA 1997?

Answer

No.

Question 2

Did the sale of the Property give rise to CGT event A1 under section 104-10 of the ITAA 1997 and a capital gain?

Answer

Yes.

Question 3

Is the Property an 'active asset' within the meaning of section 152-35 of the ITAA 1997?

Answer

No.

Question 4

Will Individual 1 and Individual 2 as the taxpayers receive the small business 50% reduction under Subdivision 115-C of the ITAA 1997?

Answer

No.

Question 5

Will Individual 1 and Individual 2 as the taxpayers receive the small business retirement exemption under Subdivision 115-D of the ITAA 1997?

Answer

No.

Question 6

Will Individual 1 and Individual 2 as the taxpayers receive the general 50% CGT discount under Division 115 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20YY

The scheme commenced on:

21 November 20YY

Relevant facts and circumstances

1.  The Property was acquired by Company A Pty Ltd ('the Trustee') for the A Trust ('the Trust') on DD/MM/YYYY.

2.  The Trust was established by deed on DD/MM/YYYY and was a family discretionary trust of which Individual 1 and Individual 2 ('the Taxpayers') and their extended family members were included in the discretionary beneficiary class.

3.  Since the Property was acquired, it was occupied and used as the premises from which a business ('the Business') operated Company B Pty Ltd ('the Business Entity'), an entity that was connected with the Taxpayers and the Trust. The Business operated from the property until DD/MM/YYYY.

4.  The Business Entity was a corporate entity and traded in a standalone capacity. In this regard:

a)            its directors were:

             i.        Individual 1

             ii.        Individual 2

             iii.        Inndividial 3.

b)            its shareholders were:

             i.        80% the Trustee atf the Trust

             ii.        20% Individual 3.

5.  The Business Entity leased the Property from the Trust.

6.  On DD/MM/YYYY, the Business was sold to a third party, and Individual 1 continued to work as a consultant in the Business after it was sold to the third party funtil DD/MM/YYYY. From DD/MM/YYYY to DD/MM/YYYY, Individual 1 had a monthly retainer in place and from DD/MM/YYYY onwards, Individual 1 ceased working in the Business altogether.

7.  Following the sale of the Business, its new owners continued to occupy and lease the Property from the Trust until sometime in YYYY.

8.  Prior to the sale of the Business, it was not a small Business Entity within the meaning of the ITAA 1997, nor did the Business entity or its affiliates / connected entities qualify at that time for the Small Business CGT Concessions under Division 152 of the ITAA 1997.

9.  The Property was always rented out on commercial lease terms to the Business Entity for as long as it was used by the Business for at least Y years and prior to the sale of the Business.

10.  Rental income from the Property has always been paid into the Trust and trust income distributions have been made every financial year where at least 20% of the income has been distributed directly or indirectly to either or both of Individual 1 and Individual 2.

11.  On DD/MM/YYYY, as part of the Taxpayers' estate and succession planning, a restructure of the property took place such that the Property was transferred out of the Trust into the names of Individual 1 and Individual 2 as tenants in common in equal shares for no consideration ('the Restructure'). The Restructure took place pursuant to a deed of capital distribution dated DD/MM/YYYY (the Deed of Distribution).

12.  The Market value of the Property at the date of the Restructure was $MV.

13.  Equitable and beneficial ownership of the Property passed to the Taxpayers on DD/MM/YYYY under the Deed of Distribution, but the Property was registered in the Taxpayers' name on DD/MM/YYYY under a transfer of land instrument dealing.

14.  At the date of the Restructure, the Property was being leased by another third part tenant, namely Company C Pty Ltd This is reflected in a lease which commenced on DD/MM/YYYY, as renewed on DD/MM/YYYY and further renewed on DD/MM/YYYY ('the Lease').

15.  Subsequent to the Restructure:

a)            the Property continued to be leased to Company C Pty Ltd under the Lease Documents; and

b)            the Trust wound up and vested on DD/MM/YYYY pursuant to a deed of vesting dated that date.

16.  Individual 1 and Individual 2 subsequently sold the Property to a third party, Individual 4 on DD/MM/YYYY, for the amount of $S ('the Sale'). A contract of sale in respect of the Sale was entered into between as the Taxpayers as the vendors and Individual 4 as the initial purchaser on DD/MM/YYYY, with an initial settlement date of DD/MM/YYYY ('the Contract of Sale').

17.  Prior to settlement, on DD/MM/YYYY, Company D Pty Ltd was nominated as the purchaser of the Property under clause 4 of the Contract of Sale and settlement was brought forward to DD/MM/YYYY.

18.  In respect of the Sale:

a)            the contract of sale was date was DD/MM/YYYY

b)            the settlement date was DD/MM/YYYY

c)            the sale price of the Property was $S (excluding GST)

d)            the cost base of the Property is $CB.

Relevant legislative provisions

Income Tax Assessment Act 1999 section 102-20

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

Income Tax Assessment Act 1997 subsection 104-10(2)

Income Tax Assessment Act 1997 subsection 104-10(3)

Income Tax Assessment Act 1997 subsection 104-10(5)

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 Subdivision 152-A

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)(a)

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

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

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

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

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

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

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

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 paragraph 152-35(1)(a)

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 paragraph 152-40(1)(b)

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

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

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

Income Tax Assessment Act 1997 section 152-47

Income Tax Assessment Act 1997 section 152-48

Income Tax Assessment Act 1997 section 328-110

Income Tax Assessment Act 1997 subsection 328-110(1)

Income Tax Assessment Act 1997 paragraph 328-110(1)(a)

Income Tax Assessment Act 1997 section 328-115

Income Tax Assessment Act 1997 section 328-120

Income Tax Assessment Act 1997 subsection 328-120

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

Income Tax Assessment Act 1997 subsection 328-125(2)

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

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

Income Tax Assessment Act 1997 section 328-130

Income Tax Assessment Act 1997 section 328-130

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-avoidance rule for income tax'.

Reasons for decision

Questions 1, 2 and 3

Summary

The sale of the Property gave rise to CGT event A1 under section 104-10 and a capital gain.

The Property is not an 'active asset' within the meaning of section 152-15.

Individual 1 and Individual 2 do not satisfy the basic conditions for the CGT small business concessions in Subdivision 152-A in respect to the disposal of the Property as the property does not satisfy paragraph 152-10(d) as it was not an active asset.

Detailed reasoning

Basic conditions in Subdivision 152-A of the ITAA 1997

1.  To qualify for the CGT small business concessions, you must satisfy several conditions that are common to all the concessions.

2.  Subsection 152-10(1) sets out the basic conditions.

A *capital gain (except a capital gain from *CGT event K7) you make may be reduced or disregarded under this Division if the following basic conditions are satisfied for the gain:

(a)          a *CGT event happens in relation to a *CGT asset of yours in an income year;

Note: This condition does not apply in the case of CGT event D1: see section 152-12.

(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 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 (1A) or (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).

3.  To be eligible to apply the small business CGT concessions you must satisfy all 4 of the basic conditions above.

The first and second basic conditions - paragraphs 152-10(1)(a) and (b)

4.  When you disposed of the Property which is a CGT asset, in the YYYY income year, it triggered CGT event A1. Where this resulted in a capital gain, the first 2 basic conditions in paragraphs 152-10(1)(a) and (b) will be met.

The third basic condition - paragraph 152-10(1)(c)

5.  Of the 2 basic conditions remaining, the condition in paragraph 152-10(1)(c) is that at least one of the requirements in subparagraphs 152-10(1)(c)(i) to 152-10(1)(c)(iv) applies.

6. In your circumstances the only requirement in paragraph 152-10(1)(c) you could possibly satisfy is subparagraph 152 -10(1)(c)(ii) the maximum value net asset test, as none of the others will apply. However, we have not considered whether you meet this condition, as you do not meet the active asset test under paragraph 152-10(1)(d) (see paragraphs 7-14).The fourth basic condition - paragraph 152-10(1)(d) - Active asset test

7.  For the disposal of your Property to qualify for the CGT small business concessions, your interest, must satisfy the fourth and final basic condition of being an active asset test as described in section 152-35.

8.  Under subsection 152-35(1), a 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.

9.  Subsection 152-35(2) provides that the relevant period begins when you acquired the asset and ends at the earlier of the CGT event or the cessation of the business.

10.  The term 'active asset' is defined at section 152-40. Subsection 152-40(1) provides that a CGT asset is an active asset at a given time if, at that time, you own it and:

•                     it is used (or held ready for use) in the course of carrying on a business by you, your affiliate or an entity connected with you (paragraph 152-40(1)(a)); or

•                     it is an intangible asset that is inherently connected with a business that is carried on by you, your affiliate, or an entity connected with you (paragraph 152-40(1)(b)).

11.  The combined effect of sections 152-35 and 152-40 is that the asset will meet the active asset test if the asset was used, or held ready for use, in the course of carrying on a business by you, a connected entity or affiliate for at least half of the time period it was owned. This is subject to any exceptions in subsection 152-40(4).

12.  As you did not carry on a business in your personal capacity and the CGT asset was leased during your period of ownership, to an unrelated entity who was not a connected entity or affiliate, the CGT asset does not satisfy sections 152-35 and 152-40.

13.  Further, paragraph 152-40(4)(e) excludes, among other things, assets whose main use is to derive rent. Such assets are excluded even if they are used in the course of carrying on a business.

Application of paragraph 152-10(1)(d)

14.  Given that during the period that you owned it, your Property has not been used in the course of carrying on a business and its main use is to derive rent, it is not an active asset for the purposes of section 152-40. Therefore, the condition in paragraph 152-10(d) is not satisfied.

Conclusion

You do not satisfy the basic conditions for the CGT small business concessions in section 152-10 in respect to the disposal of the Property as the property does not satisfy paragraph 152-10(d) as it was not an active asset.

Question 4

Summary

Individual 1 and Individual 2 do not satisfy the basic conditions for relief in Subdivision 152-A, consequently they are not eligible to receive the small business 50% reduction under Subdivision 152-C.

Detailed reasoning

Subdivision 152-C - Small business 50% reduction

1.  Subdivision 152-C sets out the requirements that must be satisfied for a taxpayer to be eligible to qualify for the small business 50% reduction.

2.  Section 152-205 of Subdivision 152-C provides that the amount of a capital gain remaining after applying step 3 of the method statement in subsection 102-5(1) (about reducing a discount capital gain by any applicable discount percentage), is reduced by 50%, if the basic conditions in Subdivision 152-A are satisfied for the gain.

3.  As concluded above (under Questions 1, 2 and 3), Individual 1 and Individual 2 do not satisfy the basic conditions for relief in Subdivision 152-A, consequently they are not eligible to receive the small business 50% reduction under Subdivision 152-C.

Question 5

Summary

Individual 1 and Individual 2 do not satisfy the basic conditions for relief in Subdivision 152-A, consequently they are not eligible to receive the small business retirement exemption under Subdivision 152-D.

Detailed reasoning

Subdivision 152-D - Small business retirement exemption

1.  Subdivision 152-D of the ITAA 1997 sets out the requirements that must be satisfied for a taxpayer to be eligible to qualify for the small business retirement exemption.

2.  Under Subsection 15-D an individual can choose to disregard all or part of a capital gain if specified requirements are satisfied.

3.  Subsection152-305(1) sets out the 3 requirements that an individual must satisfy to choose to disregard all or part of a capital gain under Subdivision 152-D.

4.  The first requirement in paragraph 152-305(1)(a) requires that the basic conditions in Subdivision 152-A are satisfied.

5.  As concluded above (under Questions 1, 2 and 3), Individual 1 and Individual 2 do not satisfy the basic conditions for relief in Subdivision 152-A, consequently they are not eligible to receive the small business retirement exemption under Subdivision 152-D.

Question 6

Summary

The sale of the Property satisfies requirements that must be met for a capital gain to qualify as a discount capital gain under Subdivision 152-A, consequently Individual 1 and Individual 2 are eligible to receive the 50% CGT discount on their share of the capital gain on the sale of the Property.

Detailed reasoning

Subdivision 115-A Discount capital gains

1.  Subdivision152-A of the ITAA 1997 sets out the requirements that must be satisfied for a capital gain to qualify as a discount capital gain.

2.  Section 115-5 provides that a discount capital gain is a *capital gain that meets the requirements of sections 115-10, 115-15, 115-20 and 115-25.

3.  Broadly the effect of these provisions are that when you dispose of an asset, you can reduce your capital gain by 50%, if the following apply:

•                     you are a trust or individual

•                     you owned the asset for at least 12 months

•                     you are an Australian resident for tax purposes.

4.  In your case a capital gain arose when CGT event A1 happened upon the sale of the Property on DD/MM/YYY (i.e the date of the Sale). It is a discount capital gain and would be eligible for the 50% discount pursuant to section 115-25 as the capital gain resulted from a CGT event happening to a CGT asset (after 21 September 1999) that you, both being Australian residents, acquired at least 12 months before the CGT event and owned for a period exceeding 12 months. Therefore, any capital gain arising from the sale of the property is a discount capital gain and eligible for the general 50% discount.

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