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Ruling

Subject: Small business CGT concessions and Part IVA

Question 1

Is the trust's 20% interest in the other trust an active asset under section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Should the trust dispose of its entire 20% interest in the trust to a new discretionary trust and distribute 100% of its income and capital profits for the financial year ended 30 June 2012 to an individual beneficiary, will the trustee be entitled to apply the small business 50% reduction in Subdivision 152-C of the ITAA 1997 to the capital gain?

Answer

Yes, but if it is applied the trustee would not be entitled to apply the small business retirement exemption or the small business rollover to this amount.

Question 3

If the small business capital gains tax provisions contained in Division 152 of the ITAA 1997 apply to the potential capital gain to be made by the trust, can the trustee apply the small business rollover concession contained in Subdivision 152-E to defer the taxing point of the capital gain for a further two years until the financial year ended 30 June 2014?

Answer

Yes, if the CGT event occurs during the financial year ended 30 June 2012 and the trustee chooses the replacement active asset rollover or to incur capital expenditure on an existing asset that will be an active asset.

Question 4

If the small business rollover concession contained in Subdivision 152-E of the ITAA 1997 applies and the residual capital gain is taxable in the financial year ended 30 June 2014, will the retirement exemption be available if the trustee makes a contribution into a complying superannuation fund of up to the CGT exempt amount for the benefit of the CGT concession stakeholder prior to the due date for lodgement (or actual date if sooner) of the trust's 2014 tax return?

Answer

Yes

Question 5

Will the anti-avoidance provisions contained in Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply to the proposed arrangement?

Answer

No

This ruling applies for the following periods:

the financial year ended 30 June 2012

the financial year ended 30 June 2013

the financial year ended 30 June 2014

The scheme commences on:

1 July 2011

Relevant facts and circumstances

The trust acquired 20% in another trust after 20 September 1985. The other 80% unit holder in the trust is an unrelated party. The other trust is an Australian resident trust.

The other trust operates a business and also owns 100% of another trust that operates a business.

You have advised that the trusts met the 80% market value test for more than half of the time period that the first trust owned the units in the other trust.

The trust also owns other assets.

The trust is tied into a unit holder agreement with the other owner of the trust and is a party to loan guarantees in relation to the businesses. It owes a financier and another party a sum in relation to the acquisition of the 20% interest that it holds in the trust.

You advised that the trust, its CGT affiliates and its connected entities will all satisfy the maximum net asset value test on the basis that their combined net assets just before the proposed sale of the shares will not exceed $6 million.

The trust is proposing to sell its entire 20% interest in the trust to a new discretionary trust.

If the small business CGT concessions are available for the proposed transaction the trustee of the trust will distribute 100% of the income and capital profits for the financial year ended 30 June 2012 to one individual. That individual is under 55 years of age.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 103-25.

Income Tax Assessment Act 1997 subsection 104-185(1).

Income Tax Assessment Act 1997 section 104-197.

Income Tax Assessment Act 1997 Division 115.

Income Tax Assessment Act 1997 Subdivision 152-A.

Income Tax Assessment Act 1997 section 152-35.

Income Tax Assessment Act 1997 subsection 152-10(2)

Income Tax Assessment Act 1997 paragraph 152-10(2)(a)

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)(c).

Income Tax Assessment Act 1997 subsection 152-40(3).

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

Income Tax Assessment Act 1997 section 152-50.

Income Tax Assessment Act 1997 section 152-60.

Income Tax Assessment Act 1997 section 152-205.

Income Tax Assessment Act 1997 subsection 152-305(2).

Income Tax Assessment Act 1997 subsection 152-315(5).

Income Tax Assessment Act 1997 section 152-325.

Income Tax Assessment Act 1997 subsection 152-325(1).

Income Tax Assessment Act 1997 subsection 152-325(5).

Income Tax Assessment Act 1997 section 152-400.

Income Tax Assessment Act 1997 section 152-410.

Income Tax Assessment Act 1997 section 152-415

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

Income Tax Assessment Act 1936 section 177C.

Income Tax Assessment Act 1936 subparagraph 177C(2)(a)(ii).

Income Tax Assessment Act 1936 section 177D.

Income Tax Assessment Act 1936 section 177EA.

Reasons for decision

The small business retirement exemption is one of the small business CGT concessions. To qualify for the small business CGT concessions you must satisfy several conditions that are common to all the concessions. These are called the 'basic conditions'.

 Basic conditions

The basic conditions in Subdivision 152-A of the ITAA 1997 (as relevant to this case) are:

· the $6 million limit on the net value of CGT assets

· the active asset test.

Net value of the CGT assets

You will satisfy the maximum net asset value test if, just before the CGT event that results in the capital gain, the net value of the CGT assets of you and the following entities does not exceed

$6 million:

· any entities connected with you

· your affiliates and any entities connected to your affiliates (subject to certain exclusions).

An entity is connected with another entity if either entity controls the other or both entities are controlled by the same third entity under subsection 328-125(1) of the ITAA 1997.

Summary

The information provided is that the maximum net value of the business assets of the trust, and any entities connected with it would be less than $6 million just before the CGT event. Therefore the trust would meet the maximum net asset value test.

Active asset test

A requirement of the active asset test contained in section 152-35 of the ITAA 1997 is that the CGT asset must be an active asset for at least half of the period from when you acquired it until the earlier of the CGT event or when you ceased business, if the relevant business had ceased to be carried on in the 12 months before the CGT event.

The meaning of an active asset is set out in section 152-40 of the ITAA 1997. It must firstly satisfy one of the 'positive tests' in subsection 152-40(1) of the ITAA 1997 and then also not be excluded by one of the exceptions in subsection 152-40(4) of the ITAA 1997.

Under subsection 152-40(1) of the ITAA 1997 a CGT asset is an active asset (subject to the exclusions) if it is owned and used, or held ready for use, in the course of carrying on a business by you or your small business CGT affiliate or another entity that is connected with you under paragraph 152-40(1)(c) of the ITAA 1997.

The combined effect of sections 152-35 and 152-40 of the ITAA 1997 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 for at least half of the time period it was owned, subject to the exclusions in subsection 152-40(4) of the ITAA 1997.

Further, subsection 152-40(3) of the ITAA 1997 provides that if the CGT asset is an interest in a trust that is an Australian resident at that time, it will be considered an active asset if the total of the following exceeds 80% or more of the market value of all of the assets of the trust:

· the market value of the active assets of the trust

· the market value of any financial instruments of the trust that are inherently connected with a business that the trust carries on

· any cash of the trust that is inherently connected with such a business.

In this case the assets are interests in a trust. Those interests will be active assets if they meet the 80% market value test.

You have advised that the market value of the active assets, financial instruments and cash for the trust are more than 80% of the market value of the assets of the trust.

Further conditions for an interest in a trust

If the CGT asset that gives rise to the capital gain is an interest in a trust, subsection 152-10(2) of the ITAA 1997 requires two additional basic conditions to be met just before the CGT event:

(a)  the entity is a CGT concession stakeholder in the trust (section 152-60 of the ITAA 1997)

(b)  the CGT concession stakeholders in the object trust together have a small business percentage in the trust of at least 90%.

A person is a CGT concession stakeholder of a trust if:

-     they are a significant individual in the company or trust, or

-     they are the spouse of the significant individual of the company or trust who has a small business participation percentage in the trust that is greater than zero (section 152-60 of the ITAA 1997).

An entity's small business participation percentage is the sum of the entity's direct and indirect small business participation percentage in the other entity at that time.

A significant individual of a trust is an individual who during an income year is entitled to at least 20% of the distributions of income or capital of the trust (section 152-55 of the ITAA 1997). The trust will satisfy the significant individual test if it has at least one significant individual just before the CGT event.

The trust cannot be a CGT concession stakeholder in the object trust as it is not an individual and therefore cannot satisfy paragraph 152-10(2)(a) of the ITAA 1997.

It is proposed that a named individual will be entitled to 100% of the income and capital of the trust and therefore will be a significant individual of the trust for the financial year ended 30 June 2012.

The named individual will be a significant individual and CGT concession stakeholder in the other trust (as their small business participation percentage in it will be 20%). They would be the only CGT concession stakeholder in the trust under the proposal as they would have a small business participation percentage in the trust of 100%.

Summary

From the information provided the other trust would satisfy the 80% test. The further conditions for an interest in a trust would also be met as the named individual is a CGT concession holder in the trust and they would have a small business percentage in the trust more than 90%. Therefore the interests in the trust are considered active assets. The trust will meet the basic conditions for the small business CGT concessions.

Discount percentage

Division 115 of ITAA 1997 allows for the discounting of capital gains in some circumstances for an individual or a trust. A capital gain from a CGT asset is a discount capital gain only if the entity making the gain acquired the asset at least a year before the CGT event causing the gain, the CGT event occurred after 21 September 1999, and no choice has been made to include indexation in the cost base of the asset.

The discount percentage is available to the trust for this capital gain.

The small business 50% active asset reduction under Subdivision 152-C

Under section 152-205 of the ITAA 1997 a capital gain is reduced by 50% if the basic conditions in Subdivision 152-A of the ITAA 1997 are satisfied. This concession is applied automatically unless a choice is made for it to not apply. A choice for it to not apply may be made so that the small business retirement exemption or small business rollover may be accessed.

The trust satisfies the basic conditions in Subdivision 152-A of the ITAA 1997 and therefore is eligible for this concession unless the trustee chooses not to apply it.

Small business roll-over concession

You may choose a roll-over under Subdivision 152-E of the ITAA 1997 if you satisfy the basic conditions in Subdivision 152-A of the ITAA 1997 (section 152-410 of the ITAA 1997). This roll-over allows the deferral of the capital gain in regard to an asset until a later time (section 152-400 of the ITAA 1997). You may acquire either a replacement active asset or incur fourth element expenditure (capital improvement to an existing asset that will be an active asset) (Note 1 to section 152-410 of the ITAA 1997).

If you meet these requirements you can then disregard all or part of each capital gain to which Subdivision 152-E of the ITAA 1997 applies (section 152-415 of the ITAA 1997).

For you to obtain a roll-over, subsection 104-185(1) of the ITAA 1997 requires you to acquire a replacement active asset within a period starting one year before, and ending two years after the last CGT event during the financial year for which you obtain the roll-over.

CGT event J5 would occur if a replacement asset is not acquired within two years and a capital gain would arise (section 104-197 of the ITAA 1997). At this point the small business retirement exemption can be chosen (subsection 152-325(1) of the ITAA 1997).

The trust will satisfy the basic conditions in Subdivision 152-A of the ITAA 1997. If it acquires either a replacement active asset or incurs fourth element expenditure within the time period it may be eligible for the small business roll-over under section 152-410 of the ITAA 1997. If the CGT event occurs during the financial year ended 30 June 2012, the tax on the capital gain can be deferred until the financial year ended 30 June 2014 while it looks for a replacement active asset or incurs capital expenditure on an existing asset that becomes an active asset within the time period.

Small business retirement exemption

Subdivision 152-D of the ITAA 1997 provides a small business retirement exemption as part of the CGT small business relief provisions. If you qualify for the small business retirement exemption, all or part of a capital gain remaining after other concessions have been applied can be disregarded if certain conditions are satisfied. If an amount is chosen to be disregarded under this exemption, the capital proceeds from the CGT event, to the extent of the exempt amount, is taken to be an eligible termination payment (ETP) paid to you at the later of when you made the choice and when you received the capital proceeds.

Subsection 152-305(2) of the ITAA 1997 states that a trust can choose to disregard all or part of a capital gain under this provision if it:

· satisfies the basic conditions

· satisfies the significant individual test

· makes a payment to at least one of its CGT concession stakeholders, worked out by reference to their percentage of the exempt amount if the payment is to more than one CGT concession stakeholder (section 152-325 of the ITAA 1997)

· keeps a written record of the amount that is to be disregarded

· if the trust has more than once CGT concession stakeholder it must specify in writing the percentage of each CGT asset's CGT exempt amount that is attributable to each of those stakeholders (subsection 152-315(5) of the ITAA 1997)

· pays the CGT concession stakeholder by seven days after the trustee makes the choice to disregard the capital gain, and

· makes a payment to a complying superannuation fund in respect of the CGT concession stakeholder, if they are under 55 years of age.

The payment to the CGT concession stakeholder must be equal to the lesser of the capital proceeds received or capital gain which was disregarded and the relevant CGT exempt amount (subsection 152-325(5) of the ITAA 1997).

The named individual will be entitled to 100% of the income and capital of the trust and therefore will be a significant individual of the trust for the financial year ended 30 June 2012 so this test is met. She will be a CGT concession stakeholder of the trust as well.

The trust will be eligible for the small business CGT retirement exemption as long as a payment is paid to the CGT concession stakeholder by seven days after the choice is made and a written record is kept of the amount disregarded. The payment must be made to a complying superannuation fund for them.

Choice

You must make a choice by the time you lodge your tax return for the financial year in which the CGT event happens (section 103-25 of the ITAA 1997).

However if you choose the small business roll-over and are unable to acquire a replacement asset or incur capital expenditure in the required time period of two years, you may choose the small business retirement exemption.

Part IVA

Part IVA of the ITAA 1936 is the anti-avoidance provisions and includes all of the sections of 177 of the ITAA 1936.

Part IVA broadly has two main components:

· the general anti avoidance provisions and the

· specific anti-avoidance provisions like the anti-dividend streaming provisions in section 177EA of the ITAA 1936.

For the general anti-avoidance provisions to apply, there must be a 'scheme' (section 177A of the ITAA 1936), a 'tax benefit' (section 177C of the ITAA 1936) and it must be concluded that the scheme was entered into or carried out by a person or persons for the sole or dominant purpose of enabling the relevant taxpayer to obtain the tax benefit (section 177D of the ITAA 1936).

No such scheme has been identified.

Conclusion

The trust would be eligible to apply the small business roll-over and if a replacement asset is not acquired apply the small business retirement exemption to the capital gain on the disposal of the interest in the trust. Part IVA of the ITAA 1936 will not apply to this case.