Edited version of your private ruling

Authorisation Number: 1012126993235

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Subject: Small business concessions

Question 1

Do you satisfy the basic conditions for the small business capital gains tax (CGT) concessions in section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to any capital gain made from the sale of land?

Answer

Yes.

Question 2

Will the annual turnovers of your beneficiaries be excluded from your aggregated turnover under section 328-115 of the ITAA 1997?

Answer

Yes.

Question 3

Do you satisfy the conditions for the retirement exemption in subsection 152-305(2) and section 152-325 of the ITAA 1997?

Answer

Yes.

Question 4

Does a beneficiary's foreign resident status have implications on the retirement exemption provisions?

Answer

No.

Question 5

Are the trustees of a beneficiary's testamentary trust required to pass the payment made under the retirement exemption directly to the beneficiary?

Answer

Yes.

Question 6

Will you qualify for the 15 year exemption in section 152-110(1) if the land is sold after a 15 year period?

Answer

Yes.

Question 7

Does only one of the beneficiaries of the estate need to establish that the sale of the land was in connection with their retirement when a capital gain is disregarded under the 15 year exemption?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commences on:

1 July 2011

Relevant facts and circumstances

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

· the application for private ruling, and

· the documents provided with the application for private ruling.

An individual died in the late 1990s. At the time of death they were operating a business as a sole trader.

Probate was granted in 2004.

The executors of the estate have operated the business from date of death to present day.

The beneficiaries of the estate are the X children of the late individual.

One beneficiary is a foreign resident.

Another beneficiary's share of the estate is held through a testamentary trust.

All X beneficiaries exceed 55 years of age.

The annual income of the estate is distributed equally to the X beneficiaries.

The net value of the capital gains tax (CGT) assets of the estate are greater than $Y million.

All and currently held by the estate was acquired by the late individual prior to 20 September 1985.

An entity is considering the purchase of the land from the estate on an arms length basis.

The estate will be a small business entity when the land is sold.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-10(1),

Income Tax Assessment Act 1997 section 152-40,

Income Tax Assessment Act 1997 section 152-305(2),

Income Tax Assessment Act 1997 section 152-325,

Income Tax Assessment Act 1997 section 152-330,

Income Tax Assessment Act 1997 section 328-25(1),

Income Tax Assessment Act 1997 section 328-115,

Income Tax Assessment Act 1997 section 328-125(2), and

Income Tax Assessment Act 1997 section 328-130.

Question 1

Basic Conditions

In order to be eligible for the small business CGT concessions, a number of basic conditions must be satisfied. The basic conditions for the small business CGT concessions are outlined in subsection 152-10(1):

(1) a CGT event happens in relation to an asset that the taxpayer owns

(2) the event would otherwise have resulted in a capital gain

(3) one or more of the following applies

(i) the taxpayer satisfies the maximum net asset value test

(ii) the taxpayer is a "small business entity" for the income year

(iii) the asset is an interest in an asset of a partnership which is a small business entity for the income year, and the taxpayer is a partner in that partnership, or

(iv) the special conditions for passively held assets in sub-sections 152-10(1A) or 152-10(1B)are satisfied in relation to the CGT asset in the income year and

(4) the asset satisfies the active asset test.

In your case a CGT event will happen in relation to an asset the entity owns when the asset is disposed of. The CGT event will result in a capital gain if the capital proceeds exceed the cost base of the asset.

You have indicated that the estate will be considered a small business entity when the land is sold.

Under section 152-35, a CGT asset satisfies 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 period specified in subsection (2); 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 period specified in subsection (2).

As per subsection 152-35(2), the period:

(a) begins when you acquired the asset; and

(b) ends at the earlier of:

(i) the CGT event; and

(ii) if the relevant business ceased to be carried on in the 12 months before that time or any longer period that the Commissioner allows - the cessation of the business.

The term 'active asset' is defined in subsection 152-40(1) as an asset you own and use (or hold ready for use) in the course of carrying on a business; or in the course of carrying on a business by a connected entity under paragraph 152-40(1)(c).

In your case, the land was acquired by the estate on the date of death of the individual. The land will be considered an active asset because it has been used in the course of carrying on a business. As the land has been held by the estate for a period of less than 15 years, it must have been an active asset for a least half the period of ownership to satisfy the active asset test. This test will be satisfied as the land has been used in the course of carrying on a business from the date it was acquired to the present day. Therefore, provided the CGT event results in a gain, the estate will satisfy the basic conditions in 152-10(1).

Question 2

Aggregated turnover

Under section 328-115 an entity's aggregated turnover includes the turnover of any connected entities or affiliates.

Connected entity

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

(a) either entity controls the other entity in a way described in this section; or

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

Subsection 328-125(2) in part states, an entity (the first entity) controls another entity if the first entity, its affiliates, or the first entity together with its affiliates:

(a) except if the other entity is a discretionary trust - beneficially own, or have the right to acquire the beneficial ownership of, interests in the other entity that carry between them the right to receive a percentage (the control percentage) that is at least 40% of any distribution of income by the other entity; or if the other entity is a partnership - the net income of the partnership; or any distribution of capital by the other entity;

This means that an entity is connected to another entity if either entity controls the other entity or both entities are controlled by the same third entity. It also means that an entity is connected to another entity, if the entity, its affiliates or both of them beneficially own, or have the right to acquire the beneficial ownership of interests in, the other entity that give them the right to receive at least 40% of the distribution of income or capital by the other entity.

In your case, no beneficiary is entitled to a distribution of income or capital of at least 40% from the estate. Therefore, no beneficiary will be considered a connected entity.

Affiliates

The term affiliate is defined in section 328-130. An individual or company can be your affiliate if the individual or company acts, or could reasonably be expected to act, in accordance with your wishes or directions, or in concert with you, in relation to the affairs of their business.

However an individual or company is not your affiliate merely because of the nature of the business relationship you and the individual or company share. Whether a person acts, or could reasonably be expected to act, in accordance with the taxpayer's directions or wishes, or in concert with the taxpayer is a question of fact dependent on all the circumstances of the particular case. No one factor will necessarily be determinative.

In your case, there is no indication that any beneficiaries act, or could reasonably be expected to act in accordance with the estate's directions or wishes or in concert with the estate in relation to the affairs for the business. Therefore, no beneficiaries will be considered affiliates of the estate.

In your case, as no beneficiaries are connected with the estate or are affiliates of the estate, only the annual turnover of the estate will need to be included in the aggregated turnover for the estate.

Question 3

Retirement exemption

Subsection 152-305(2) allows a company or trust to disregard some of its capital gains under the small business retirement exemption. A company or a trust can choose to disregard such an amount if:

(a) the basic conditions in Subdivision 152-A are satisfied for the capital gain; and

(b) the entity satisfies the significant individual test (see section 152-50); and

(c) the company or trust conditions in section 152-325 are satisfied.

The basic conditions will be satisfied for any capital gain made on the sale of the land by the estate as determined in question 1.

Significant individual

The significant individual test in section 152-50 will be satisfied provided the entity had at least one significant individual just before the CGT event. As per section 152-55, 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, an entity's small business participation percentage in another entity is the percentage that is the sum of the entity's direct and indirect small business participation percentage in the other entity.

As per item 2 of the table in section 152-70, an individual's direct small business participation percentage in a trust is the percentage that you have from the holding of the legal and equitable interests in the trust, as determined by:

(a) the percentage of any distribution of income that the trustee may make to which the entity would be beneficially entitled; or

(b) the percentage of any distribution of capital that the trustee may make to which the entity would be beneficially entitled.

(c) the percentage of any distribution of capital

If these amounts are different, the smallest amount is used.

Under subsection 152-75(1) the holding entity's indirect small business participation percentage is calculated by multiplying:

(a) the holding entity's direct small business participation percentage (if any) in another entity (the intermediate entity) at that time; by


(b) the sum of:

(i) the intermediate entity's direct small business participation percentage (if any) in the test entity at that time; and

(ii) the intermediate entity's indirect small business participation percentage (if any) in the test entity at that time (as worked out under one or more other applications of this section).

In your case, all X of the beneficiaries receive an equal percentage of the distributions from the estate. All of the beneficiaries are considered significant individuals of the estate as they have a direct small business participation percentage of Z%. The estate will have a least one significant individual prior to the CGT event as per the requirements. Therefore, provided the payment conditions in section 152-325 are satisfied, the estate is entitled to the retirement exemption.

Additional information

Under subsection 152-325(7), if a CGT concession stakeholder is under 55 just before a payment is made under the small business retirement exemption, the payment must be contributed to a complying superannuation fund. In your case, each of the CGT concession stakeholders exceed 55 years of age, therefore there is no requirement for the payment to be used to provide for their retirement.

Question 4

The legislation does not exclude a non-resident from being a significant individual or CGT concession stakeholder. The fact that a beneficiary is a non-resident does not impede the ability of the estate to choose the retirement exemption.

Question 5

Section 152-325 states that a payment made under the small business retirement exemption, whether directly or indirectly through one or more interposed entities, must be made to the CGT concession stakeholder.

Therefore, if the payment is made to the testamentary trust on the beneficiary's behalf, that payment must flow through to the CGT concession stakeholder, the beneficiary, in order to satisfy section 152-325.

Question 6

Small business 15 year exemption

Under section 152-110 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

· continuously owned the CGT asset for the 15 year period ending just before the CGT event happened

· 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:

o at least 55 years old at that time and the event happened in connection with their retirement, or

o permanently incapacitated at that time.

In your case, the basic conditions will be satisfied for any capital gain made from the sale of the land by the estate as determined in question 1. The estate will satisfy the conditions for the 15 year exemption provided the land is held for a 15 year period ending just before the CGT event. The estate will also need to have had a significant individual for a total of at least 15 years of the whole period of ownership of the CGT asset.

Additional information

Under section 152-330 the 15 year exemption takes priority over the other CGT small business concessions. This is because the application of this concession means any capital gain is entirely disregarded, so there is no need for any further concession to apply. If you qualify for the 15 year exemption, you will not be able to choose the retirement exemption to disregard your capital gain.

Question 7

Under paragraph 152-110(1)(d), the CGT event must only be in connection with the retirement of one significant individual.

In your case, only one of the beneficiaries would need to establish that the CGT event happened in connection with their retirement.