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Ruling

Subject: CGT small business concessions

Question 1

Can the trust apply the small business 15 year exemption to the capital gain?

Answer

No

Question 2

Can the trust apply the small business 50% active asset reduction to the capital gain?

Answer

Yes

Question 3

Can the trust apply the small business rollover to the capital gain?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 2013

The scheme commenced on:

1 July 2012

Relevant facts and circumstances

The trust acquired a property less than 15 years ago.

The trust used the property in the business that it conducted from the date of acquisition.

This was the only use of the property until recently when the trust began to derive rental income from the use of some of the structures on the property. The trust still used the property in its business during this time and the rental income received was minimal; the main source of income from the property was the business income.

The property was purchased by a government authority during the 2012-13 income year. A capital gain was made.

The government authority only purchased the land and structures on the land; they did not purchase the business.

The trust has decided to cease trading following the disposal of the property.

The business was in operation for over 15 years (through a different entity).

The trust is a small business entity.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 Section 152-10

Income Tax Assessment Act 1997 Section 152-35

Income Tax Assessment Act 1997 Subdivision 152-B

Income Tax Assessment Act 1997 Section 152-110

Income Tax Assessment Act 1997 Subdivision 152-C

Income Tax Assessment Act 1997 Section 152-205

Income Tax Assessment Act 1997 Subdivision 152-E

Income Tax Assessment Act 1997 Section 152-410

Reasons for decision

To qualify for the small business capital gains tax (CGT) concessions, you must satisfy several conditions that are common to all the concessions. These are called the 'basic conditions'. Each concession also has further requirements that you must satisfy for the concession to apply (except for the small business 50% active asset reduction which applies if the basic conditions are satisfied).

Basic Conditions

A capital gain that you make may be reduced or disregarded under Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997) 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 have resulted in a gain

c) the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997, and

d) at least one of the following applies;

e) you are a small business entity for the income year

f) you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997

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

h) 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.

The active asset test is contained in section 152-35 of the ITAA 1997. Where you have owned the asset for less than 15 years, the active asset test is satisfied if the asset was an active asset of yours for a total of at least half of the test period detailed below.

The test period:

begins when you acquired the asset, and

ends at the earlier of

the CGT event, and

when the business ceased, if the business in question ceased in the 12 months before the CGT event (or such longer time as the Commissioner allows).

A CGT asset is an active asset if it is owned by you and is used or held ready for use in a business carried on (whether alone or in partnership) by you, your affiliate, your spouse or child, or an entity connected with you.

However, paragraph 152-40(4)(e) of the ITAA 1997 states that an asset whose main use in the course of carrying on the business is to derive rent can not be an active asset unless the main use for deriving rent was only temporary. This exclusion generally does not apply to a CGT asset leased to an affiliate or connected entity.

Although the trust derived rental income from the property, it was only for a period of X years out of the approximately X years of ownership. At all other times, the property was used solely in the trust's business. Accordingly, we do not need to consider the exclusion contained in paragraph 152-40(4)(e) of the ITAA 1997.

For a period of at least half of the period of ownership, the property was used solely in a business carried on by the trust. Accordingly the trust meets the active asset test in relation to the property.

In this case, it is accepted that the trust meets the basic conditions due to the following:

a) a CGT event occurred when the trust disposed of the property to the government authority

b) the event resulted in a gain

c) the trust is a small business entity, and

d) the asset meets the active asset test.

The further requirements for each individual concession are discussed below.

Small business 15 year exemption

For a company or trust to be eligible for the small business 15-year exemption you must satisfy the basic conditions and three further conditions:

you continuously owned the CGT asset for the 15-year period ending just before the CGT event happened.

you had a significant individual for a total of at least 15 years of the whole period of ownership (even if it was not the same significant individual during the whole period), and

the individual who was a significant individual just before the CGT event was

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

was permanently incapacitated at that time.

The trust purchased the property less than 15 years prior to the CGT event. Accordingly, the trust is not entitled to the small business 15 year exemption.

Small business 50% active asset reduction

To apply the small business 50% active asset reduction, you only need to satisfy the basic conditions. There are no further requirements.

As the trust satisfies the basic conditions, any capital gain from the sale of the property that remains after applying any current year capital losses, any unapplied prior year net capital losses, and the CGT discount (if applicable), is reduced by 50%.

Small business rollover

The small business rollover allows you to defer all or part of a capital gain made from a CGT event happening to an active asset. To qualify for the small business rollover, you need to satisfy the basic conditions that apply to all the CGT small business concessions. There are rollover conditions that must also be met, however you can choose to obtain a rollover even if you have not yet acquired a replacement asset or incurred expenditure on a capital improvement to an existing asset.

The rollover conditions must be satisfied by the end of the replacement asset period. This period starts one year before and ends two years after the last CGT event that occurs in the income year for which you choose the rollover. If the rollover conditions are not met within the replacement asset period, the gain will become assessable.

As the trust satisfies the basic conditions, it is able to choose to apply the small business rollover. The trust may choose to apply the rollover to as much of the capital gain as it decides.