Edited version of your private ruling

Authorisation Number: 1012612289062

Ruling

Subject: Capital gains tax

Question 1

Is the trust entitled to the capital gains tax (CGT) small business 15 year exemption concession?

Answer

No.

Question 2

Is the trust entitled to the small business rollover concession where another entity acquires the replacement asset?

Answer

No.

Question 3

Is the trust entitled to the small business CGT 50% active asset reduction?

Answer

Yes.

Question 4

Is the trust entitled to the small business retirement exemption?

Answer

Yes.

This ruling applies for the following period

Year ending 30 June 2016

The scheme commenced on

1 July 2015

Relevant facts

The trust is a discretionary family trust.

The trust owns an asset.

The trust has owned the asset for less than 10 years.

The trust wishes to sell the lease within two to three years.

The trust estimates a capital gain will result.

Another trust, a self-managed superannuation fund, will buy a replacement asset.

Entity A and entity B are the beneficiaries of both the superfund and the trust.

The beneficiaries are both under 55.

The trust is a small business entity.

The trust has a significant individual.

The asset satisfies the active asset test.

The trust satisfies the maximum net asset value test.

The trust meets the basic conditions for the small business CGT concessions.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Division 152

Income Tax Assessment Act 1997 - Subdivision 152-A

Income Tax Assessment Act 1997 - Subdivision 152-B

Income Tax Assessment Act 1997 - Subdivision 152-C

Income Tax Assessment Act 1997 - Subdivision 152-D

Income Tax Assessment Act 1997 - Subdivision 152-E

Income Tax Assessment Act 1997 - Section - 152-40

Income Tax Assessment Act 1997 - Section - 152-110

Income Tax Assessment Act 1997 - Section 104-97

Reasons for decision

The CGT provisions provide some small business relief in Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997).

Basic conditions

To qualify for the small business CGT concessions, the basic conditions as contained in subdivision 152-A of the ITAA 1997 must be satisfied.

The basic conditions are:

• A CGT event happens in relation to a CGT asset of yours in an income year,

• The event would have resulted in a gain,

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

• At least one of the following applies;

- you are a small business entity for the income year,

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

- 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

- 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.

Active asset test

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.

Subsection 152-40(1) of the ITAA 1997 details 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.

The asset satisfies the active asset test.

15 year exemption

Section 152-110 of the ITAA 1997 provides a small business 15 year exemption for companies and trusts. Under this section, a trust can disregard the capital gain from the disposal of a CGT asset if: 

(a) the trust satisfies the basic conditions in Subdivision 152-A of the ITAA 1997 for the small business CGT concessions

(b) the trust continuously owned the CGT asset for the 15 year period ending just before the CGT event

(c) the trust had a significant individual for a total of at least 15 years during which time the trust owned the CGT asset; and

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

• 55 or over at that time and the event happened in connection with their retirement or

• permanently incapacitated at that time.

In your case, the trust meets the basic conditions for the small business CGT concessions. However, the trust has not owned the CGT asset for 15 years. Therefore the trust is not entitled to this exemption.

Small business 50% reduction

Subdivision 152-C of the ITAA 1997 tells you about the small business 50% reduction. Apart from the basic conditions as outlined above, there are no other requirements to get the small business 50% reduction. Therefore the CGT small business 50% reduction can apply.

Retirement exemption

The rules covering the small business retirement exemption are contained in Subdivision 152-D of the ITAA 1997. An entity may choose to disregard all or part of a capital gain under the retirement exemption if certain conditions are satisfied.

If the entity is a trust, they can choose to disregard all or part of a capital gain where all of the following conditions are met:

• the trust satisfies the basic conditions

• the trust satisfies the significant individual test

• a written record of the amount disregarded is kept and if there are more than one CGT concession stakeholders, each stakeholder's per cent of the exempt amount (one may be nil, but together they must add up to 100%)

• a payment is made to at least one of the CGT concession stakeholders worked out by reference to each individual's percentage of the exempt amount

• the payment is equal to the exempt amount or the amount of capital proceeds, whichever is less, and

• where the capital proceeds are received in instalments, a payment is made to a CGT concession stakeholder for each instalment in succession.

If a CGT concession stakeholder is under 55 years old just before receiving a payment, an amount equal to that payment must be immediately paid to a complying superannuation fund or retirement savings account on their behalf. The trust must notify the trustee of the fund or the retirement savings account at the time of the contribution that the contribution is being made in accordance with the requirements of the retirement exemption.

CGT retirement exemption limit

The amount of the capital gain that you choose to disregard must not exceed your CGT retirement exemption limit or, in the case of a company or trust, the CGT retirement exemption limit of each CGT concession stakeholder receiving a payment. A significant individual is a CGT concession stakeholder.

Under section 152-320 of the ITAA 1997, an individual's lifetime CGT retirement exemption limit is $500,000 reduced by any previous CGT exempt amounts the individual has disregarded under the retirement exemption.

The amount of the capital gain the trust disregards cannot exceed the CGT retirement exemption limit of each CGT concession stakeholder receiving a payment.

As already stated the trust meets the basic conditions for the small business CGT concessions and will have at least one significant individual just before the CGT event to satisfy the significant individual test.

Therefore, the trust can choose to disregard part or all of the capital gain from the disposal of the CGT asset under the CGT retirement exemption, up to the CGT retirement exemption limit.

For the purposes of this exemption, the latest date on which the choice may be made is the date of lodgement of the relevant trust tax return (section 103-25 of the ITAA 1997).

The small business rollover

The conditions surrounding the small business rollover are contained in Subdivision 152-E of the ITAA 1997. The small business rollover allows an entity to defer all or part of a capital gain made from a CGT event happening to an active asset.

Where you choose the small business rollover, there are rollover conditions that 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, or a longer period that the Commissioner allows.

If the rollover conditions are not met within the replacement asset period the gain will become assessable.

You satisfy the rollover conditions where you meet all the following conditions:

• you acquire one or more CGT assets as replacement assets or make a capital improvement to one or more existing assets, or both, within the replacement asset period

• the replacement asset, or the asset to which the capital improvement was made is an active asset at the end of the replacement asset period (a depreciating asset can be a replacement asset)

• if the replacement asset is a share in a company or an interest in a trust, at the end of the replacement asset period:

n you, or an entity connected with you, are a CGT concession stakeholder in the company or trust, or

n CGT concession stakeholders in the company or trust have a small business participation percentage in the interposed entity of at least 90%

• the capital gain that is being rolled over is not more than the sum of the following

n the amount paid to acquire the replacement asset (that is, the first element of the cost base of the replacement asset)

n any incidental costs incurred in acquiring that asset, which can include giving property (that is, the second element of the cost base of the replacement asset), and

n the amount expended on capital improvements to one or more assets that were acquired or already owned (that is, fourth element expenditure).

Section 104-197 of the ITAA 1997 deals with the consequences that arise if a replacement asset is not acquired within the replacement asset period. Subsection 104-197(1) of the ITAA 1997 states that CGT event J5 will occur if 'you' have not acquired a replacement asset within the replacement asset period. In this instance, 'you' refers to the entity that chose the small business rollover. There are no provisions that allow the replacement asset to be acquired by any other entity.

Accordingly, if the replacement asset is acquired by another entity, the rollover conditions will not be satisfied. The fact that the same individuals may be the same beneficiaries for both entities does not change the above.