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Edited version of private advice
Authorisation Number: 1012657196139
Ruling
Subject: CGT - SBC - passively held assets
Question 1
Will the conditions of section 152-10(1A) of the Income Tax Assessment Act 1997 (ITAA 1997) be met if the property is sold in the same financial year as the business?
Answer
No
Question 2
Will the conditions of section 152-10(1A) of ITAA 1997 be met if the property is sold in a subsequent financial year to the year the business is sold?
Answer
No
This ruling applies for the following periods:
Year ending 30 June 2015
Year ending 30 June 2016
Year ending 30 June 2017
The scheme commenced on:
1 July 2014
Relevant facts and circumstances
X is a discretionary trust.
X owns a freehold property (the property). The property was acquired by X more than 15 years ago.
The property has used in the business of Y since its acquisition. A monthly rental payment is made to the trustee of X for the use of the property.
The turnover of Y's business has been over $2million per annum.
It is proposed that Y will dispose of its business with leases in place.
Following the sale of the business, Y will not be carrying on any other business.
However, you have received advice that in order to maximise the potential buyers and capital profits, the property should be disposed of separately.
Accordingly, X intends to dispose of the property at a time following the sale of Y's business.
Relevant legislative provisions
Income Tax Assessment Act 1997 Division 152
Income Tax Assessment Act 1997 Section 152-10
Income Tax Assessment Act 1997 Paragraph 152-10(1)(c)
Income Tax Assessment Act 1997 Subsection 152-10(1A)
Income Tax Assessment Act 1997 Subsection 328-110(1)
Income Tax Assessment Act 1997 Subsection 328-110(3)
Reasons for decision
In order to access the small business concessions contained in Division 152 of the ITAA 1997, the basic conditions contained in section 152-10 of the ITAA 1997 (in addition to any conditions relevant to each specific concession) must be satisfied.
One of the basic conditions (paragraph 152-10(1)(c) of the ITAA 1997) requires that at least one of the following applies:
• you are a small business entity (SBE) for the income year
• you satisfy the maximum net asset value test
• you are a partner in a partnership that is a SBE for the income year and the capital gains tax (CGT) asset is an interest in an asset of the partnership; or
• the conditions mentioned in subsection 152-10(1A) or (1B) of the ITAA 1997 are satisfied in relation to the CGT asset in the income year that the CGT event occurs;
Passively held assets
Section 152-10(1A) of the ITAA 1997 provides:
The conditions in this subsection are satisfied in relation to the *CGT asset in the income year if:
(a) your *affiliate, or an entity that is *connected with you, is a *small business entity for the income year; and
(b) you do not carry on a *business in the income year (other than in partnership); and
(c) if you carry on a business in partnership - the CGT asset is not an interest in an asset of the partnership; and
(d) in any case - the small business entity referred to in paragraph (a) is the entity that, at a time in the income year, carries on the business (as referred to in subparagraph 152-40(1)(a)(ii) or (iii) or paragraph 152-40(1)(b)) in relation to the CGT asset.
A SBE is defined in subsection 328-110(1) of the ITAA 1997:
You are a small business entity for an income year (the current year) if:
(a) you carry on a *business in the current year; and
(b) one or both of the following applies:
(i) you carried on a business in the income year (the previous year) before the current year and your *aggregated turnover for the previous year was less than $2 million;
(ii) your aggregated turnover for the current year is likely to be less than $2 million.
Where a business only carries on a business for part of the year, their turnover must be worked out using a reasonable estimate of what their turnover would have been had they operated for the entire year (subsection 328-12(5) of the ITAA 1997).
Subsection 328-110(3) of the ITAA 1997 provides that an entity will not be a SBE in an income year (the current year) if it carried on a business in each of the two income years prior to the current year and its aggregated turnover in those two prior years was $2 million or more.
In this case, Y carries on a business with historical turnovers of more than $2 million. You have not provided any indication that the turnover would reduce prior to the sale of the business.
Accordingly, while we accept that Y is an entity that is connected to X, Y is not a SBE.
Additionally, if the property is sold in a subsequent year to the business, Y will still not be a SBE. Even though their turnover will be reduced to below $2 million they will not be carrying on a business and therefore do not fall within the definition provided in subsection 328-110(1) of the ITAA 1997.
Therefore, regardless of whether the property is sold in the same financial year as the business or in a subsequent year, the conditions contained in subsection 152-10(1A) of the ITAA will not be met.