Edited version of your written advice

Authorisation Number: 1012919381156

Date of advice: 11 December 2015

Ruling

Subject: Small Business CGT Concessions

Question:

Does the trust satisfy the basic conditions for the small business CGT concessions under section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

Yes

This ruling applies for the following period:

Year ended 30 June 2015

The scheme commenced on

1 July 2014

Relevant facts

An entity is the corporate trustee for the unit trust (the trustee).

A person is the director of the trustee entity.

The person is also the sole director and shareholder in a company which carries on a business.

The person has entire control over the day to day running of the trust and the company.

The trust owned property which had always been rented to the company.

The company always used the property in its business.

The trust's unit holders are the children of the person who are all under 18.

The person is not a unit holder of the trust.

The property was sold.

The sale of the property resulted in a capital gain.

The net value of the CGT assets held by the trust, its connected entities, its affiliates and entities connected with its affiliates, for the purposes of the maximum net asset value test is under six million dollars.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 152-10
Income Tax Assessment Act 1997 Paragraph 152-10(1)(d)
Income Tax Assessment Act 1997 Section 152-15
Income Tax Assessment Act 1997 Section 152-35
Income Tax Assessment Act 1997 Section 328-125
Income Tax Assessment Act 1997 Subsection 328-125(2)
Income Tax Assessment Act 1997 Subsection 328-130(1)

Reasons for decision

Summary

The trust satisfies the basic conditions contained in section 152 -10 of the ITAA 1997 for the following reasons:

• the trust has sold an asset giving rise to a CGT event which resulted in a gain

• the trust meets the maximum net asset value test, and

• the company which used the trust's asset in its business is an affiliate of the trust.

Therefore, the trust can access the small business CGT concessions on this basis.

Detailed reasoning

Small business CGT concession eligibility

Section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997) contains the basic conditions you must satisfy to be eligible for the small business capital gains tax (CGT) concessions. These conditions are:

(a) a CGT event happens in relation to a CGT asset in an income year.

(b) the event would have resulted in a gain

(c) at least one of the following applies:

(i) you are a small business entity for the income year

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

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

(iv) the conditions in subsection 152-10(1A) or (1B) of the ITAA 1997 are satisfied in relation to the CGT asset in the income year.

(d) the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997.

Maximum net asset value test (MNAV test)
Section 152-15 of the ITAA 1997 explains that you satisfy the MNAV test if, just before the CGT event, the sum of the following amounts does not exceed $6,000,000:

(a) the net value of the CGT assets of yours;

(b) the net value of the CGT assets of any entities connected with you;

(c) the net value of the CGT assets of any affiliates of yours or entities connected with your affiliates (not counting any assets already counted under paragraph (b)).

Active asset test
The active asset test is contained in section 152-35 of the ITAA 1997. The active asset test is satisfied if:

• 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 detailed below, or

• 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 7.5 years during the test period.

The test period is from when the asset is acquired until the CGT event. If the business ceases within the 12 months before the CGT event (or such longer time as the Commissioner allows) the relevant period is from acquisition until the business ceases.

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.

Connected entities

Under section 328-125 of the ITAA 1997 an entity is connected with another entity if:

• either entity controls the other entity, or

• both entities are controlled by the same third entity

An entity controls another entity if it or its affiliate (or all of them together):

• owns, or has the right to acquire ownership of, interests in the other entity that give the right to receive at least 40% (the control percentage) of any distribution of income or capital by the other entity, or

• if the other entity is a company, owns, or has the right to acquire ownership of, equity interests in the company that give at least 40% of the voting power in the company.

Affiliates

An affiliate is, according to section 328-130 of the ITAA 1997, an individual or a company who acts, or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you, in relation to the affairs of the business of the individual or company.

The Advanced guide to capital gains tax concessions for small business (NAT 3359) confirms that an individual or a company can be an affiliate of a trust. However, this will only occur providing that the individual or company acts or could reasonably be expected to act in accordance with the directions or wishes of the trust, or in concert with the trust, in relation to the affairs of the individual's or company's business.

Application to your circumstances

The trust sold the property giving rise to CGT event A1 and a gain on the sale.

You have advised that the net value of the CGT assets held by the trust, its connected entities, its affiliates and entities connected with its affiliates, for the purposes of the MNAV test is under six million dollars. Based on this information you have provided, the MNAV test is met.

The last basic condition that must be met for the small business CGT concessions is the active asset test. The property was used in the business of the company for the entire period it was owned by the trust. Therefore, the active asset test will be met if the company was either an entity connected with the trust or an affiliate of the trust.

The trust and company are not connected entities. This is because neither the trust or company have rights to receive distributions of income or capital from the other and the third entity (the person) who is claimed to control them both only has distribution rights with respect to the company, not the trust.

However, from the information provided we accept that company is an affiliate of the trust as the company acts in accordance with the directions of the trust and in concert with the trust.

As the company is an affiliate of the trust, the active asset test is met.

Accordingly, the basic conditions for the small business CGT concessions have been satisfied.