Edited version of private advice

Authorisation Number: 1051531944894

Date of advice: 18 June 2019

Ruling

Subject: 15 Year Small Business CGT Concession

Question 1

Are the Taxpayers eligible to access the small business CGT concessions in Section 152 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Is the company an 'affiliate' of the Taxpayers as defined in section 328-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 3

Was the Partnership 'connected with' the Taxpayers?

Answer

Not required.

Question 4

Are the Taxpayer's eligible to access the 15 Year small business CGT concession in Section 152 - 105 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period(s):

1 July 20XX to 30 June 20XX

The scheme commences on

1 July 20XX

Relevant facts and circumstances

1.    The Taxpayers and their two Children are the current business owners.

2.    The Taxpayers are involved in various automotive industry business activities.

3.    The Taxpayers also collected rent from other businesses that operated from their industrial site (the Property).

4.    In about 19XX, the Taxpayers entered into business with their children.

5.    In 19XX, the Taxpayers purchased a Business and formed a Partnership. The partners held various ownership percentages, ranging from 10% to 20%.

6.    In 19XX, the Partnership purchased another larger but similar business that was in close proximity to their existing site. The old site was sold at that time.

7.    The Property was purchased by the Taxpayers in 19XX.

8.    The business located on the new Property was also purchased in 19XX.

9.    In 19XX, some of the land was sold.

10.  In 20XX, the Property was valued.

11.  In 20XX, the partners restructured the Business and commenced running the Business through the Company.

12.  The Partnership was dissolved and two former partners exited the Business.

13.  The Company is owned by the Taxpayers and two of their children.

14.  In 20XX, the land was re-valued.

15.  In 20XX, the Taxpayers sold the land.

16.  The business was conducted from the land since it was purchased in 19XX.

17.  The Taxpayers were always the head of the family business.

18.  Both taxpayers ran and controlled the business equally between them.

19.  They were the controlling minds of the business and no decisions were made without their consultation.

20.  They were always present and they dealt with all financial advisers, lawyers and banks.

21.  The Taxpayers also controlled the day to day running of the business.

22.  The Taxpayers divided the duties between the two of them one controlling the stock and asset purchases and the other controlling the banking, wages, tax accounting and general finances.

23.  Both were equally responsible for staff direction and financial control.

24.  The Taxpayers are directors and shareholders of the Company.

25.  The Company is a CGT Small Business Entity for the income year, as it carried on the business in the 2019 income year, its aggregated turnover for the 20XX income year was less than $X million and its estimated aggregated turnover for the 20XX income year is less than $X million, and there are no associated entities that carry on a business.

26.  Trading in the business ceased in 20XX, due to the sale of the Property.

27.  The Taxpayers were the primary directors and decision makers for all business activities such as:

                              i.        Financial

                             ii.        Legal

                            iii.        Operational

                           iv.        Accounting

                            v.        Capital purchases

                           vi.        Banking employees

                          vii.        Restructuring

                         viii.        Business planning

28.  The Taxpayers used personal capital as collateral for business finance and are the second largest creditors of the Company along with the bank.

29.  The decision to sell the Property and wind-up the Business was a consequence of the Taxpayer's ill-health and their compulsory departure from the Business.

30.  The Company ceased the Business following the sale of the Property in support of the Taxpayers' decision to retire from the Business permanently.

31.  The Taxpayers have not used any part of the Property for personal use or enjoyment.

32.  The Taxpayers derive rent from the Company for the Property.

33.  The Taxpayers also derive rent from two third party tenants for parts of the Property know as lot 1, 2 and 3. A breakdown of the land area use and rental income derived from third parties and the Company is provided in the tables below.

Area of land use

Income derived from land use

34.  The Taxpayers leased some land to a third party from 20XX until August 20XX to 20XX.

35.  The Taxpayers leased some land to a third party from 20XX until 20XX.

Relevant legislative provisions

Section 328 - 130 of the Income Tax Assessment Act 1997

Section 152 - 105 of the Income Tax Assessment Act 1997

Subdivision 152-A of the Income Tax Assessment Act 1997

Subsection 152 - 10(1) of the Income Tax Assessment Act 1997

Section 152 - 35 of the Income Tax Assessment Act 1997

Subsection 152 - 35(1) of the Income Tax Assessment Act 1997

Paragraph 152 - 35(1)(b) of the Income Tax Assessment Act 1997

Subsection 152 - 35(2) of the Income Tax Assessment Act 1997

Section 152 - 12 of the Income Tax Assessment Act 1997

Section 152 - 10(1A) of the Income Tax Assessment Act 1997

Subparagraph 152 - 40(1)(a)(ii) of the Income Tax Assessment Act 1997

Section 152 - 49 of the Income Tax Assessment Act 1997

Subsection 152 - 110(5) of the Income Tax Assessment Act 1997

Section 328 - 130 of the Income Tax Assessment Act 1997

Subsection 328 - 130(1) of the Income Tax Assessment Act 1997

Section 152 - 40 of the Income Tax Assessment Act 1997

Paragraph 152 - 40(4)(e) of the Income Tax Assessment Act 1997

Paragraph 152 - 40(4A) of the Income Tax Assessment Act 1997

Reasons for decision

Summary

The basic conditions in Subdivision 152-A are met. Just before the CGT event happened, the Property had been owned by the Taxpayers for a continuous period of at least 15 years and the sale of the Property occurred in connection with each of the Taxpayer's respective retirements. Therefore, the capital gain from CGT event A1 happening can be disregarded in accordance with section 152-105 of the ITAA 1997.

Small Business CGT concessions

To qualify for the CGT small business concessions, the Taxpayers must each satisfy several conditions that are common to all the concessions.

Basic conditions for relief

152-10(1) A *capital gain (except a capital gain from *CGT event K7) you make may be reduced or disregarded under this Division if the following basic conditions are satisfied for the gain:

a)     a *CGT event happens in relation to a *CGT asset of yours in an income year;

Note: This condition does not apply in the case of CGT event D1: see section 152-12.

b)    the event would (apart from this Division) have resulted in the gain;

c)     at least one of the following applies:

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

(ii)    you satisfy the maximum net asset value test (see section 152-15);

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

(iv)  the conditions mentioned in subsection (1A) or (1B) are satisfied in relation to the CGT asset in the income year;

d)    the CGT asset satisfies the active asset test (see section 152-35).

Note: This condition does not apply in the case of CGT event D1: see section 152-12.

To be eligible to apply the small business CGT concessions, each of the Taxpayers must satisfy all four of the basic conditions above. In the Taxpayers case, they sold the Property causing CGT event A1 to happen in relation to this asset the Taxpayers owned in 2018. This CGT event would have resulted in a gain. In the Taxpayers circumstances they must satisfy subsection 152-10(1A) because company is the small business entity that at the time carried on the business.

Passively held assets

You can access the small business concessions for CGT assets you own if the asset is used in a business carried on by your affiliate or an entity connected with you.

152-10(1A) 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 *CGT 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 and interest in an asset of the partnership; and

d)    in any case - the CGT 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(b)) in relation to the CGT asset.

Note 1: The meaning of connected with is affected by section 152-78.

Note 3: For businesses that are winding up, see section 152-49 and subsection 328-110(5).

The Taxpayers did not carry on a business in the 2019 income year and the CGT asset is not an interest in a partnership. However, the Company is a CGT Small Business Entity and it carries on a business on the Property. In addition to meeting these requirements, the Taxpayers must also demonstrate that the Company is an affiliate of each of them or an entity that is connected with them.

Affiliate

An affiliate is defined by section 328-130 of the ITAA 1997.

Section 328-130 Meaning of Affiliate

328-130(1) An individual or company is an affiliate of yours if the individual or company 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 Company will be an affiliate of each of the Taxpayers if the company acted or could reasonably be expected to act according to the directions or wishes of each of the Taxpayers or in concert with each of their directions or wishes in relation to its business affairs.

Whether a person or entity acts, or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you is a question of fact that is particular to the circumstances. No one factor will necessarily be determinative.

The Explanatory Memorandum to the Tax Laws Amendment (Small Business) Bill 2007, Chapter 2, discusses relevant factors that may support a finding that a person acts as an affiliate:

·         the existence of a close family relationship between the parties;

·         the lack of any formal agreement or formal relationship between the parties dictating how the parties are to act in relation to each other;

·         the likelihood that the way the parties act, or could reasonably be expected to act, in relation to each other would be based on the relationship between the parties rather than on formal agreements or legal or fiduciary obligations; and

·         the actions of the parties.

The Business was a family business, run and controlled equally by the Taxpayers; they were the controlling minds of the business and no decisions were made without consulting them. They maintained the day to day running of the business including staff direction and were the primary instructors with all financial advisers, lawyers and banks.

No action took place in the Business without deference to the Taxpayers decisions, they divided the duties between the two of them one controlling the stock and asset purchases and the other controlling the banking, wages, tax accounting and general finances.

The Taxpayers controlled the restructure from Partnership to Company; they are directors and shareholders of the Company together with their two sons. They were the decision makers and the familial relationships between them and their children show deference to the Taxpayers decisions. At all times they were considered by the family members as the controllers of the Business and this influence was equal to both due to their individual involvement in all aspects of the Business affairs.

The Company is an affiliate of each of the Taxpayers as it is accepted that the company acted according to the directions or wishes of each of the Taxpayers or in concert with each of their directions or wishes in relation to its business affairs.

Active asset

Section 152-40 of the ITAA 1997 provides the meaning of 'active asset'. The CGT asset will be an active asset at a time if, at that time, the Taxpayers own the asset and the asset was used or held ready for use by the Taxpayers, an affiliate of the Taxpayers, or by another entity that is 'connected with' the Taxpayers, in the course of carrying on a business.

The whole time the Taxpayers owned the Property, it was used first by the business carried on by each of them in partnership with others and then by the Company who, is an affiliate of each of them.

Active asset test

Section 152-35 of the ITAA 1997 prescribes the Active asset test.

152-35(1) 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 7^1/2 years during the period specified in subsection (2).

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.

In the Taxpayers circumstances subsection 152-35(1)(b) applies. The Taxpayers have owned the asset for more than 15 years andthe asset was an active asset of theirs for a total of at least 7.5 years specified in subsection 152-35(2).

However, in addition to making the Property available to the business, given the significant size of the Property, the taxpayers did make a portion of it available to third parties over the course of ownership to derive rental income. It must be noted that an asset whose main use is to derive rent cannot be an active asset (paragraph 152-40(4)(e)).

Section 152-40(4A) determines the 'main use' of an asset for the purpose of paragraph (4)(e).

152-40(4A) For the purposes of paragraph (4)(e), in determining the main use of an asset:

(a)  disregard any personal use or enjoyment of the asset by you; and

(b)  treat any use by your affiliate, or an entity that is *connected with you, as your use.

The Taxpayers have not used the Property for their own personal use or enjoyment. The land has been used for the business, either run by the partnership or later the company (an affiliate of each of them).

Whether an assets main use is to derive rent will depend on the particular circumstances of the case. As outlined in Tax Determination TD 2006/78 Income Tax: capital gains: are there any circumstances in which premises used in a business of providing accommodation for reward may satisfy the active asset test in section 152-35 of the Income Tax Assessment Act 1997 notwithstanding the exclusion in paragraph 152-40(4)(e) of the Income Tax Assessment Act 1997 for assets whose main use is to derive rent?, when determining 'main use' the Commissioner will consider the following in relation to part rental use:

1. The area of use.
2. The level of income derived.

The Taxpayers have also provided the details of the area usage between 20XX and 20XX which they state is indicative of the use of land area by tenants. This information shows that the area rented to the third parties is at most XX.XX% of the Property. Also the income derived from third party rent over the period amounted to at most X.XX% of total income.

Based on the facts provided by the Taxpayers, we consider that deriving rental income is not the main use of the Property. Therefore, the Property satisfies the 'Active Asset Test'.

15 year exemption

Section 152-105 of the ITAA 1997 provides that you can disregard any capital gain arising from a CGT event happening if all of the following conditions are satisfied:

a)    you satisfy the basic conditions (in Subdivision 152-A),

b)    you continuously owned the CGT asset for the 15-year period ending just before the CGT event, and

c)    either you are:

-   at least 55 years old at the time of the CGT event happening and the event happened in connection with your retirement, or

-   permanently incapacitated at the time of the CGT event.

The Taxpayers satisfy the basic conditions (as per above), and have continuously owned the Property for at least 15 years prior to the CGT event happening.

Therefore, because the Taxpayers are both more than 55 years old, they will be entitled to claim the 15 year exemption if the sale of the land was in relation to their retirement. The Taxpayers have advised that:

·         they were the controlling minds of the business and were involved in all key business decisions,

·         they were actively involved in the day to day running of the business. Specifically:

·         the first Taxpayer controlled the business' stock purchases and asset purchases, and

·         the second Taxpayer controlled the banking, wages, tax, accounting and general finances.

Due to their ill-health, the Taxpayers have decided to retire from the business. As a result of this decision, the business is being wound up and the Taxpayers have sold the Property. Prior to this, the Taxpayers were both actively involved in running the business. Consequently, in relation to each taxpayer, the Commissioner accepts that CGT event A1 happened in 'connection with' their retirement.

Conclusion:

The basic conditions in Subdivision 152-A have been met, just before the CGT event happened the Property had been owned by the Taxpayers for a continuous period of at least 15 years and the sale of the Property occurred in connection with each of the Taxpayer's retirements. Therefore, the capital gain from CGT even A1 happening can be disregarded in accordance with section 152-105 of the ITAA 1997.

ATO view documents

Tax Determination TD 2006/78 Income Tax: capital gains: are there any circumstances in which premises used in a business of providing accommodation for reward may satisfy the active asset test in section 152-35 of the Income Tax Assessment Act 1997 notwithstanding the exclusion in paragraph 152-40(4)(e) of the Income Tax Assessment Act 1997 for assets whose main use is to derive rent?

Other references (non ATO view)

Chapter 2 of the 'The Explanatory Memorandum to the Tax Laws Amendment (Small Business) Bill 2007'.