Edited version of private advice

Authorisation Number: 1051707833457

Date of advice: 28 September 2020

Ruling

Subject: Small business concessions

Question 1

Were the W Trust and B Trust connected entities?

Answer

Yes.

X was the corporate trustee of both the W Trust and the B Trust. For the relevant period, A & B were the shareholders and directors of X. Accordingly, as they are both controlled by the same third parties, the W Trust and the B Trust are connected entities in accordance with section 328-125 of the Income Tax Assessment Act 1997 (ITAA 1997).

Question 2

Was the W Trust a CGT small business entity for the 2018-19 financial year for the purposes of the B trust meeting the requirements of subsection 152-10(1A) of the ITAA 1997.

Answer

Yes.

Section 152-49 of the ITAA 1997 applies to treat an entity as a CGT small business entity in a CGT event year if they are winding up a business previously carried on for the purposes of meeting subsection 152-10(1A) of the ITAA 1997. We consider that, in the 20XX-XX financial year, the W Trust (who was an entity connected to the B Trust) was winding up the business that it took over from the Partnership. Accordingly, section 152-49 of the ITAA 1997 will apply to treat the W Trust as carrying on a business in the 20XX-XX financial year in relation to the Farm Land, and as a CGT small business entity. Further, as the B Trust did not carry on a business, it will meet the requirements of subsection 152-10(1A) of the ITAA 1997.

Question 3

Does the vesting of the Farm Land to A & B satisfy the basic conditions for the CGT small business concessions contained in section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

A CGT event occurred upon the vesting of the Farm Land that resulted in a capital gain. As discussed above, the requirements of subsection 152-10(1A) of the ITAA 1997 have been met. The Farm Land also meets the active asset test as a result of the historical use by various related entities during the course of the ownership periods. Accordingly, the vesting of the Farm Land to A & B satisfies the basic conditions for the CGT small business concessions contained in section 152-10 of the ITAA 1997.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

A (deceased) and B were spouses.

A was diagnosed with a terminal illness.

The B Trust is a discretionary trust. The Trustee of the B Trust is X.

The B Trust has held numerous land titles over a period of time. The family has farmed the land via various trading entities over time.

The relevant land holdings are collectively referred to as the Farm Land.

The W Trust is a discretionary trust that was established conduct a farming business as part of a restructure from a previous trading partnership of A & B (the Partnership). The Trustee of the W Trust is also X.

For the relevant period, the shareholders and directors of X were A & B.

The W Trust's aggregated turnover in the 20XX-XX year was under $XXX.

The W Trust entered into a sub-lease agreement with unrelated for the Farm Land.

With their advisors, A & B discussed options for the future, such as the commencement of a sheep enterprise or a full share farming arrangement with the Lessee.

During the 20XX-XX financial year A & B maintained the Farm Land, marketed and sold grain, maintained and sold plant and equipment. This income has been included in the profit and loss statement for the W Trust.

The income from the grain included in the 20XX-XX financial year was mostly from prior year harvests. However, the Lease allows the Lesee to deposit grain in favour of the Lessor. This would be from mutual agreement and Simon and/or Joanne would inspect and review the crop to assess suitability of the arrangement.

For at least half of the respective ownership periods (or 7.5 years where the land was held for more than 15 years), the Partnership used the Farm Land in its business that involved cultivating and propagating various crops.

The Farm Land was previously leased to an unrelated party from 1 March 20XX to 28 February 20XX.

A Vesting Deed was executed, which resulted in the Farm Land vesting to A & B.

A passed away.

B has since commenced operation of a sheep enterprise.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 152-10

Income Tax Assessment Act 1997 Section 152-49

Income Tax Assessment Act 1997 Section 328-125