Edited version of private advice

Authorisation Number: 1051809660750

Date of advice: 25 February 2021

Ruling

Subject: Capital gains tax

Question 1

Can the entity A apply the small business capital gains tax (CGT) 50% active asset reduction to the capital gain arising from the sale of the property?

Answer

Yes.

Question 2

Will entity A meet the conditions for the small business retirement exemption under Subdivision 152-D of the Income Tax Assessment Act 1997 (ITAA 1997) where a written record of the amount chosen is kept and the amount is less than or up to your retirement exemption limit and the amount is paid into a complying superannuation fund on behalf of a concession stakeholder within the required timeframe?

Answer

Yes.

Question 3

Will entity A meet the conditions for the small business retirement exemption under Subdivision 152-D of the ITAA 1997 where a payment is made to a beneficiary who is not a concession stakeholder?

Answer

No.

This ruling applies for the following period

Year ending 30 June 20XX

The scheme commences on

1 July 20XX

Relevant facts and circumstances

Entity A owned property. The property was purchased on xxxx.

The property was sold on xxxx.

Entity A rented the whole property to entity B. Entity B has been the only tenant of the property since purchase. Entity B continues to lease the property from the new owners.

Entity B ran a business from the premises.

The shares in entity B were owned by entity C and entity D.

The shares in entity B were sold in xxxx to an unrelated party.

Entity C and entity D are the only trustees of entity A.

Entity A satisfies the maximum net asset value test just before the CGT event.

The income and corpus beneficiaries are entity C, D, E, F, G and B.

The xxxx income year the Trust made a distribution of $xxxx to entity C and $xxxx to entity D.

For the year ended xxxx the estimated distribution from entity A to the beneficiaries will be $xxxx income and $xxxx gross capital gain.

Entity C and entity D are under 55 years.

The money will be paid into a complying superannuation fund.

Entity C and D were both significant individuals just before the CGT event.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 Subdivision 152-D

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 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 capital gains tax (CGT) asset will satisfy the active asset test 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.

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.

In this case, the property was used by the entity B in the course of carrying on its business. As entity B was connected with entity A, it is considered that entity A satisfies the active asset test.

In this case, it is accepted that entity A has met the basic conditions due to the following:

•         a CGT event occurred when the property was disposed of

•         the events will result in a gain

•         entity A meets the maximum net asset value test; and

•         the property meets the active asset test.

Small business 50% reduction

The rules covering the small business CGT 50% reduction are contained in Subdivision 152-C of the ITAA 1997.

Unlike the other small business concessions, the small business 50% reduction can apply automatically if the basic conditions are satisfied. There are no further requirements.

Accordingly, entity A can apply the 50% active asset reduction.

Small business retirement exemption

Subdivision 152-D of the ITAA 1997 contains the requirements for the small business retirement exemption.

Entity A can choose to disregard all or part of a capital gain under the small business retirement exemption if they satisfy certain conditions. To be entitled to this exemption, entity A must meet all the following conditions contained in subsection 152-305(2) of the ITAA 1997:

•         the basic conditions in Subdivision 152-A of the ITAA 1997 are satisfied,

•         entity A satisfies the significant individual test

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

•         entity B must make a payment to at least one of its 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 you receive the capital proceeds in instalments, you make a payment to a CGT concession stakeholder for each instalment in succession (up to the asset's CGT exempt amount).

Where a CGT concession stakeholder is under 55 years old just before a payment is made in relation to them, entity A must make the payment to the CGT concession stakeholder by contributing it to a complying superannuation fund or Retirement Savings Account (RSA) on their behalf within seven days of making the choice. Entity A must notify the trustee of the fund or the RSA at the time of the contribution that the contribution is being made in accordance with the requirements of the retirement exemption.

Failure to make the payment by the end of seven days after making the choice into a complying superannuation fund or RSA will mean the conditions are not satisfied and the retirement exemption will not be available.

The amount of the capital gain that is chosen to be disregarded must not exceed the CGT retirement exemption limit. In the case of a trust, the CGT retirement exemption limit of each CGT concession stakeholder receiving a payment is relevant.

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.

Under section 152-55 of the ITAA 1997 an individual is a significant individual in a trust if they have a small business participation percentage in the trust of at least 20%. This 20% can be made up of direct and indirect percentages.

Entity A satisfies the significant individual test if it had at least one significant individual just before the CGT event.

Under section 152-60 of the ITAA 1997 an individual is a CGT concession stakeholder of entity A if they are a significant individual or the spouse of a significant individual where the spouse has a small business participation percentage in the trust at that time that is greater than zero.

In this case, entity A satisfies the basic conditions and the significant individual test. From the information provided both entity C and entity D are entity A's CGT concession stakeholders. Entity A is eligible to apply the small business retirement exemption up to its CGT Concession Stakeholder's life time limit of $500,000. As the concession stakeholders are under 55 years at the time entity A makes the choice, entity A must make a personal contribution equal to the exempt amount into a complying superannuation fund or RSA. The CGT Concession stakeholder must also keep a record of the amount they choose to disregard.

Please note that if entity A distributes any part of the capital gain to a beneficiary that is not a concession stakeholder, then the exemption under Subdivision 152-D of the ITAA 1997 will not apply.