Edited version of private advice

Authorisation Number: 1051890503268

Date of advice: 28 September 2021

Ruling

Subject: CGT small business concessions

Question 1

Do Partner A and Partner B satisfy the condition under section 152-10(1)(c)(i) of the Income Taxation Assessment Act 1997 (ITAA 1997), should the Property be transferred in the 20XX or the 20XX income year?

Answer

No.

Question 2

Do Partner A and Partner B satisfy the condition under section 152-10(1)(c)(iii) of the ITAA 1997, should the Property be transferred in the 20XX or the 20XX income year?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The partnership is made up of two partners, Partner A and Partner B.

The partnership operates a primary production business.

On X January 20XX, Partner A and Partner B jointly purchased commercial property XXX XXX (the Property) for $XXX XXX. The Property is not used in the primary production business and is rented to a related entity, with the rent returned as income of the partnership.

A recent valuation estimates the Property in the vicinity of $XXX XXX.

The partnership is registered for Goods and Services Tax (GST) and reports commercial rent from related entity DEF Pty Ltd, which carries on a business.

In the 20XX, 20XX and 20XX income years, the partnership had a turnover of less than $X million. You anticipate going forward the turnover will remain less than $X million.

Up until X July 20XX, the Property was rented to DEF Pty Ltd which carried on a business at the Property.

Partner A owns XX% of the shares in DEF Pty Ltd.

Partner B owns XX% of the shares in DEF Pty Ltd.

DEF Pty Ltd also owns XX% of the shares in GHIK Pty Ltd.

GHIK Pty Ltd also carried on a business in XXXX.

In the 20XX and 20XX income years, the total aggregated turnover of the partnership, DEF Pty Ltd and GHIK Pty Ltd exceeded $X million.

DEF Pty Ltd and GHIK Pty Ltd recently sold their business to a third party, XYZ. The business was sold for $X XXX XXX with settlement occurring on the X July 20XX.

Upon settlement of the business sale, XYZ began renting the Property from the partnership. The partnership has charged and remitted GST to the ATO from the rent collected from the Property.

Neither Partner A, Partner B or any related entity own shares in XYZ.

From X July 20XX to X July 20XX, when settlement of the business sale occurred, DEF turnover was approximately $XX XXX. GHIK turnover was approximately $XX XXX. No further turnover is anticipated following settlement of the business sale. The partnership's turnover was approximately $XXX XXX with income expected to remain consistent until XX June 20XX.

Partner A and Partner B want to transfer ownership of the Property and seek to apply the small business capital gains tax concessions to the resulting gain.

Partner A and Partner B do not pass the maximum net asset value test.

Relevant legislative provisions

Income Taxation Assessment Act 1997 Section 108-5

Income Taxation Assessment Act 1997 Section 152-10(1)(c)(i)

Income Taxation Assessment Act 1997 Section 152-10(1)(c)(iii)

Income Taxation Assessment Act 1997 Section 152-15

Income Taxation Assessment Act 1997 Section 152-35

Income Taxation Assessment Act 1997 Section 328-110

Reason for decision

Detailed reasoning

Division 152 of the Income Taxation Assessment Act 1997 (ITAA 1997) allows you to reduce or disregard a capital gain from a capital gains tax (CGT) event under the small business concessions. To qualify for the small business CGT concessions, you must satisfy several conditions that are common to all the concessions. These are called the basic conditions.

Basic conditions

Section 152-10(1) of the ITAA 1997 contains the basic conditions that must be satisfied to be eligible to apply the CGT small business concessions. These conditions are:

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

(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 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)          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.

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

Subparagraph 152-10(1)(c)(i)

Section 152-10(1AA) of the ITAA 1997 defines a CGT small business entity as:

•         you are a small business entity for the year; and

•         you would be a small business entity for the year as per section 328-110 of the ITAA 1997, if each reference to $10 million was a reference to $2 million.

Section 328-110 of the ITAA 1997 states at subsection (1) that you are a small business entity if:

•         you carry on a business in the income year; and

•         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 $10 million;

(ii) your aggregated turnover for the current year is likely to be less than $10 million.

For the purposes of applying subparagraph 152-10(1)(c)(i) of the ITAA 1997, the reference to 'you' in section 328-110 of the ITAA 1997 is to Partner A and Partner B individually. Furthermore, subsection 328-110(6) of the ITAA 1997 states: a person who is a partner in a partnership in an income year is not, in his or her capacity as a partner, a small business entity for the income year.

Subparagraph 152-10(1)(c)(iii)

In line with section 328-110 of the ITAA 1997 above, the individual partners of the partnership are not small business entities and therefore subparagraph 152-10(1)(c)(iii) of the ITAA 1997 requires the partnership to satisfy the small business entity test.

An asset is a partnership asset if the partners own the asset in accordance with their respective interests as specified in the partnership agreement. Partners may be eligible for the concessions if they met the following conditions:

•         the asset is the partner's interest in a partnership asset, and

•         that partnership is a small business entity.

Section 108-5(1) of the ITAA 1997 explains a CGT asset is any kind of property, or a legal or equitable right that is not property. Section 108-5(2)(c) and (2)(d) of the ITAA 1997 confirm this includes any interest in an asset of a partnership.

Application to your circumstances

Subparagraph 152-10(1)(c)(i)

Partner A and Partner B are partners in a partnership. In line with subsection 328-110(6) of the ITAA 1997, each individual partner does not carry on a business in their own right. As Partner A and Partner B are not small business entities, subparagraph 152-10(1)(c)(i) of the ITAA 1997 cannot be met.

Subparagraph 152-10(1)(c)(iii)

The asset, being the commercial property that is leased out, is jointly owned by the two individual partners. The partnership carries on a business of primary production as well as reports rental income on the partnership income tax return. As the partnership meets the turnover threshold for 20XX of less than $X million, both elements of being a CGT small business entity and the CGT asset being an asset of the partnership are satisfied.