Edited version of private advice

Authorisation Number: 1051895926961

Date of advice: 9 September 2021

Ruling

Subject: CGT - small business retirement exemption

Question

Will the Trust satisfy the conditions required to allow the Trust to apply the CGT small business retirement exemption under Subdivision 152-D of the Income Tax Assessment Act 1997 (ITAA 1997) to the capital gain made upon the disposal of the property?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

In 20XX the Trust (the Trust) was created.

P has been the sole beneficiary of the Trust for at least the last 5 years.

P is over 55 years of age.

P is the sole director and owns 50% of the shares of Company Pty Ltd (the Company).

In 20XX, the Trust purchased a property.

The property was exclusively used by the Company.

Until 20XX the Company operated a business.

The property has now been sold with a gross capital gain of approximately $X

All proceeds from the sale of the property will be distributed to P as the beneficiary of the Trust.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-D

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152-55

Income Tax Assessment Act 1997 section 152-60

Income Tax Assessment Act 1997 section 152-65

Income Tax Assessment Act 1997 section 152-70

Income Tax Assessment Act 1997 section 152-75

Income Tax Assessment Act 1997 section 152-305

Income Tax Assessment Act 1997 section 152-320

Reasons for decision

Subdivision 152-D of the Income Tax Assessment Act 1997 (ITAA 1997) contains the small business retirement exemption. You may choose to disregard all or part of a capital gain under the small business retirement exemption if you satisfy certain conditions.

If you are a company or trust, other than a public entity, you can choose to disregard all or part of a capital gain where you meet all the following conditions contained in subsection 152-305(2) of the ITAA 1997:

•         you satisfy the basic conditions

•         you satisfy the significant individual test

•         you keep a written record of the amount you choose to disregard (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%)

•         you make a payment to at least one of your 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).

If a CGT concession stakeholder is under 55 years old just before receiving a payment, an amount equal to that payment must be paid to a complying superannuation fund or retirement savings account (RSA) on their behalf within 7 days of making the choice. The company or trust 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.

There is no requirement to make this contribution to a superannuation fund or retirement savings account if the stakeholder was 55 years old or older however, you still need to ensure the payment to the significant individual as the concessional stakeholder is paid.

You must make payments:

•         seven days after you choose to disregard the capital gain if you choose the retirement exemption for a J2, J5 or J6 event, or

•         in any other case, by the later of

­   seven days after you choose to disregard the capital gain, and

­   seven days after you receive the capital proceeds from the CGT event.

Section 152-60 of the ITAA 1997 provides that an individual is a CGT concession stakeholder of a company or trust at a time if the individual is a significant individual in the company or trust. Section 152-55 provides that a significant individual is an individual of a company or trust if they have a small business participation percentage of at least 20%. The small business participation percentage is calculated by considering both the direct and indirect participation percentage (section 152-65).

The method for calculating an entity's direct and indirect small business participation percentage in a trust is outlined in sections 152-70 and 152-75.

An individual has a direct small business participation percentage in a discretionary trust (i.e. a trust where entities do not have entitlements to all the income and capital of the trust) equal to:

(a) if the trustee makes distributions of income during the income year (the relevant year) in which that time occurs - the percentage of the distributions to which the entity was beneficially entitled; or

(b) if the trustee makes distributions of capital during the relevant year - the percentage of the distributions to which the entity was beneficially entitled;

or, if 2 different percentages are applicable, the smaller.

An individual is a CGT concession stakeholder of a trust if the individual is either:

•         a significant individual in the trust, or

•         the spouse of a significant individual in the trust, if the spouse has a small business participation percentage in trust at that time that is greater than zero.

The amount of the capital gain that you choose to disregard must not exceed your CGT retirement exemption limit or, in the case of a company or trust, the CGT retirement exemption limit of each CGT concession stakeholder receiving a payment.

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.

Application to your circumstances

In this case, the Trust is not a small business entity, however the property was used in a business carried on by a small business entity, being the Company, that is your connected entity as P is the sole director and 50% shareholder of the company as well as the sole beneficiary of the Trust. As the property was being used in the business of a connected entity, it will be considered an active asset of the Trust.

When the property was sold, CGT event A1 occurred which resulted in a gain. As such the Trust will meet the basic conditions to apply the CGT small business concessions.

The Trust satisfies the significant individuals test as P is the sole beneficiary of the Trust, receiving 100% of capital or income distributed from the Trust. As P is a significant individual for the Trust, P will also be considered the CGT concession stakeholder for the Trust.

The Trust will be eligible to apply the small business retirement exemption as long as the Trust meets the remaining requirements under subsection 152-305(2) of the ITAA 1997 relating to the keeping of written records of the amount distributed, the timing of payment. As P is over 55 years of age, a payment will not need to be made to a complying superannuation fund or retirement saving account however, a transaction of the payment must occur to the beneficiary within the 7 day timeframe.