Edited version of private advice

Authorisation Number: 1051908790637

Date of advice: 13 October 2021

Ruling

Subject: CGT - small business concessions

Question

Does the Unit Trust meet the conditions under section 152-110 of the Income Tax Assessment Act 1997 to be eligible to apply the small business 15 year exemption to disregard the capital gain made upon the disposal of the asset?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Unit Trust (the Unit Trust) is a small business entity.

The Unit Trust has run a business since 19XX.

The Unit Trust sold XX% of its asset on XX November 20XX.

It took a further X months to wind up the business.

A and B both worked in the business.

A worked full time and B worked approximately XX hours per week in the business.

Both A and B reduced their hours working in the business after the sale of the asset.

B also runs a secondary business. After the sale of the asset, B also reduced the hours worked in the secondary business.

Both A and B are over 55 years of age.

The Family Trust (Family Trust) is the sole unit holder of the Unit Trust and is entitled to receive 100% of both income and capital of the Unit Trust.

In the 2019-20 income year, B received 100% of the income and capital distributed from the Family Trust.

B has received at least 90% of income and capital distributions from the Family Trust for at least 15 years.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 section 152-110

Income Tax Assessment Act 1997 section 152-55

Income Tax Assessment Act 1997 section 152-65

Income Tax Assessment Act 1997 section 152-75

Reasons for decision

A capital gain that you make may be reduced or disregarded under Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997) if the following basic conditions contained in section 152-10 of the ITAA 1997 are satisfied:

(a)  A CGT event happens in relation to a CGT asset of yours in an income year,

(b)  The event would have resulted in a gain,

(c)   The CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997, and

(d)  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.

To be eligible to apply the CGT small business concessions an entity must satisfy all four of the basic conditions above.

In this case, there was a CGT event upon disposal of the asset which resulted in a capital gain. The asset would be considered an active asset of the business of the Unit Trust and satisfies the active asset test. The Unit Trust was also a small business entity for the 2019-20 income year. As such the Unit Trust satisfies the basic conditions to apply the CGT small business concessions.

Section 152-110 of the ITAA 1997 provides a small business 15-year exemption for companies and trusts. Under this section, a company can disregard the capital gain from the disposal of a CGT asset if:

(a)    the company or trust satisfies the basic conditions in Subdivision 152-A of the ITAA 1997 for the small business CGT concessions,

(b)    the company or trust continuously owned the CGT asset for the 15-year period ending just before the CGT event happened,

(c)     the company or trust had a significant individual for a total of at least 15 years (even if the 15 years was not continuous and it was not always the same significant individual) during which the entity owned the CGT asset, and

(d)    an individual who was a significant individual of the entity just before the CGT event was either:

-       at least 55 years old at that time and the event happened in connection with their retirement or

-       permanently incapacitated at that time.

In this case, as previously stated the Unit Trust satisfies the basic conditions. The asset has been an asset of the Unit Trust and part of the business for at least the last 15 years.

The third condition in paragraph 152-110(c) of the ITAA 1997 requires the Unit Trust to have a significant individual for a total of at least 15 years.

Section 152-55 of the ITAA 1997 sets out that an individual is a significant individual in a company at a time if, at that time, the individual has a small business participation percentage in the company of at least 20%.

The small business participation percentage for an individual can be either direct or indirect according to section 152-65 of the ITAA 1997. Section 152-75 of the ITAA 1997 provides how to work out the indirect small business participation percentage for an entity. An entity's indirect small business participation percentage in a company or trust is calculated by multiplying together the entity's direct participation percentage in an interposed entity and the interposed entity's total participation percentage (both direct and indirect) in the company or trust.

In this case, B received 100% of the distributions from the Family Trust, therefore B's direct participation percentage in the Family Trust is 100%. To find B's participation percentage in the Unit Trust in the 2019-20 income year, we multiply together B's direct participation percentage in the Family Trust and the Family Trust's total participation percentage in the Unit Trust (100%), ie:

100% x 100% = 100%

For the other years, B's participation percentage in the Unit Trust will be as follows:

90% x 100% = 90%

As B has a participation percentage in the Unit Trust of more than 20% B would be considered a significant individual both in the year of the CGT event (2019-20 income year) and for at least 15 years. This means the Unit Trust has a significant individual for a total of at least 15 years, therefore the third condition in paragraph 152-110(c) of the ITAA 1997 has been satisfied.

B was over 55 years at the time the rent roll was sold and as B has significantly reduced their working hours, it is considered that the disposal of the rent roll is in connection with their retirement.

As such, the Unit Trust meets the conditions under section 152-110 of the ITAA 1997 and is eligible to apply the small business 15 year exemption to disregard the gain made from the disposal of the asset.