Edited version of private advice

Authorisation Number: 1051921666072

NOTICE

This edited version has been found to be misleading or incorrect. It does not represent the ATO’s view of the relevant law.

This notice must not be taken to imply anything about:

● the binding nature of the private advice issued to the applicant

● the correctness of other edited versions.

Edited versions cannot be relied upon as precedent or used for determining how the ATO will apply the law in other cases.

Date of advice: 9 December 2021

Ruling

Subject: Small business CGT concessions

Question 1

Are the changes in property titles, for Property A, Property B and Property C, from Crown Lease to Freehold capital gains tax (CGT) events under section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

If the answer to question 1 is yes, is there an entitlement to the CGT rollover relief under section 124-575 of the ITAA 1997?

Answer

Yes.

Question 3

If the answer to question 2 is yes, is the date of acquisition of Property A, Property B and Property C taken to be the date when the original Crown Lease was acquired under item 2 of the table of subsection 115-30 of the ITAA 1997?

Answer

Yes.

Question 4

Will the basic conditions under subdivision 152-A of the ITAA 1997 be satisfied in relation to the disposal of Property A, Property B and Property C?

Answer

Yes.

Question5

Will the conditions for the small business 15-year exemption in Subdivision 152-B of the ITAA 1997 be satisfied in relation to the capital gain made from the sale of Property A and Property C?

Answer

Yes.

Question 6

Will the conditions for the small business 15-year exemption in Subdivision 152-B of the ITAA 1997 be satisfied in relation to the capital gain made from the sale of Property B?

Answer

Yes.

This private ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Individual and their spouse own three lots of property either individually or through entities that they control.

The properties are adjacent to each other and have been used for the carrying on of primary production activities since inception/ownership.

The Individual's are now considering selling the rural properties with a view to retirement.

Details of ownership are as follows:

The Trust and the Company carry on a business from their land. The aggregated turnover is less than $2 million.

The trustee of the trust is a company. The directors and shareholders of this company are the Individual and their spouse.

History of trust distribution of income by percentage:

The distributions in the 20XX, 20XX and 20XX financial years were 100% income distributions and there were no capital distributions.

The trust will have income in the 20XX financial year and will distribute at least 20% each to the Individual and their spouse.

Shareholding history:

As of 30 June 20XX

As of 30 October 20XX

Relevant legislative provisions

Income Tax Assessment Act section 104-25

Income Tax Assessment Act section 115-30

Income Tax Assessment Act Subdivision 124-J

Income Tax Assessment Act section 124-575

Income Tax Assessment Act Subdivision 152-A

Income Tax Assessment Act subsecton152-10(1A)

Income Tax Assessment Act subparagraph152-40(1)(a)(ii)

Income Tax Assessment Act subparagraph152-40(1)(a)(iii)

Income Tax Assessment Act paragraph 152-40(1)(b)

Income Tax Assessment Act section 152-50

Income Tax Assessment Actsubsection152-70(5)

Income Tax Assessment Act Subdivision 152-B

Income Tax Assessment Act section 152-105

Income Tax Assessment Act section 152-110

Income Tax Assessment Act subsection152-110(c)

Income Tax Assessment Act Subdivision 152-D

Income Tax Assessment Act section 152-325

Reasons for decision

Question 1, 2 and 3

CGT event A1 happens if you dispose of a CGT asset. When a Crown Lease is converted to a freehold title, a CGT event happens. You surrender a right (the Crown Lease) and acquire a new right (the freehold title) as a replacement asset.

While the ending of the lease would normally constitute a CGT event under section 104-25 of the ITAA 1997, the rollover provisions under section 124-J of the ITAA 1997 automatically apply where a Crown Lease is renewed or converted to a freehold estate.

As per section 115-30 of the ITAA 1997, which sets out the special rules about the time of acquisition, the replacement asset is taken to have been acquired on the date the original asset involved in the rollover was acquired.

Application to the circumstances

The Trust, Company and Individual each held a Crown lease which was later converted to a freehold title. A CGT event would have occurred when the new right was acquired, however subdivision 124-J of the ITAA 1997 provides rollover relief to disregard the gain.

As per section 115-30 of the ITAA 1997, the Trust, Company and Individual are taken to have acquired the freehold title at the time they acquired the original asset involved in the rollover. Therefore, the acquisition date of the freehold title is when the Crown lease was originally acquired.

Question 4

The basic conditions

The basic conditions for the small business CGT concessions are contained in Subdivision 152-A of the Income Tax Assessment Act 1997 (ITAA 1997). To qualify for the small business CGT concessions, you must satisfy several conditions that are common to all the concessions. The following are the basic conditions:

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

(b) the event would 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;

(iii) 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;

(iv) the conditions mentioned in subsection (1A) or (1B) are satisfied in relation to the CGT asset in the income year;

(d) the CGT asset satisfies the active asset test (see section 152-35).

Note that the small business 50% active asset reduction will apply if the basic conditions are satisfied.

Passively held assets

The conditions in subsection 152-10(1A) of the ITAA 1997 are satisfied in relation to the CGT asset in the income year if:

(a) your affiliate, or an entity that is connected with you, is a small business entity for the income year; and

(b) you do not carry on a business in the income year (other than in partnership); and

(c) if you carry on a business in partnership - the CGT asset is not an interest in an asset of the partnership; and

(d) in any case - the small business entity referred to in paragraph (a) is the entity that, at a time in the income year, carries on the business (as referred to in subparagraph 152-40(1)(a)(ii) or (iii) or paragraph 152-40(1)(b) in relation to the CGT asset.

Active asset test

The active asset test is contained in section 152-35 of the ITAA 1997. The active asset test is satisfied 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 detailed below, or

•         you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of at least 7.5 years during the test period.

The test period is from when the asset is acquired until the CGT event. If the business ceases within the 12 months before the CGT event (or such longer time as the Commissioner allows) the relevant period is from acquisition until the business ceases.

A CGT asset is an active asset if it is owned by you and is used or held ready for use in a business carried on (whether alone or in partnership) by you, your affiliate, your spouse or child, or an entity connected with you.

Application to the circumstances

The Trust, Company and Individual will sell their interests in Property A, Property B and Property C and make a capital gain. It is accepted that the Individual and their spouse control the Company and the Trust.

The Company - Property A

As above, the company is connected with the Trust and the Individual. The company's aggregated turnover is less than $2 million, therefore they are a small business entity.

Property A has been used in the course of carrying on a business by the Company since it was acquired in 20XX and therefore satisfies the active asset test.

The Trust - Property B

The Trust is connected with the Company and the Individual. The aggregated turnover of the Trust is less than $2 million, therefore they are a small business entity.

Property B has been used in the course of carrying on a business by the Trust since it was acquired in 19XX and therefore satisfies the active asset test

The Individual - Property C

As above, the individual is connected with the Trust and Company. The Individual does not carry on a business; however, the Trust uses Property C to carry on its business.

Property C has been used in the course of carrying on a business by an entity connected with the Individual since it was acquired in 20XX and therefore satisfies the active asset test.

Question 5

The 15 year exemption

The Individual - Property C

As per section 152-105 of the ITAA 1997, if you are an individual you can disregard any capital gain arising from a CGT event if the basic conditions are satisfied, the individual continuously owned the CGT asset for the 15 year period ending just before the CGT event and you are 55 or over at the time of the CGT event and the event happens in connections with your retirement.

As discussed above, the Individual has satisfied the basic conditions in relation to Property C. It has been owned since 20XX and therefore has been continuously owned for at least a 15 year period. The Individual is over 55 years of age and intends to retire upon the sale of the land. As the conditions have been satisfied, the Individual is entitled to disregard the capital gain made in relation to the disposal of Property C.

The Company - Property A

As per section 152-110 of the ITAA 1997, an entity that is a company or trust can disregard any capital gain arising from a CGT event if all of the following conditions are satisfied:

(a) the basic conditions are satisfied for the gain;

(b) the entity continuously owned the CGT asset for the 15-year period ending just before the CGT event;

(c) the entity 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;

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

(i) was 55 or over at that time and the event happened in connection with the individual's retirement; or

(ii) was permanently incapacitated at that time.

An individual is a significant individual of a company or a trust at a time if, at that time, the individual has a small business participation percentage in the company or trust of at least 20%. An entity's direct small business participation in a company is:

•         the percentage of any voting power, or

•         the percentage of any dividend, or

•         the percentage of any distribution of capital.

If these amounts are different, the smallest is taken to be the individual's small business participation percentage.

As discussed above, the company has satisfied the basic conditions in relation to Property A. It has been owned by the company since 20XX and therefore has been continuously owned for at least a 15 year period. Both the Individual and their spouse have always had a small business participation in the company of at least 20% since 20XX and both are over 55 years of age and will retire upon the sale of the land.

The company has satisfied all of the conditions for the 15 year exemption and can disregard any capital gain made in relation to the sale of Property A.

Question 6

The 15 year exemption

The Trust - Property B

As discussed above, to apply the 15 year exemption the trust must have had a significant individual for a total of at least 15 years during which the entity owned the CGT asset.

An entity's direct small business participation percentage in a trust (where entities do not have entitlements to all the income and capital of the trust) is:

         •            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

         •            If the trustee makes distributions of capital during the relevant year - the percentage of the distributions to which the entity was beneficiary entitled

If these amounts are different, the smallest is taken to be the individual's small business participation percentage.

If the trust does not make a distribution of income or capital in the relevant year subsection 152-70(5) of the ITAA 1997 requires that you treat the references to the 'relevant year' as being references to:

(a)  if the trustee made a distribution of income or capital during the CGT event year - the CGT event year; or

(b)  otherwise - the last income year before the CGT event year in which the trustee did make a distribution of income or capital.

Application to your circumstances

In the 20XX financial year, the trust distributed X% of the income to a company. The spouse held at X% interest in the company which means their indirect participation percentage in the trust was X%. The Individual held a X% interest in the company which means their indirect participation percentage in the trust was X%. Both the Individual and their spouse would be significant individuals of the trust for the 20XX financial year.

The trust distributed 100% of the income to the spouse in both the 20XX and 20XX financial years. The spouse would be considered a significant individual of the trust for both the 20XX and 20XX financial year.

The trust had tax losses from 20XX-20XX and did not make any distributions during that period. Subsection 150-70(5) of the ITAA 1997 requires consideration of the distributions made in the CGT event year to determine the direct small business participation percentage held in the trust for the years where the trust had a tax loss and did not make a distribution.

In this case the CGT event year will be the 20XX financial year. The trust will have income to distribute and will distribute at least 20% to each the Individual and their spouse. Therefore, the individual and their spouse will be significant individuals for the 20XX financial year and in accordance with subsection 152-70(5) of the ITAA 1997 will also be considered significant individuals for the 20XX to 20XX financial years.

The trust will satisfy all of the conditions for the 15 year exemption and can disregard any capital gain made in relation to the sale of Property B.