Edited version of private advice

Authorisation Number: 1051967117469

Date of advice: 1 April 2022

Ruling

Subject: CGT - small business concessions

Question 1

Do you meet the basic conditions under section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997) to apply the small business capital gains tax (CGT) concessions?

Answer

Yes

Question 2

Does the property satisfy the 'active asset test' for the small business CGT concessions pursuant to section 152-35 of the ITAA 1997?

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

You purchased the property (the property) jointly with your late spouse in 19XX.

You acquired your spouse's interest in the property upon their death on XXX 20XX.

A partnership was established with you and family members in 20XX (the partnership).

The partnership carries on a business.

The property was first used in the partnership for storage in 20XX and continued to be used by the partnership until 20XX.

The partnership does not pay you rent for the use of the property.

On XXXX 20XX you ceased to be a partner in the partnership, however the partnership business continued with the remaining partners using the same Australian Business Number and Tax File Number.

You continue to conduct the following activities in the business:

i)              Main administration officer for the business

ii)             Collection and posting of mail

iii)           Answering telephones

iv)           Banking

v)            Payroll

vi)           Payment of accounts

vii)          Negotiating and renewal of finance/loans

viii)         Liaising with suppliers to negotiate stock. Provision of required documentation to ensure these continue on a yearly basis

ix)           You are a guarantor for the bank loans and other finance and have provided the property as security for these finance arrangements

x)            Your name is on the bank account and loan account for the business. You have transactional authority on all accounts

You intend to transfer the property to one of your family members.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152-40

Income Tax Assessment Act 1997 section 328-125

Income Tax Assessment Act 1997 section 328-130

Reasons for decision

Small Business Concessions

Section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides the basic conditions that need to be met to apply the small business CGT concessions.

Subsection 152-10(1) states that a capital gain that you make may be reduced or disregarded under Division 152 ITAA 1997 if the following basic conditions 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) 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) 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 (passively held assets as outlined in subsections 152-10(1A) and 152-10(1B) of the ITAA 1997), and

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

Active assets

Subsection 152-35(1) of the ITAA 1997 states that a CGT asset satisfies 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 period of ownership, 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 and a half years.

Section 152-40 of the ITAA 1997 provides the meaning of 'active asset'. A CGT asset will be an active asset at a time if, at that time, you own the asset and the asset was used or held ready for use in the course of carrying on a business that is carried on by you, an affiliate or by another entity that is 'connected with' you.

Passively-held assets

The conditions in subsection 152-10(1A) 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.

Affiliate

The meaning of affiliate is contained in section 328-130 of the Income Tax Assessment Act 1997 (ITAA 1997) and is set out below:

(1) An individual or a company is an affiliate of yours if the individual or company acts, or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you, in relation to the affairs of the business of the individual or company.

(2) However, an individual or a company is not your affiliate merely because of the nature of the business relationship you and the individual or company share.

Trusts, partnerships and super funds can't be your affiliates. However, a trust, partnership or super fund may have an affiliate who is an individual or company.

Whether an individual acts, or could reasonably be expected to act in accordance with you, is a question of fact dependent on all the circumstances of the particular case. Relevant factors to consider are:

•         the existence of a close family relationship between the parties

•         the lack of any formal agreement or formal relationship between the parties dictating how the parties are to act in relation to each other

•         the likelihood that the way the parties act, or could reasonably be expected to act, in relation to each other would be based on the relationship between the parties rather than on formal agreements or legal or fiduciary obligations

•         the actions of the parties.

Application to your circumstance

In your case, you intend to transfer the property to one of your family members which will trigger CGT event A1 and result in a capital gain, satisfying paragraphs 152-10(1)(a) and (b) of the ITAA 1997.

You do not carry on a business, but your CGT asset, the property, is used in a business carried on by a small business entity, the partnership. You have not been a partner of the partnership since 2008, however you have remained involved in the day-to-day activities of running the business. You have a close family relationship with the partners. You remain an account holder on the bank accounts and loan accounts of the business and you are a guarantor on those loans, providing your property as security. Due to the active involvement within the business and the relationship with the partners it is reasonable to expect that they would act in accordance with you and would therefore be considered your affiliates. As such you satisfy the condition under sub-paragraph 152-10(1)(c)(iv) of the ITAA 1997.

You have held the property for more than 15 years during which time the property was used in the course of carrying on a business by your affiliates for over 7.5 years. The property therefore satisfies the active asset test in section 152-35 of the ITAA 1997, satisfying the condition under paragraph 152-10(1)(d) of the ITAA 1997.

Therefore, you have met the required basic conditions under section 152-10 of the ITAA 1997 to apply the small business CGT concessions.