Edited version of private advice

Authorisation Number: 1051999254108

Date of advice: 27 June 2022

Ruling

Subject: CGT - small business 15-year exemption

Question

Will the CGT small business 15-year exemption under section 152-105 of the Income Tax Assessment Act 1997 apply to the gift of land by Taxpayer A?

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

Overview

You are over 55 years of age.

You and your spouse own several properties and have operated a significant business on these properties for a number of decades through a partnership.

You own Property X wholly.

In 20XX you sold Property Y.

Following the sale of Property Y, you transitioned the business operations into a trust (the Trust) with your child and their family.

You, your spouse, your child and their spouse are beneficiaries of the Trust.

After the sale you began your transition to retirement by reducing your working hours and moving a significant distance away from the business operations with your spouse.

Gifting of Property X

You acquired the property in 20XX and there has been no change in ownership since acquisition.

The property has been used to carry on a business for the whole period of ownership.

As part of succession planning, you are intending to gift the property to your child.

The property will continue to be used by the Trust to conduct business.

This transfer is intended to be a further step in your retirement plan.

You suffered a serious health event in 20XX and have received medical advice to reduce your working hours for health purposes.

Following the transfer, you and agreed with your child that you will continue to reduce your hours in the business.

Additional facts

You and your spouse have significant assets to support your retirement.

You will not pass the $6 million maximum net asset value test under section 152-15 of the Income Tax Assessment Act 1997 (ITAA 1997).

You do not carry on a business in your own right.

The annual turnover of the Trust for the 20XX income year is less than $X million.

There are no entities related to you, your spouse, your child, or their spouse that:

•         Carry on business, and

•         Generate income from unrelated parties, and

•         Have annual turnover in the 20XX income year that has not been included in the aggregated turnover of the Trust for 20XX.

There are no affiliates or other entities connected with the Trust that had any turnover that is required to be included when calculating the aggregated turnover of the Trust.

The Trust will make an election in the relevant income years to elect you, your spouse, your child and their spouse as controllers of the Trust for the purpose of section 152-78 of the ITAA 1997.

This nomination will be executed and signed by the 4 nominees at or before the time of choosing to apply the small business CGT concessions to the gifting of the Property in accordance with section 103-25 of the ITAA 1997.

Relevant legislative provisions

Section 152-10 of the Income Tax Assessment Act 1997

Section 152-10(1AA) of the Income Tax Assessment Act 1997

Section 152-10(1A) of the Income Tax Assessment Act 1997

Section 152-35 of the Income Tax Assessment Act 1997

Section 152-40 of the Income Tax Assessment Act 1997

Section 152-78 of the Income Tax Assessment Act 1997

Section 152-105 of the Income Tax Assessment Act 1997

Section 328-110 of the Income Tax Assessment Act 1997

Section 328-115 of the Income Tax Assessment Act 1997

Section 328-120 of the Income Tax Assessment Act 1997

Section 328-125 of the Income Tax Assessment Act 1997

Reasons for decision

Under the Small Business CGT Concessions contained within Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997) an individual can disregard the capital gain arising from a CGT event under the 15-year exemption pursuant to section 152-105 of the ITAA 1997. To be eligible for the 15-year exemption taxpayers must:

1.    satisfy the basic conditions under Subdivision 152-A of the ITAA 1997, and

2.    continuously own the relevant CGT asset for at least 15 years, ending just before the CGT event, and

3.    either:

a.    be over 55 years at the time of the CGT event and the event happens in connection with their retirement, or

b.    be permanently incapacitated at the time of the CGT event.

Basic Conditions

The first condition for access to the 15-year exemption is that the basic conditions under Subdivision 152-A of the ITAA 1997 must be satisfied. Under the current scenario, the basic conditions under section 152-10 of the ITAA 1997 are satisfied if:

•         a CGT event happens in relation to your CGT asset, and

•         the CGT event would have resulted in a capital gain (but for the application of the small business CGT concessions), and

•         the further requirements under section 152-10(1A) of the ITAA 1997 for passively held assets are satisfied, and

•         the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997.

Passively held assets - affiliates and entities connected with you

The further requirements under section 152-10(1A) of the ITAA 1997 are satisfied where:

•         you do not carry on a business in the income year, and

•         an entity affiliated or connected with you is a CGT small business entity for the income year, and

•         that connected entity carries on the business in relation to the CGT asset that you own.

Connected entity

Connected entity is defined by virtue of section 328-125 of the ITAA 1997 and affected by nominations that can be made pursuant to section 152-78 of the ITAA 1997 (relating specifically to trusts).

In determining whether a trust is connected to you for the purposes of the small business CGT concessions, a trust will be connected to you in an income year if the Trustee makes a written and signed nomination of not more than four beneficiaries stating they control the trust in that income year under section 152-78 of the ITAA 1997, provided that the trust has a tax loss or no net income for that year and the trustee did not make any distributions of income or capital during that year.

CGT Small Business Entity

An entity will be a CGT small business entity under sections 152-10(1AA) and 328-110 of the ITAA 1997 if they carry on a business in the current income year and their aggregated turnover is less than $2 million in the current or previous year.

An entity's aggregated turnover for an income year is the sum of their annual turnover and the annual turnovers of their connected and affiliated entities, excluding the amounts derived between the entity and their connected and affiliated entities (see section 328-115 of the ITAA 1997).

An entity's annual turnover for an income year is the total ordinary income that an entity derives in the income year in the ordinary course of carrying on a business (see section 328-120 of the ITAA 1997).

Active asset test

An asset will satisfy the active asset test in section 152-35 of the ITAA 1997 if you have owned the asset for more than 15 years and it was an active asset of yours for at least 7.5 years during your ownership of the CGT asset (whether or not the 7.5 years were continuous).

Where you do not carry on a business personally, to be your active asset for a particular income year, the CGT asset must have been used in the course of carrying on a business that is carried on by an entity that is connected with you in that particular year in accordance with section 152-40 of the ITAA 1997.

There are exclusions contained in subsection 152-40(4) of the ITAA 1997. An asset whose main use by you is to derive rent cannot be an active asset under paragraph 152-40(4)(e) of the ITAA 1997. However, when considering whether an asset's main use is to derive rent, subsection 152-40(4A) allows you to disregard any personal use or enjoyment of the asset by you or your affiliated or connected entities.

Application

The gifting of the Property to your child in the 30 June 20XX income year will trigger CGT event A1 and would ordinarily result in a capital gain (but for the application of the small business CGT concessions).

The requirements under section 152-10(1A) of the ITAA 1997 for passively held assets will be satisfied on the basis that, while you do not operate a business in your own name,

•         the Trust carries on the business in relation to your Property

•         the Trust will be connected to you in the 30 June 20XX income year by virtue of the nomination that will be executed under section 152-78 of the ITAA 1997, nominating you as a controller of the trust

•         the Trust is a CGT small business entity for the 20XX income year on the basis that it operated a business in the 20XX income year and its aggregated turnover for the 20XX income year was less than $2 million

•         there were no entities related to you, your spouse, your child or their spouse that carried on business in the 20XX income year and derived income from unrelated parties that was not included in the calculation of the Trust's aggregated turnover for 20XX

The Property also satisfies the active asset test in section 152-35 of the ITAA 1997 on the basis that:

•         the Property has been owned by you for more than 15 years

•         the Property has been used by the Trust in its business for more than 7.5 years

•         you will be connected to the Trust for the relevant income years by virtue of the nominations to be executed under section 152-78 of the ITAA 1997 (ie. you will be connected to the trust for at least 8 years)

•         the main use of the property, despite your child and their family living at the property, does not indicate that the property's main use is to derive rent

Therefore, the basic conditions under Subdivision 152-A of the ITAA 1997 will be satisfied.

Continuously held for 15 years

The second condition for access to the 15-year exemption outlined further above, under section 152-105 of the ITAA 1997, is that you must have continuously owned the relevant CGT asset for at least 15 years, ending just before the CGT event.

You have owned the Property continuously for over 15 year and accordingly this requirement is satisfied.

In connection with your retirement

The third and final requirement for access to the 15-year retirement exemption under section 152-105 of the ITAA 1997 is that you must either:

•         be over 55 years at the time of the CGT event and the event happens in connection with their retirement, or

•         be permanently incapacitated at the time of the CGT event.

You are currently over 55 years old and therefore you will be over 55 years old at the time of the CGT event.

You have been winding down your involvement in the farming business since the sale of Property Y.

Your transition to retirement has also included the transfer of the operations of the business to your child and their family, which was undertaken by virtue of transferring the business operations from the partnership between you and your spouse over to the Trust.

You have demonstrated that active steps have been taken to significantly reduce your ownership of business assets in furtherance of your retirement

Your working hours have been reducing as you transition to retirement.

You and your child have agreed the hours you work on the business will continue to decrease as part of your plan to retire. You suffered a serious health event and have received medical advice to reduce hours actively working on the business.

Your child currently has responsibility for the day-to-day management of the business in conjunction with the Trust's employees.

You will not be receiving any compensation on the sale of the land to your child. However, it is not a requirement for consideration to be received to connect the gifting to your retirement and to be eligible for the concession.

It is our view that the gifting of the property is in connection with your retirement. It is a step taken to facilitate your retirement and:

•         you have demonstrated that active steps have been taken to significantly reduce the business assets that you own in furtherance of your retirement,

•         you have already reduced your work hours and will continue to reduce your work hours in the business,

•         your health has significantly impacted your ability to continue performing the same level of duties on the farm and you will follow the health advice to reduce your working hours further,

•         significant parts of the business have in effect already transitioned to your child and will continue to transition such that your responsibilities will reduce and you will be closer to retirement,

•         active steps will be taken in close proximity after the gifting of the property to reduce your involvement in the financial aspects of the business

•         you and your spouse intend to actually retire and you plan to travel in your retirement (and therefore you will not be in a position to be actively working in the business).

Conclusion

You will satisfy the requirements to utilise the 15-year retirement exemption under section 152-105 of the ITAA 1997 to disregard the capital gain on the gifting of the Property to your child in the 20XX income year.