Edited version of private advice

Authorisation Number: 1052042705880

Date of advice: 25 October 2022

Ruling

Subject: CGT - small business concessions

Question

Does the Estate satisfy the significant individual test for the purpose of applying the small business retirement exemption to reduce the gain from the sale of the Property?

Answer

Yes

This ruling applies for the following period:

Income year ended 30 June 20YY

The scheme commences on:

1 July 20YY

Relevant facts and circumstances

The deceased Will allowed their child (Individual A) to use of the Property and other assets of the Estate for their own business as long as they wished as long as certain conditions were met.

The deceased Will provided their grandchild (Individual B) the remainder interest in the Estate, which included the Property.

Since the deceased's death the Property was used in a business conducted in a technical and physical sense by Individual A, however, for administrative purposes it was conducted in the name of the Estate.

Individual B was not interested in running the business. Individual B agreed to a variation of the terms of the Will whereby they would be paid an amount from the sale of the Property. It was agreed that the remaining net proceeds from the sale of Property would be paid to Individual A.

The Estate sold the Property with contract date and settlement in the income year ended 30 June 20YY.

Up until the income year ended 30 June 20YY the executors of the Estate have not made a distribution of income or capital for tax purposes.

The Estate made distributions of capital to Individual A and Individual B in the income year ended 30 June 20YY.

Individual A was made beneficially entitled to more than 20% of the capital distributions made by the Estate in the income year ended 30 June 20YY.

The Estate will not make distributions of income in the income year ended 30 June 20YY.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-50

Income Tax Assessment Act 1997 section 152-55

Income Tax Assessment Act 1997 section 152-65

Income Tax Assessment Act 1997 section 152-70

Reasons for decision

Question 1

Summary

As Individual A's small business participation percentage in the income year is more than 20%, they will be a significant individual for the income year ended 30 June 20YY. This includes the relevant time being just before the CGT event. The Estate will satisfy the significant individual test in section 152-50 of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the sale of the Property.

Detailed reasoning

An entity satisfies the significant individual test if the entity had at least one 'significant individual' just before the CGT event (section 152-50 of the ITAA 1997).

An individual is a 'significant individual' in a trust if at the relevant time, they have a small business participation percentage in the trust of at least 20% (section 152-55 of the ITAA 1997).

The small business participation percentage is calculated by considering both the direct and indirect participation percentage (section 152-65 of the ITAA 1997).

Item 3 of the table in section 152-70, provides the relevant method for determining the small business participation for a trust, where entities do not have entitlements to all the income and capital. It provides that an entity has a direct small business participation percentage at the relevant time 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.

The relevant time in this case is just before the CGT event on DD MM 20YY, and the relevant year is the year of the CGT event being the income year ended 30 June 20YY

Individual A was made beneficially entitled to more than 20% of distributions of capital made by the Estate in the income year ended 30 June 20YY and there were no distributions of income. Therefore, Individual A had a direct small business participation percentage in the trust of more than 20% for the income year ended 30 June 20YY.

As Individual A's small business participation percentage in the income year is more than 20%, they will be a significant individual for the income year ended 30 June 20YY. This includes the relevant time being just before the CGT event on DD MM 20YY. The Estate will satisfy the significant individual test in section 152-50 of the ITAA 1997 in relation to the sale of the Property.