Edited version of private advice

Authorisation Number: 1052098960324

Date of advice: 24 March 2023

Ruling

Subject: CGT - small business tax concessions

Question 1

Will the Unit Trust satisfy the basic conditions under section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997) for small business relief upon the disposal of the Property?

Answer

Yes.

Question 2

Will the Unit Trust satisfy the requirements in section 152-110 of the ITAA 1997 to apply the 15-year exemption in respect of the sale of the Property?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Individual A and Individual B have each owned more than 40% the units in the Unit Trust since it settled more than 15 years ago. Their respective unit holdings in the Trust providing each with more than 40% of the beneficial entitlement to any income or capital distributions the trustee may make.

The Unit trust acquired the Property more than 15 years ago.

Individual A and Individual B operate a repair business through the Company.

Individual A and Individual B have been directors of the Company and have each have owned 50% of its shares for more than 15 years.

The Property has been used by the Company in carrying on the business from the date of acquisition until the current date, a period of more than 15 years.

The Company carries on a business and its connected entities and affiliates had a turnover of less than $X million in the 20XX-20XX financial year.

The net value of CGT assets owned by the Unit Trust, its connected entities and affiliates will be less than $X million at the time of the Property sale for the purpose of the maximum net asset value test in section 152-15 of the ITAA 1997.

The Unit Trust intends to sell the Property and apply the small business CGT 15-year exemption concession to the expected capital gain.

Individual A and Individual B are both over the age of 55 and will retire in connection with the sale of the Property.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 section 152-15

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152-40

Income Tax Assessment Act 1997 section 152-55

Income Tax Assessment Act 1997 section 152-65

Income Tax Assessment Act 1997 section 152-70

Income Tax Assessment Act 1997 section 328-110

Income Tax Assessment Act 1997 section 328-125

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 Subdivision 152-B

Reasons for decision

Question 1

Summary

The Unit Trust will meet the basic conditions for relief set out in subsection 152-10(1) of the ITAA 1997 for the sale of the Property. The sale of the Property will be a CGT event which is expected to result in a gain. The maximum net asset value test is satisfied. The active asset test is satisfied as the Property has been owned by the Unit Trust for more than 15 years and the Property has been used in a connected entities business for more than 7 ½ years of this ownership period.

Detailed Reasoning

Basic conditions for relief

The basic conditions for relief under the CGT small business concessions are outlined in Subdivision 152-A of the ITAA 1997.

Subsection 152-10(1) of the ITAA 1997 provides that a capital gain you make may be reduced or disregarded 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 (apart from this Division) 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 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.

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

A CGT event A1 will occur when the Unit Trust sells the Property. The sale of the Property is expected to result in a capital gain. Both paragraph 152-10(1)(a) and (b) of the ITAA 1997 are satisfied.

The Unit Trust will satisfy the net asset value test in the period covered by this private ruling. Therefore, subparagraph 152-10(1)(c)(ii) of the ITAA 1997 is satisfied.

Active Asset

Subsection 152-40(1) of the ITAA 1997 provides that a CGT asset is an active asset at a time if it is used, or held ready for use, in the course of carrying on a business that is carried on by you, or your affiliate, or another entity that is connected with you.

In this case the Unit Trust does not use the Property to carry on a business. The Unit Trust will need to be connected to the Company which uses the Property in the course of carrying on its business for the Property to be an active asset for the purpose of the active asset test.

Connected Entities

Under subsection 328-125(1) of the ITAA 1997, an entity is connected with another entity if:

(a)  either entity controls the other entity; or

(b)  both entities are controlled by the same third entity.

Paragraph 328-125(2)(a) of the ITAA 1997 provides that a trust (other than a discretionary trust) is controlled by you, if you, your affiliates, or you together with your affiliates have the right to receive 40% or more of any income and capital the trust distributes.

Paragraph 328-125(2)(b) of the ITAA 1997 provides that a company is controlled by you if you, or you together with your affiliates, own, or have the right to acquire the ownership of, equity interests in the company that carry between them the right to exercise, or control the exercise of, at least 40% of the voting power in the company.

Individual A and Individual B have each owned more than 40% of the units in the Unit Trust for more than 15 years. They each, therefore, have had the right to receive 40% or more of any income and capital distributions from the Unit Trust. Individual A and Individual B have both controlled the Unit Trust for more than 15 years under paragraph 328-125(2)(a) of the ITAA 1997.

Individual A and Individual B have each owned 50% of the shares with voting rights in the Company for more than 15 years. They each, therefore, have owned the right to exercise, or control the exercise of, at least 40% of the voting power in the Company. Each Individual A and Individual B have both controlled the Company for more than 15 years under paragraph 328-125(2(b) of the ITAA 1997.

The Company and the Unit Trust have been controlled by either Individual A or Individual B under subsection 328-125(2) of the ITAA 1997 for more than 15 years. The Company and Unit Trust have therefore been controlled by the same third entity and have been connected under paragraph 328-125(1)(b) of the ITAA 1997, for more than 15 years.

Active asset test

Under subsection 152-35(1) of the ITAA 1997, a CGT asset will satisfy the active asset test if:

(a)  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, or

(b)  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 7½ years during the test period.

Under subsection 152-35(2) of the ITAA 1997, the period:

(a)  begins when you acquired the asset; and

(b)  ends at the earlier of:

                    (i)        the CGT event; and

                   (ii)        if the relevant business ceased to be carried on in the 12 months before that time or any longer period that the Commissioner allows - the cessation of the business.

For more than 15 years, the Unit Trust has been connected to the Company and the Company has used the Property in carrying on its business. It follows that the Property has been an active asset of the Unit Trust for more than 15 years.

The Property has been owned by the Unit Trust for more than 15 years. As it has been an active asset for more than 7 ½ years during this time, subsection 152-35(1)(b) of the ITAA 1997 is satisfied.

As the active asset test is satisfied, paragraph 152-10(1)(d) of the ITAA 1997 is satisfied, and all required basic conditions of subsection 152-10(1) of the ITAA 1997 are satisfied.

Question 2

Summary

The requirements to allow the Unit Trust to apply the small business 15-year exemption to the sale of the Property are satisfied. These include the basic conditions as outlined in question one of this ruling. It owned the Property for more than 15 years and both Individual A and Individual B were significant individual for at least 15 years. Both individuals will be at least 55 years at the time the CGT event happens. The sale of the Property will happen in connection with Individual A and Individual B's retirement.

Detailed reasoning

15-year exemption

Subdivision 152-B of the ITAA 1997 outlines the conditions that need to be met for a capital gain to be disregarded under the small business 15-year exemption.

Under subsection 152-110(1) of the ITAA 1997, an entity that is a trust can disregard any capital gain arising from a CGT event if all of the following conditions are satisfied:

(a)  the basic conditions in Subdivision 152-A 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.

A significant individual is defined in section 152-55 of the ITAA 1997 as an individual who has a small business participation percentage in the company of at least 20%.

A small business participation percentage in another entity is defined in section 152-65 of the ITAA 1997 as the sum of an entity's direct and indirect small business participation percentages in the other entity.

An entity's direct percentage in a trust (where entities have entitlements to all the income and capital of the trust) is the lesser of the percentage of its beneficial entitlement to either any income or capital distribution the trustee may make (item 2 in subsection 152-70(1) of the ITAA 1997).

Application to your circumstances

As outlined in question one, the basic condition for relief in Subdivision 152-A of the ITAA 1997 will be satisfied for the expected gain from the proposed sale of the Property satisfying paragraph 152-110(a) of the ITAA 1997.

The Unit Trust has owned the Property for at least 15 years and therefore paragraph 152-110(b) of the ITAA 1997 will be satisfied.

Individual A and Individual B have both held more than 40% of the units in the Unit Trust for more than 15 years. Their respective unit holdings in the Trust providing each with more than 40% of the beneficial entitlement to any income or capital distributions the trustee may make. This amount being more than 20%, both individuals have been significant individuals of the Unit Trust for more than 15 years satisfying paragraph 152-110(c) of the ITAA 1997.

Individual A and Individual B will both be over the age of 55 and will retire in connection with the sale of the Property, satisfying paragraph 152-110(1)(d) of the ITAA 1997.

As all the conditions of subsection 152-110(1) of the ITAA 1997 will be satisfied, the 15-exemption will be able to be applied to the sale of the Property and the Unit Trust will be entitled to disregard its capital gain.