Edited version of private advice

Authorisation Number: 1052155576135

Date of advice: 18 August 2023

Ruling

Subject: CGT - small business - basic conditions

Question 1

Does the Trust satisfy the basic conditions for relief in Subdivision 152-A of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the proposed sale of the Property?

Answer

Yes.

Question 2

Will the Trust's disposal of the Property be in connection with the retirement of a significant individual of the Trust, allowing it to disregard the gain from the sale under the small business 15-year exemption in Subdivision 152-B of the ITAA 1997?

Answer

No.

Question 3

Can the Trust choose to apply the small business retirement exemption reduction in Subdivision 152-D of the ITAA 1997 to the gain arising from the sale of the Property?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 2024

The scheme commenced on:

1 July 2023

Relevant facts and circumstances

The Trust is a discretionary trust.

The Trust purchased the Property approximately 30 years ago.

The Property was used in a business that the Trust carried on from the date the Property was acquired.

The Trust's use of the Property ended approximately 10 years later when the Trust sold the business. The Property has been leased since this time.

The beneficiaries of the Trust retired at the time the Trust's business was sold.

The Trust intends on selling the Property in the 2023-24 financial year.

The Trust will satisfy the maximum net asset value test under section 152-15 of the ITAA 1997 in the financial year the Property will be sold.

The trustee of the Trust will make distributions in the financial year the Property is sold (the CGT event year), so as to satisfy the significant individual test under section 152-50 of the ITAA 1997.

If the Trust chooses to apply the retirement exemption in Subdivision 152-D of the ITAA 1997, the Trust will keep the necessary records, and make the necessary payments, to satisfy the conditions under sections 152-320 and 152-325 of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 subdivision 152-B

Income Tax Assessment Act 1997 subdivision 152-D

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 subsection 152-10(1)

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 152-50

Income Tax Assessment Act 1997 section 152-110

Income Tax Assessment Act 1997 subparagraph 152-110(d)(i)

Income Tax Assessment Act 1997 section 152-305

Income Tax Assessment Act 1997 section 152-320

Income Tax Assessment Act 1997 section 152-325

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997.

Question 1

Does the Trust satisfy the basic conditions for relief in Subdivision 152-A in relation to the proposed sale of the Property?

Summary

The basic conditions in subsection 152-10(1) are satisfied. A CGT event will occur when the Trust sells the Property, which will result in a capital gain. The maximum net asset test under section 152-15 will be satisfied at the time. The active asset test under section 152-35, is satisfied as the asset was owned for more than 15 years and was an active asset for more than 7 ½ years during the 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.

Subsection 152-10(1) 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;

(a)  the event would (apart from this Division) have resulted in a gain;

(b)  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;

(c)   the CGT asset satisfies the active asset test in section 152-35.

Maximum net asset value

You satisfy the maximum net asset value test under section 152-15 if, just before the CGT event, the sum of the following amounts does not exceed $6,000,000:

(a)  the net value of the CGT assets of yours;

(b)  the net value of the CGT assets of any entities connected with you;

(c)   the net value of the CGT assets of any affiliates of yours or entities connected with your affiliates (not counting any assets already counted under paragraph (b)).

Active asset

Subsection 152-35(1) states that a CGT asset satisfies the active asset test if:

(a)  you have owned the asset for 15 years or less andthe asset was an active asset of yours for a total of at least half of the period of ownership, 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 7 ½ years.

Subsection 152-35(2) provides that the test period begins when you acquired the asset and ends at the earlier of:

                    (i)        the time of 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.

Subsection 152-40(1) 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 (either alone or in partnership) by you, or your affiliate, or another entity that is connected with you.

Application to your circumstances

A CGT event will occur when the Trust sells the Property which will result in a capital gain satisfying paragraphs 152-10(1)(a) and (b).

The maximum net asset test under section 152-15 will be satisfied in the financial year the Property is sold, therefore paragraph 152-10(1)(c) will be satisfied.

The Trust owned the Property and ran the business from the Property for a period of more than 7 ½ years of its ownership period of more than 15 years. Consequently, the Property satisfies the active asset test under section 152-35, and the final basic condition in paragraph 152-10(1)(d) is satisfied.

Question 2

Will the Trust's disposal of the Property be in connection with the retirement of a significant individual of the Trust, allowing it to disregard the gain from the sale under the small business 15-year exemption in Subdivision 152-B?

Summary

Although the basic small business CGT concessions have been met, and the Trust has owned the Property for over 15 years, and relevant individuals are over 55, the CGT event will not be in connection with their retirement. Therefore, the Trust does not satisfy the requirements to apply the small business 15-year exemption to the sale of the Property.

Detailed reasoning

The 15-year exemption in Subdivision 152-B can be used to disregard the gain arising from a CGT asset it owned for more than 15 years if certain conditions have been met.

Section 152-110 provides a small business 15-year exemption for companies and trusts. Under this section, the company or trust can disregard the capital gain from the disposal of a CGT asset if:

(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; and

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

(i)    at least 55 years old at that time and the event happened in connection with their retirement or

(ii)   permanently incapacitated at that time.

We consider that the retirement of the individual must have some proximity to the CGT event for the CGT event to be in connection with retirement, i.e., that the individual is retiring at or near the time of the CGT event.

Application to your circumstances

The relevant beneficiaries of the Trust retired at the time the Trust sold its business, being approximately 20 years before the Property is to be sold.

Due to the length of time between the retirement of the relevant beneficiaries and the sale of the Property, we do not consider their retirement to be in connection with the CGT event. Consequently, the fourth and final condition in subparagraph 152-110(d)(i) is not satisfied.

Therefore, the Trust does not satisfy the conditions under section 152-110 to apply 15-year exemption to disregard the gain from the sale of the Property.

Question 3

Can the Trust choose to apply the small business retirement exemption reduction in Subdivision 152-D to the gain arising from the sale of the Property?

Summary

The Trust can choose to disregard all or part of the capital gain from the sale of the interest in the Property under the small business retirement exemption in Subdivision 152-D.

Detailed reasoning

Retirement exemption

Subsection 152-305(2) of the ITAA 1997 provides that a company or trust can disregard any capital gain arising if:

(a)  the basic conditions are satisfied;

(b)  the significant individual test is satisfied under section 152-50;

(c)   the company or trust conditions in section 152-325 are satisfied.

Significant individual

An individual is a significant individual in a company or trust if they have a small business participation percentage in the company or trust of at least 20% (section 152-55). The small business participation percentage can be made up of direct and indirect percentages (section 152-65).

The direct small business participation percentage is provided by section 152-70. Item 3 of the table in subsection 152-70(1) is relevant. It provides that an entity holds a direct small business participation percentage equal to the following:

(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.

Company or trust requirements

Section 152-325 of the ITAA 1997 provides that a company or trust must further satisfy the following conditions in order to be eligible to disregard all or part of a capital gain:

•         you keep a written record of the amount you choose to disregard (the exempt amount) and, if there is more than one CGT concession stakeholder, each stakeholder's percentage of the exempt amount,

•         you make a payment to at least one of your CGT concession stakeholders worked out by reference to each individual's percentage of the exempt amount,

•         the payment is equal to the exempt amount or the amount of capital proceeds, whichever is less, and

•         where you receive the capital proceeds in instalments, you make a payment to a CGT concession stakeholder for each instalment in succession (up to the asset's CGT exempt amount).

An individual is a CGT concession stakeholder of a company or trust at a time if the individual is:

(a)  a significant individual in the company or trust; or

(b)  a spouse of a significant individual in the company or trust, if the spouse has a small business participation percentage in the company or trust at that time that is greater than zero.

You must make payments if you choose the retirement exemption for an event 7 days after you choose to disregard the capital gain or seven days and seven days after you receive the capital proceeds from the CGT event.

If a CGT concession stakeholder is under 55 years old just before a payment is made in relation to them, the company must make the payment to the CGT concession stakeholder by contributing it to a complying superannuation fund or retirement savings account (RSA) on their behalf. The company must notify the trustee of the fund or RSA at the time of the contribution that the contribution is being made in accordance with the requirements of the retirement exemption.

There is no requirement to make this contribution if the stakeholder was 55 years old or older.

Application to your circumstances

As per question 1, the Trust satisfied the basic conditions in Subdivision 152-A for the capital gain from the sale of the Property, satisfying paragraph 152-305(2)(a).

The Trust proposes to sell the Property in the 2023-24 financial year. The trustee of the Trust will make the required distributions to a significant individual in the CGT event year to satisfy the significant individual test under section152-50, consequently paragraph 152-305(2)(b) will also be satisfied.

The individuals who will be the significant individuals of the Trust in the 2023-24 financial year, have not utilised the CGT small business retirement exemption previously, and therefore have their full lifetime limit of $500,000 under section 152-320, available.

The Trust will satisfy the additional requirements in section 152-325 by keeping records and making the required payments of the exempt amounts, therefore paragraph 152-305(2)(c) will be satisfied.

The Trust is entitled to choose to apply the small business CGT retirement exemption as all the required conditions under subsection 152-305(2) will be satisfied.