Edited version of private advice

Authorisation Number: 1052164741220

Date of advice: 25 September 2023

Ruling

Subject: CGT - choice to apply small business retirement exemption

Question

Is the Trust entitled to disregard the capital gain arising from the CGT event by making the choice to apply the retirement exemption in Subdivision 152-D of the Income Tax Assessment Act 1997 (ITAA 1997) at the time of lodging its 20XX-XX trust tax return?

Answer

Yes

The Trust is entitled to make the choice to apply the retirement exemption to the gain from the CGT event J5 as:

•         the CGT small business concessions basic conditions do not apply to capital gains arising from the CGT event J5

•         as a result of the distributions made to them in the 20XX-XX financial year, and the application of subsection 152-70(5) of the ITAA 1997, both Individual A and Individual B were significant individuals of the Trust in the 20XX-XX financial year, satisfying the second requirement in paragraph 152-305(2)(b) of the ITAA 1997

•         the company and trust requirements in section 152-325 of the ITAA 1997 will be satisfied

•         a choice to apply the small business retirement exemption has not previously been made by the Trust in relation to the J5 event

The Trust must make the choice in writing at the time of lodging the 20XX-XX income tax return.

This ruling applies for the following period:

Financial year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The Trust is a discretionary trust established to hold property and carry-on business activities.

The trustees of the Trust are Individual A and Individual B.

The appointors of the Trust are Individual A and Individual B.

The Trust held Property A which was an active asset utilised in the running of a business by the Trust for the entire period of ownership.

The business carried on at the premises, along with the Property A was sold by the Trust in the 20XX-XX financial year.

At the date of sale, the Trust satisfied the basic requirements of the small business CGT concessions in Subdivision 152-A of the ITAA 1997 and applied the 50% active asset reduction in Subdivision 152-C of the ITAA 1997 to the gain on sale.

The remaining capital gain of <$500,000 was rolled over under Subdivision 152-E of the ITAA 1997.

Property B was purchased by the Trust a short time after the sale of Property A.

At the time of purchase of Property B, it was the intention of the trustees to use Property B in a business venture.

Based on this intention, the taxation advisor of the Trust at the time advised the trustees that Property B was an appropriate replacement asset which could be applied against the net capital gain from Property A which had been rolled over under Subdivision 152-E of the ITAA 1997.

In line with the intention stated above, further money and a considerable amount of time and effort was spent in renovating Property B so it would be fit for the Trust's business purpose.

The renovations allowing for the business use of Property B were completed within the replacement asset period.

However, the business using Property B had not commenced by the end of replacement asset period and the replacement asset requirements under subsection 104-197(2) of the ITAA 1997 were not satisfied.

The requirement for Property B to be an active asset of the Trust at the end of the replacement asset was not understood by the trustees of the Trust at the time the replacement asset period ended.

After the replacement asset period had expired all activities and intentions to use Property B in the Trust's business ceased. This was due to various reasons including ill-health of the trustees.

There were no other assets acquired by the Trust which met the replacement asset requirements for the purposes of the rollover under Subdivision 152-E of the ITAA 1997 by the end of the replacement asset period.

CGT event J5 occurred at the end of the replacement asset period.

The Trust did not make any distributions of income or capital for the year ended 30 June 20XX.

The most recent year prior to the year ended 30 June 20XX in which the Trust made a distribution of income or capital was the 20XX-XX financial year. The income distribution in that year was directed 50% to Individual A and 50% to Individual B.

The Trust's did not have net income to distribute in the 20XX-XX, 20XX-XX, 20XX-XX, and 20XX-XX financial years.

The Trust did not lodge a tax return in the 20XX-XX financial year.

Making the choice in writing

A choice to apply the Subdivision 152-D small business retirement exemption has not previously been made by the Trust in relation to the CGT event J5 which occurred in the 20XX-XX financial year.

It is proposed the Trust will:

•         now make this choice in writing at the time of lodging its 20XX-XX trust tax return

•         choose to disregard the capital gain of less than $500,000 (being the CGT exempt amount) from the CGT event J5 using the retirement exemption in Subdivision 152-D of the ITAA 1997.

•         also specify in writing that 100% of the of the CGT exempt amount is attributable to Individual A.

Satisfying the company and trust payment conditions as set out in section 152-325 of the ITAA 1997

Within 7 days of making the choice in writing, the Trust will make the payment or payments of the CGT exempt amount to Individual A.

Individual A has previously not exempted any amount of capital gains under Subdivision 152-D of the ITAA 1997. Payments to Individual A of the total CGT exempt amount of less than $500,000 will not exceed their $500,000 retirement lifetime limit.

Individual A will be older than 55 at the time the CGT exempt payment will be made to them.

Individual A was not an employee of the Trust after the 20XX-XX financial year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 Subdivision 152-D

Income Tax Assessment Act 1997 section 152-55

Income Tax Assessment Act 1997 section 152-70

Income Tax Assessment Act 1997 subsection 152-305(2)

Income Tax Assessment Act 1997 subsection 152-305(4)

Income Tax Assessment Act 1997 section 152-315

Income Tax Assessment Act 1997 section 152-320

Income Tax Assessment Act 1997 section 152-325