Edited version of private advice

Authorisation Number: 1052224667550

Date of advice: 5 March 2024

Ruling

Subject: CGT - Small Business Concessions

Question

Will the disposal of the motel property satisfy the basic conditions under subdivision 152-A of the Income Tax Assessment Act 1997 (ITAA 1997)?

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

Person A and Person B run a partnership. The only two partners in the partnership are Person A and Person B.

The partnership only holds the motel property. The acquisition date of the motel property by the partnership was 20XX. The partnership earns rental income from the family trust, pays loan repayments and miscellaneous expenses.

The partnership does not run a business.

The family trust has been running the business for 10 years, leasing the motel property from the partnership.

Person A and Person B are the only directors and shareholders of the trustee company of the family trust and are the main beneficiaries, who manage the family trust's motel business.

The family trust is still currently running the motel business.

The family trust is a small business entity.

The family trust is planning on selling the motel business and the partnership is planning on selling the motel property.

The potential sale of the motel business and the motel property would happen in the 2024 income year.

The partnership and family trust (with the trustee company) are the only active entities Person A and Person B have. The motel business is the only business they are running.

The aggregated turnover of the partnership is less than $2 million.

The aggregated turnover of the trust is less than $2 million.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Subdivision 152-A

Income Tax Assessment Act 1997 - section 152-10

Income Tax Assessment Act 1997 - section 152-35

Income Tax Assessment Act 1997 - section 152-40

Income Tax Assessment Act 1997 - section 152-78

Reasons for decision

Basic conditions

A capital gain that you make may be reduced or disregarded under Division 152-A of the Income Tax Assessment Act 1997 (ITAA 1997) if the following basic conditions are satisfied:

•                    a CGT event happens in relation to a CGT asset of yours in an income year

•                    the event would have resulted in a gain

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

•                    at least one of the following applies;

o   you are a small business entity for the income year

o   you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997

o   you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an interest in an asset of the partnership, or

o   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.

Active asset test

The active asset test is contained in section 152-35 of the ITAA 1997. Where you have owned the asset for less than 15 years, the active asset test is satisfied if the asset was an active asset of yours for a total of at least half of the test period detailed below.

The test period:

•                    begins when you acquired the asset, and

•                    ends at the earlier of

o        the CGT event, and

o        when the business ceased, if the business in question ceased in the 12 months before the CGT event (or such longer time as the Commissioner allows).

Section 152-40 of the ITAA 1997 explains that a CGT asset is an active asset if it is owned by you and is used or held ready for use in a business carried on (whether alone or in partnership) by you, your affiliate, your spouse or child, or an entity connected with you.

Connected entities

Subsection 328-125(2)(b) of the ITAA 1997 says an entity controls another entity if the other entity is a company and the first entity, its affiliates, or the first entity together with its 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, a percentage (the control percentage) that is at least 40% of the voting power in the company.

In this case, Person A and Person B are expecting to dispose of the motel property in the 2024 income year which will result in a capital gain.

Person A and Person B are beneficiaries of the family trust and are the only directors and shareholders of the trustee which also receives share distribution from the family trust. Person A and Person B are also the only partners in their partnership. Therefore, the family trust and partnership are connected through Person A and Person B.

Although Person A and Person B do not carry on a business, the motel property is used by a trust connected to them which is a small business entity. Person A and Person B satisfy the active test as they held the motel property for a number of years and it was used as an active asset by the trust for its entire ownership period. Therefore, the basic conditions under section 152-A of the ITAA 1997 have been satisfied.