Edited version of private advice

Authorisation Number: 1052358852543

Date of advice: 10 February 2025

Ruling

Subject: CGT - small business concessions

Question 1

Can the Trust claim the 15-year exemption under section 152-110 of the Income Tax Assessment Act 1997 (ITAA 1997) for the capital gains made on the sale of the A XXXX roll?

Answer

Yes.

Question 2

Can the Trust claim the 15-year exemption under section 152-110 of the ITAA 1997 for the capital gains made on the sale of the C XXXX roll and the D XXXX roll?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

The Trust commenced operations as a XXXX business in MM 20YY.

The beneficiaries of the Trust are person A and person B.

The XXXX roll of the Trust (A XXXX roll) has been progressively built up from 20YY. The Trust has acquired the majority of their properties to manage from word of mouth (recommendations), advertising, and through properties that they have sold that have turned into being XXXX.

The Trust purchased three additional XXXX rolls:

•                     B XXXX roll was purchased in MM 20YY.

•                     C XXXX roll purchased in MM 20YY.

•                     D XXXX roll was purchased in MM 20YY.

The Trust recently decided to downsize their business to concentrate on sales and they have sold all the XXXX rolls in MM 20YY.

The total properties on the sale contract are XX.

XX of those properties were from the C and D XXXX roll that they had physically purchased.

The rest of the properties were one's that they had built up by themselves on the A XXXX roll.

The B XXXX roll had no XXXX properties on the books when they did the sale contract.

Person A was over 55 years old at the time of the sale.

Before the sale, person A was completing XX hours of work per week.

Person A is currently completing reduced hours per week as the Trust has received the majority of settlement proceeds, however there is a bit of hold up with the adjustment with retention of properties with the solicitors, so they haven't received the final instalment yet.

After the settlement has finalised, person A is planning on stopping work altogether.

In 20YY, 20YY, 20YY, 20YY, 20YY, 20YY, 20YY, 20YY, 20YY and 20YY person A received a distribution of 20% or more from the Trust.

In 20YY and 20YY company A received over XX% (40%) distribution from the Trust. The shareholders for company A are Trust A which person A and person B are the primary beneficiaries. If dividends were paid it would be 50/50 to person A and person B.

In 20YY and 20YY Trust B received YY% and 100% distribution, respectively from the Trust. The primary beneficiaries of Trust B are person A and person B. When there have been distributions paid over the years it was always 50/50 to person A and person B.

In 20YY and 20YY there was a tax loss resulting in no distribution of income or capital for those years.

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 152-55

Income Tax Assessment Act 1997 section 152-65

Income Tax Assessment Act 1997 section 152-70

Income Tax Assessment Act 1997 section 152-75

Income Tax Assessment Act 1997 section 152-110

Question 1

Can the Trust claim the 15-year exemption under section 152-110 of the ITAA 1997 for the capital gains made on the sale of the A XXXX roll?

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;

-                    You are a CGT small business entity for the income year

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

-                    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

-                    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 outlined in section 152-35 of the ITAA 1997. The active asset test is satisfied 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 period specified in subsection (2); 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 during the period specified in subsection (2).

The test period beings when you acquired the asset and ends at the earlier of the CGT event and if the relevant business ceased to be carried on in the 12 months before that time - the cessation of the business.

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.

Application to your circumstances

The Trust created the A XXXX roll in 20YY5 sold it MM 20YY. The trust owned the A XXXX roll for over 15 years. The Trust used the XXXX rolls for their entire ownership period to carry on a XXXX business. The sale of the XXXX roll in the 20YY income year resulted in a capital gain.

15-year exemption

Section 152-110 of the ITAA 1997 says that for the trust to be eligible for the small business 15-year exemption it must satisfy the basic conditions and three further conditions:

•                     the Trust continuously owned the CGT asset for the 15-year period ending just before the CGT event;

•                     the Trust 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 Trust owned the CGT asset;

•                     either:

-                    the significant individual is 55 or over at the time of the CGT event and the event happens in connection with their retirement; or

-                    the significant individual is permanently incapacitated at the time of the CGT event.

Whether a CGT event happens in connection with an individual's retirement depends on the particular circumstances of each case. A CGT event may be in connection with your retirement even if it occurs at some time before retirement.

Significant Individual

Section 152-55 of the ITAA 1997 defines a significant individual in a company or a trust at a time if, at that time, the individual has a small business participation percentage in the company or trust of at least 20%.

Section 152-65 of the ITAA 1997 says an entity's small business participation percentage in another entity at a time is the percentage that is the sum of:

(a)            the entity's direct small business participation percentage in the other entity at that time; and

(b)            the entity's indirect small business participation percentage in the other entity at that time.

Direct small business participation percentage

The table in subsection 152-70(1) of the ITAA 1997 helps to work out an entity's direct small business participation percentage.

An entity's direct small business participation percentage in a trust (where entities have entitlements to all the income and capital of the trust) is:

(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.

Discretionary trusts

Subsection 152-70(4) of the ITAA 1997 states:

Subsections (5) and (6) apply for the purpose of working out the direct small business participation percentage in an entity in connection with a CGT event that happened in an income year (the CGT event year), if:

(a)            the entity is a trust (where entities do not have entitlements to all the income and capital of the trust); and

(b)            during the relevant year mentioned in item 3 of the table in subsection (1) (disregarding subsection (5)), the trustee mentioned in that item:

(i)          does not make a distribution of income; and

(ii)          does not make a distribution of capital.

Subsection 152-70(5) of the ITAA 1997 states:

Treat the references in that item to the relevant year as being references to:

(a)            if the trustee made a distribution of income or capital during the CGT event year - the CGT event year; or

(b)            otherwise - the last income year before the CGT event year in which the trustee did make a distribution of income or capital.

Indirect small business participation percentage

Subsection 152-75(1) of the ITAA 1997 states:

Work out the indirect small business participation percentage that an entity (the holding entity) holds at a particular time in another entity (the test entity ) by multiplying:

(a)            the holding entity's direct small business participation percentage (if any) in another entity (the intermediate entity) at that time; by

(b)            the sum of:

(i)          the intermediate entity' direct small business participation percentage (if any) in the test entity at that time; and

(ii)          the intermediate entity's indirect small business participation percentage (if any) in the test entity at that time (as worked out under one or more other applications of this section).

Application to your circumstances

In 20YY, 20YY, 20YY, 20YY, 20YY, 20YY, 20YY, 20YY, 20YY and 20YY XX received a distribution of 20% or more from the Trust.

In 20YY and 20YY income years the Trust did not make any distributions so paragraph 152-70(4)(b) of the ITAA 1997 says that you apply subsection 152-70(5) of the ITAA 1997. For the 20YY and 20YY income years there was no distribution, so we look at the last year distribution was made which was 20YY.

In the 20YY income year the distribution went XX% (20%) to person A so person A is considered to have a XX% small business participation percentage in the Trust in the 20YY income year.

Applying paragraph 152-70(5)(b) of the ITAA 1997, person A would be considered to have a XX% small business participation percentage in the Trust in 20YY and 20YY.

In the 20YY and 20YY income years company A received a XX% distribution from the Trust. As person A has 50% shareholding in company A and received YY% distribution from the trust in the 20YY and 20YY income years, the indirect participation percentage results in YY% (20%).

In the 20YY and 20YY income years Trust B received a XX% and 100% distribution, respectively from the Trust. As person A receives 50% of the distribution from Trust B a YY% and ZZ% distribution from the trust in the 20YY and 20YY income year. This results in person A having an indirect small business participation percentage of YY% (20%) and ZZ% (20%) in the trust, respectively.

In summary, person A is considered to have a 20% or higher small business participation percentage in 20YY to 20YY resulting in there being a significant individual of the trust for 15 years.

In conclusion the A XXXX roll was continuously owned by the Trust for over 15-years. The Trust satisfies the basic conditions under Division 152-A of the ITAA 1997. The Trust is considered to have a significant individual for 15 years and one of those significant individuals, person A was over 55 years old when the XXXX roll sold. They reduced their hours as a result of the sale and plans to stop working altogether once settlement has finalised. Therefore, the Trust is entitled to the small business 15-year exemption on this disposal of the A XXXX roll.

Question 2

Can the Trust claim the 15-year exemption under section 152-110 of the ITAA 1997 for the capital gains made on the sale of the C XXXX roll and the D XXXX roll?

Reasons for decision

Section 152-110 of the ITAA 1997 says that for the trust to be eligible for the small business 15-year exemption it must satisfy the basic conditions and further conditions:

•                     the Trust continuously owned the CGT asset for the 15-year period ending just before the CGT event;

•                     the Trust 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 Trust owned the CGT asset;

•                     either:

-                    the significant individual is 55 or over at the time of the CGT event and the event happens in connection with their retirement; or

-                    the significant individual is permanently incapacitated at the time of the CGT event.

Whether a CGT event happens in connection with an individual's retirement depends on the particular circumstances of each case. A CGT event may be in connection with your retirement even if it occurs at some time before retirement.

Application to your circumstances

The Trust purchase the C XXXX roll in MM 20YY and the D XXXX roll in MM 20YY and sold them both in MM 20YY. The Trust has not owned the C XXXX roll or D XXXX rolls for 15 years therefore the Trust is not eligible for the 15-year exemption under section 152-110 of the ITAA 1997.