Edited version of private advice

Authorisation Number: 1052376049971

Date of advice: 21 March 2025

Ruling

Subject: Small business concessions

Question 1

Does the sale of Person 1's interests in Landholding A satisfy the basic conditions to access the small business CGT concessions under Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

Yes.

Question 2

Is Person 1 able to choose to obtain the roll-over under subdivision 152-E of the ITAA 1997 in relation to the sale of their interests in Landholding A?

Answer 2

Yes.

Question 3

Will CGT Event J2 under section 104-185 of the ITAA 1997 occur at the end of the replacement asset period in relation to Person 1's purchase of New Land as the replacement asset for their interests in Landholding A?

Answer 3

No.

Question 4

Will the sale of Person 2 and Person 3's interests in Landholding B satisfy the basic conditions to access the small business CGT concessions under Division 152 of the ITAA 1997?

Answer 4

Yes.

Question 5

Will each of Person 2 and Person 3 be able to choose to obtain the roll-over under subdivision 152-E of the ITAA 1997 in relation to their respective sales of their interests in Landholding B?

Answer 5

Yes.

Question 6

Will CGT Event J2 under section 104-185 of the ITAA 1997 occur at the end of the replacement asset period in relation to Person 3's purchase of the interests in Landholding A as the replacement assets for their interest in Landholding B?

Answer 6

No.

This ruling applies for the following periods:

Years ending 30 June 20XX and 20XX

Relevant facts and circumstances

Landholding A and its disposal

A property, Landholding A, is owned as follows:

•                     XX% by an individual, Person 1

•                     XX% by another individual, Person 2.

Person 1 executed a contract of sale during the 2025 income year for their ownership in Landholding A to another individual, Person 3.

Landholding B and its disposal

Another property, Landholding B, is owned as follows:

•                     XX% by Person 1

•                     XX% by Person 2

•                     XX% by Person 3.

It is proposed that Person 2 and Person 3 will dispose of their interests in Landholding B to the Trustee for ABC Trust. This trust is controlled by Person 1 who is the Trustee, Primary Beneficiary and Appointor of that trust.

This disposal will occur within one year of Person 1's disposal of their interest in Landholding A.

Primary production business

A unit trust (the Unit Trust) has carried on a primary production business of agriculture on Landholding A and Landholding B since the land was acquired.

The Unit Trust

A Trust and BC Trust each hold 100 ordinary units in the Unit Trust. There are no other units in the Unit Trust.

Each unit gives the holder the proportionate right to the income and capital of the Unit Trust as assigned to that class of units.

A Trust

The A Trust was established with:

•                     the Principal being Person 1, which gives them, amongst other things, the power to unilaterally remove and appoint the trustee

•                     the primary beneficiaries being Person 1 and Person 1Co Pty Ltd (Person 1Co), and

•                     secondary beneficiaries as the spouse and children of the primary beneficiary.

A Trust distributed more than XX% of its net income to Person 1 in at least 1 of the last 4 income years.

Person 1 is the sole shareholder in Person 1Co.

BC Trust

The BC Trust was established with:

•                     the Principal being Person 2, which gives them, amongst other things, the power to unilaterally remove and appoint the trustee

•                     the primary beneficiaries being Person 2, Person 3 and Person 2Co Pty Ltd (Person 2Co), and

•                     secondary beneficiaries as the spouse and children of a primary beneficiary.

BC Trust distributed more than XX% of its net income to Person 2 in at least 1 of the last 4 income years.

The following shares in Person 2Co have always been held at all relevant times:

•                     1 A class share by Person 2 and

•                     1 C class share by Person 3.

A class shares give shareholders the right to vote at company meetings, whilst C class shares do not give any voting rights.

Person 2 and Person 3 are the directors of Person 2Co.

Annual turnovers

The combined annual turnover of the entities connected with or affiliated with the Unit Trust for the 2024 income year was less than $2 million.

Person 1's replacement asset

Person 1 has signed a contract since the sale of their interest in Landholding A for the purchase of land (New Land), which will be the replacement asset for the sale of this interest. This purchase happened within one year of their sale of their interest in Landholding A.

This land will be used in carrying on a business indefinitely from the time of acquisition by the A Trust.

Person 2 and Person 3's intended replacement assets

Person 3 intends that their acquisition of interests in Landholding A (outlined above) will be their replacement asset for their disposal of interests in Landholding B. Person 3's newly acquired interests in Landholding A will continue to be used in the carrying on of a business indefinitely by the BC Trust.

Person 2 intends to acquire replacement business use assets (either land or plant and equipment) within 2 years of their disposal of interests in Landholding B.

Other relevant facts

Person 1 is over 55 years of age.

The Unit Trust is a fixed trust.

Since Landholding A and Landholding B were acquired, they have been used solely in carrying on a agriculture business.

Person 2 and Person 3 are affiliates pursuant to section 328-130 of the ITAA 1997.

There are no other entities that are connected with or affiliates of Person 1, Person 2 or Person 3 under sections 328-125 and 328-130, respectively.

Does Part IVA apply to this private ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidancerule for income tax'.

Reasons for decision

All references are to the Income Tax Assessment Act 1997, unless otherwise indicated.

Question 1

Summary

The sale of Person 1's interests in Landholding A satisfies the basic conditions to access the small business CGT concessions under Division 152.

Detailed reasoning

The basic conditions for relief under the small business CGT concessions are outlined in subsection 152-10(1). These conditions are:

(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 the gain

(c)           at least one of the following applies:

(i)            you are a CGT small business entity for the income year

(ii)           you satisfy the MNAV test (see section 152-15)

(iii)          you are a partner in a partnership that is a CGT small business entity for the income year and the CGT asset is an interest in an asset of the partnership

(iv)          the conditions mentioned in subsection 152-10(1A) or 152-10(1B) are satisfied in relation to the CGT asset in the income year

(d)           the CGT asset satisfies the active asset test (see section 152-35).

Consideration of each of these requirements in the current circumstances is examined below.

Basic condition (a) of subsection 152-10(1) - A CGT event happens in relation to a CGT asset of yours in an income year

A CGT asset is defined in subsection 108-5(1) as any kind of property or a legal or equitable right that is not property. Note 1 to section 108-5 provides some examples of CGT assets, which include 'land and buildings'.

Person 1's interest in Landholding A, being land and buildings, is a CGT asset.

Subsection 104-10(1) provides that CGT event A1 happens if you dispose of a CGT asset. Subsection 104-10(2) provides that you dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law.

Person 1 has entered contracts of sale for their interest in Landholding A. This change of ownership constitutes a disposal and thus CGT event A1 happened.

Consequently, paragraph 152-10(1)(a) is satisfied.

Basic condition (b) of subsection 152-10(1) - The event would have resulted in the gain

As Person 1 will otherwise make a capital gain from the disposal of their interests in Landholding A, the requirements of paragraph 152-10(1)(b) are satisfied.

Basic condition (c) of subsection 152-10(1) - at least one of the tests in paragraph 152-10(1)(c) applies.

Paragraph 152-10(1)(c) requires that at least one of the requirements in subparagraphs 152-10(1)(c)(i) to 152-10(1)(c)(iv) applies.

One of these requirements, in subparagraph 152-10(1)(c)(iv), is that subsection 152-10(1A) is satisfied, which states:

Passively held assets - affiliates and entities connected with you

(1A) The conditions in this subsection are satisfied in relation to the *CGT asset in the income year if:

(a)           your *affiliate, or an entity that is *connected with you, is a * CGT small business entity for the income year; and

(b)           you do not carry on a *business in the income year (other than in partnership); and

(c)           if you carry on a business in partnership--the CGT asset is not an interest in an asset of the partnership; and

(d)           in any case--the CGT small business entity referred to in paragraph (a) is the entity that, at a time in the income year, carries on the business (as referred to in subparagraph 152 - 40(1)(a)(ii) or (iii) or paragraph 152 - 40(1)(b)) in relation to the CGT asset.

Note 1: The meaning of connected with is affected by section 152-78.

Note 3: For businesses that are winding up, see section 152-49 and subsection 328-110(5).

Subsection 328-125(1) provides that an entity is connected with another entity if either entity controls the other, or if both entities are controlled by the same third entity.

Subsection 328-125(2) relevantly states:

An entity (the first entity ) controls another entity if the first entity, its *affiliates, or the first entity together with its affiliates:

(a)           except if the other entity is a discretionary trust--own, or have the right to acquire the ownership of, interests in the other entity that carry between them the right to receive a percentage (the control percentage) that is at least 40% of:

(i)            any distribution of income by the other entity; or

(ii)           if the other entity is a partnership--the net income of the partnership; or

(iii)          any distribution of capital by the other entity; or ...

In relation to the direct control of a discretionary trust subsections 328-125(3) and (4) state:

(3)           An entity (the first entity) controls a discretionary trust if a trustee of the trust acts, or could reasonably be expected to act, in accordance with the directions or wishes of the first entity, its * affiliates, or the first entity together with its affiliates.

(4)           An entity (the first entity) controls a discretionary trust for an income year if, for any of the 4 income years before that year:

(a)           the trustee of the trust paid to, or applied for the benefit of:

(i)            the first entity; or

(ii)           any of the first entity's *affiliates; or

(iii)          the first entity and any of its affiliates;

any of the income or capital of the trust; and

(b)           the percentage (the control percentage) of the income or capital paid or applied is at least 40% of the total amount of income or capital paid or applied by the trustee for that year.

Subsection 328-125(7) provides that an entity will indirectly control another entity through an interposed entity if it controls an interposed entity that in turn controls (directly or indirectly) that other entity.

Section 328-130 is about when an entity is an 'affiliate of yours'. Subsection (1) provides that an affiliate of yours is an individual or company which acts (or could be reasonably expected to act) in accordance with your directions or wishes (or act in concert with you) in relation to the affairs of the entity's business. Subsection (2) clarifies that an individual or company isn't your affiliate merely because of the nature of the business relationship you and the individual or company share.

A CGT small business entity is defined in section 152-10:

CGT small business entity

(1AA) You are a CGT small business entity for an income year if:

(a)           you are a *small business entity for the income year; and

(b)           you would be a small business entity for the income year if each reference in section 328-110 to $10 million were a reference to $2 million.

Note: For the purposes of subsection (1A) or (1B), in determining whether an entity would be a small business entity, see also sections 152-48 and 152-78.

Taking into account the definition of a small business entity in section 328-110, a CGT small business entity is an entity that carries on business in the current year and either:

•                     it carried on business in the previous year and its aggregated turnover for the previous year was less than $2 million, or

•                     its aggregated turnover for the current year is likely to be less than $2 million (this test is not applicable where the entity has carried on business in each of the last 2 income years and the aggregated turnover for each of those years was more than $2 million), or

•                     its aggregated turnover for the current year, worked out as at the end of the year is less than $2 million.

An entity's aggregated turnover for an income year includes, pursuant to section 328-115, the annual turnovers for the income year of:

•                     the entity

•                     any other entities connected with the entity at any time during the income year, and

•                     any other entities that is an affiliate of the entity at any time during the income year.

Subsection 328-120 defines annual turnover and states:

An entity's annual turnover for an income year is the total * ordinary income that the entity * derives in the income year in the ordinary course of carrying on a * business.

Application to the facts - basic condition (c) of subsection 152-10(1)

Person 1 does not carry on business on Landholding A - the Unit Trust does.

The Unit Trust is controlled by, and thus connected with Person 1 under subsection 328-125(1) as:

•                     XX% of the Unit Trust's units are owned by Person 1 Trust, which gives Person 1 Trust the right to receive more than XX% of the distribution of income and capital of the Unit Trust. Thus, pursuant to subsection 328-125(1), it controls the Unit Trust.

•                     Person 1 controls Person 1 Trust pursuant to section 328-125(3) as Principal of the Person 1 Trust (they also controls the Person 1 Trust pursuant to section 328-125(4) as Person 1 received more than XX% of the income of the Person 1 Trust in the 2021 and 2022 income years, being years within the previous 4 income years).

Thus, the Unit Trust is connected with Person 1 for the purposes of paragraph 152-10(1A)(a).

The Unit Trust will be a CGT small business entity if its aggregated turnover for the previous year did not exceed $2 million or its aggregated turnover for the current year is likely to be less than $2 million.

The Unit Trust's Aggregated Turnover

The Unit Trust's aggregated turnover includes its annual turnover and that of its connected entities and affiliates.

Person 1's control of the Unit Trust, Person 1 Trust and Person 1Co Pty Ltd

The Person 1 Trust holds XX% of the units in the Unit Trust, giving it the right to XX% of the income, capital and voting of the Unit Trust. Thus, the Person 1 Trust controls the Unit Trust pursuant to section 328-125(2).

Based on the facts provided it is reasonable to expect that the trustee of Person 1 Trust would act in accordance with Person 1's wishes. Thus, Person 1 controls the Person 1 Trust in accordance with section 328-125(3).

Additionally, Person 1 has also been allocated more than XX% of the income of the Person 1 Trust in at least one of the last X years, thus, also satisfying the control test of section 328-125(4).

Person 1 controls Person 1Co Pty Ltd pursuant to section 328-125(2) as, being its sole shareholder, Person 1 is entitled to more than XX% of the income and capital distributions of the company, and its voting rights.

Evidently, Person 1 indirectly controls the Unit Trust pursuant to section 328-152(7).

Thus, the aggregated turnover of the Unit Trust will include the annual turnovers of the Person 1 Trust and Person 1Co Pty Ltd as these entities are connected with the Unit Trust pursuant to section 328-125(1), all being entities controlled by Person 1.

Person 2's control of the Unit Trust, BC Trust and Person 2Co Pty Ltd

The BC Trust holds XX% of the units in the Unit Trust, giving it the right to XX% of the income, capital and voting of the Unit Trust. Thus, Person 2 and Person 3 trust controls the Unit Trust pursuant to section 328-125(2).

Based on the facts provided it is reasonable to expect that the trustee of BC Trust would act in accordance with Person 2's wishes. Thus, Person 2 controls the BC Trust in accordance with section 328-125(3).

Additionally, Person 2 has also been allocated more than XX% of the income of the BC Trust in at least 1 of the last X years, thus, also satisfying the control test of section 328-125(4).

Person 2 controls Person 2Co Pty Ltd pursuant to section 328-125(2) as, being its only voting shareholder, Person 1 is entitled to more than XX% of the voting rights of the company.

Evidently, Person 2 indirectly controls the Unit Trust pursuant to section 328-152(7).

Thus, the aggregated turnover of the Unit Trust will also include the annual turnovers of the BC Trust and Person 2Co Pty Ltd as these entities are connected with the Unit Trust pursuant to section 32-125(1), all being entities controlled by Person 2.

Aggregated turnover for the previous year (2024 income year)

For the 2024 income year the aggregated turnover for the Unit Trust, which includes its affiliates and entities it is connected with, is less than $2 million.

As the Unit Trust carried on business in the 2025 income year and its aggregated turnover for the previous year is less than $2m, it is a CGT small business entity for the 2025 income year.

Conclusion on basic condition (c) of subsection 152-10(1)

As the Unit Trust, a CGT small business entity that is connected with Person 1, carried on business in relation to Person 1's interest in Landholding A at a time in the 2025 income year, paragraph 152-10(1A) and therefore subparagraph 152-10(1)(c)(iv) are satisfied for the 2025 income year.

Basic condition (d) of subsection 152-10(1) - the CGT asset satisfies the active asset test

A CGT asset satisfies the active asset test under subsection 152-35(1) 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 7 ½ years during the test period.

Subsection 152-35(2) provides that the test period is from when the asset is acquired until the CGT event. If the business ceases within the 12 months before the CGT event (or such longer time as the Commissioner allows) the relevant period is from acquisition until the business ceases.

A CGT asset will be an active asset at a time if, at that time, you own the asset and the asset was used or held ready for use by you, an affiliate of yours, or by another entity that is 'connected with' you, in the course of carrying on a business (section 152-40).

In the current circumstances, Landholding A has been used in the carrying on of a primary production business from when Person 1 acquired their interest in it until their sale of their interest in Landholding A.

Given that Landholding A has been an active asset for the entirety of Person 1's ownership period, it will be an active asset pursuant to section 152-35. Thus, Landholding A satisfies paragraph 152-10(1)(d).

Conclusion

The gain on the sale of Person 1's interest in Landholding A satisfies the basic conditions for relief under subsection 152-10(1).

Question 2

Summary

Person 1 will be able to choose to obtain the roll-over under subdivision 152-E in relation to the sale of their interests in Landholding A.

Detailed reasoning

Section 152-410 states:

You can choose to obtain a roll-over under this Subdivision for a *capital gain if the basic conditions in Subdivision 152-A are satisfied for the gain.

Note 1:

You can choose the roll-over even if you have not yet acquired a replacement asset or incurred fourth element expenditure, but:

(a)           CGT event J5 happens if, by the end of the replacement asset period, you do not acquire the asset or incur the expenditure (see section 104-197); and

(b)           CGT event J6 happens if, by the end of the replacement asset period, the cost of the replacement asset or the amount of fourth element expenditure incurred (or both) is less than the amount of the capital gain that you disregarded (see section 104-198).

Note 2:

If you have acquired a replacement asset or incurred fourth element expenditure but there is a change in relation to the replacement asset or improved asset after the end of the replacement asset period, CGT event J2 may happen: see section 104-185.

As Person 1's sale of their interest in Landholding A satisfies the basic conditions in Subdivision 152-A, Person 1 may choose to obtain the roll-over under Subdivision 152-E.

Question 3

Summary

CGT Event J2 will not occur at the end of the replacement asset period in relation to the Person 1's purchase of New Land as the replacement asset for their interests in Landholding A.

Detailed reasoning

Section 104-185 relevantly discusses CGT Event J2, relating to the acquisition of replacement asset/s, and relevantly states:

Change in relation to replacement asset or improved asset after a roll-over under Subdivision 152-E: CGT event J2

(1)

CGT event J2 happens if you choose a small business roll-over under Subdivision 152-E for a *CGT event that happens in relation to a *CGT asset in an income year and:

(a)           you *acquire a replacement asset (the replacement asset), or you incur *fourth element expenditure in relation to a CGT asset (also the replacement asset), or you do both, by the end of the *replacement asset period; and

(b)           the replacement asset is your *active asset at the end of the replacement asset period; and

(c)           ...; and

(d)           a change of a kind specified in subsection (2) or (3) happens after the end of the replacement asset period.

(2)

For any replacement asset that satisfied paragraph (1)(b) and, if applicable, paragraph (1)(c), the change is:

(a)           the asset stops being your *active asset; or

(b)           the asset becomes your *trading stock; or

(c)           you start to use the asset solely to produce your *exempt income or *non-assessable non-exempt income.

...

Subsection 104-190(1A) provides that the replacement asset period is the period starting one year before the last CGT event in the income year for which you obtain the roll-over and ending 2 years after the last CGT event in the income year for which you obtain the roll-over.

As Person 1 purchased New Land (their replacement asset) within the replacement asset period and it will continue to be used in the carrying on of a business by an entity connected with their (being the Person 1 Trust), New Land will be an active asset pursuant to section 152-40. Assuming this continues past the replacement asset period, CGT event J2 will not be triggered at this time.

Question 4

Summary

The sale of the Person 2 and Person 3's interests in Landholding B will satisfy the basic conditions to access the small business CGT concessions under Division 152.

Detailed reasoning

Consideration of each of the requirements of subsection 152-10(1) in the current circumstances is examined below.

Basic condition (a) of subsection 152-10(1) - A CGT event happens in relation to a CGT asset of yours in an income year

Person 2 and Person 3's interests in Landholding B, being land and buildings, is a CGT asset.

When Person 2 and Person 3 dispose of their interests in Landholding B, CGT Event A1 will happen pursuant to subsection 104-10(1).

Consequently, paragraph 152-10(1)(a) is satisfied.

Basic condition (b) of subsection 152-10(1) - The event would have resulted in the gain

As Person 2 and Person 3 will each otherwise make a capital gain from the disposal of their interests in Landholding B, the requirements of paragraph 152-10(1)(b) are satisfied.

Basic condition (c) of subsection 152-10(1) - at least one of the tests in paragraph 152-10(1)(c) applies.

Person 2 and Person 3 did not carry on business on Landholding B - the Unit Trust did and does.

As discussed under Question 1, the Unit Trust is controlled by BC Trust, which is controlled by Person 2, and both trusts are thus connected with Person 2.

Person 3 received more than XX% of the income of BC Trust in the 2022 income year, satisfying the control test within subsection 328-125(4).

As Person 3 controls BC Trust, and BC Trust controls the Unit Trust, Person 3 controls the Unit Trust pursuant to subsection 328-125(7). The Unit Trust is thus connected with Person 3 pursuant to subsection 328-125(1).

The Unit Trust is a CGT small business entity (as discussed under Question 1) that carried on business on Landholding B in the 2025 income year, thus satisfying section 152-10(1A) and subparagraph 152-10(1)(c)(iv) for Person 2 and Person 3's sale of their interests in Landholding B.

Basic condition (d) of subsection 152-10(1) - the CGT asset satisfies the active asset test

In the current circumstances, Landholding B has been used in the carrying on of a primary production business from when Person 2 and Person 3 acquired their interests and will be used as such until their sale.

Given that Landholding B has been an active asset for the entirety of Person 2 and Person 3's ownership period, it will be an active asset pursuant to section 152-35. Thus, Landholding B satisfies paragraph 152-10(1)(d).

Conclusion

The gain on the sale of Person 2 and Person 3s' interests in Landholding B will satisfy the basic conditions for relief under subsection 152-10(1).

Question 5

Summary

Person 2 and Person 3s will each be able to choose to obtain the roll-over under subdivision 152-E in relation to their respective sales of their interests in Landholding B.

Reasoning

As Person 2 and Person 3's sale of their interests in Landholding B will satisfy the basic conditions in Subdivision 152-A, they may each choose to obtain the roll-over under Subdivision 152-E.

Question 6

Summary

CGT Event J2 will not occur at the end of the replacement asset period in relation to Person 3's purchase of the interests in Landholding A as the replacement asset for their interests in Landholding B.

Detailed reasoning

As Person 3's newly acquired interest in Landholding A (her replacement asset) will be acquired within the replacement asset period and will continue to be used in the carrying on of a business by an entity connected with their (being the BC Trust), the interest will continue to be an active asset pursuant to section 152-40. Assuming this continues past the replacement asset period, CGT event J2 will not be triggered at this time.