Private ruling: Small business CGT concessions – small business retirement exemption
Date of advice: 11 July 2017
Published: November 2017
Ruling period: Year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Are you eligible to choose to apply the small business retirement exemption to the capital gain you made on the disposal of the Capital gains tax (CGT) asset? | A1: Yes. | Q2: Are you eligible to choose to apply the small business roll-over to all or part of the capital gain you made on the disposal of the CGT asset? | A2: Yes.

Relevant facts and circumstances: You are a discretionary trust. You acquired a CGT asset. The CGT asset has been used exclusively by a connected entity of yours throughout your ownership period. You sold the CGT asset and made a capital gain on the disposal. You had a significant individual (Individual A) just before you disposed of the CGT asset. You will receive the capital proceeds from the sale of the CGT asset in instalments. Individual A received a distribution of 100% of your net income in the year ended 30 June 2016. You have resolved to distribute 100% of any distributable net income for the year ended 30 June 2017 to Individual A. Individual A is under 55 years of age. Individual A has never used any of their $500,000 CGT retirement exemption limit. You will make a payment up to Individual A’s CGT retirement exemption limit to a member account of a complying superannuation fund in their name by the later of seven days after making the choice to apply the small business retirement exemption or seven days after you receive the capital proceeds from the disposal. At the time of making the contribution you will notify the complying superannuation fund that the contribution is being made in accordance with the requirements of the small business retirement exemption. You will keep a written record of the amount you choose to disregard under the small business retirement exemption.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 152 | Income Tax Assessment Act 1997 Subdivision 152-A | Income Tax Assessment Act 1997 subsection 152-10(1A) | Income Tax Assessment Act 1997 section 152-35 | Income Tax Assessment Act 1997 section 152-50 | Income Tax Assessment Act 1997 section 152-55 | Income Tax Assessment Act 1997 section 152-60 | Income Tax Assessment Act 1997 section 152-75 | Income Tax Assessment Act 1997 Subdivision 152-C | Income Tax Assessment Act 1997 section 152-220 | Income Tax Assessment Act 1997 Subdivision 152-D | Income Tax Assessment Act 1997 subsection 152-310(2) | Income Tax Assessment Act 1997 section 152-315 | Income Tax Assessment Act 1997 subsection 152-315(1) | Income Tax Assessment Act 1997 subsection 152-315(2) | Income Tax Assessment Act 1997 subsection 152-315(3) | Income Tax Assessment Act 1997 subsection 152-315(4) | Income Tax Assessment Act 1997 subsection 152-320(1) | Income Tax Assessment Act 1997 section 152-325 | Income Tax Assessment Act 1997 Subdivision 152-E | Income Tax Assessment Act 1997 section 152-400 | Income Tax Assessment Act 1997 section 328-125 | Income Tax Assessment Act 1997 subsection 328-125(1) | Income Tax Assessment Act 1997 subsection 328-125(2) | Income Tax Assessment Act 1997 subsection 328-125(3) | Income Tax Assessment Act 1997 subsection 328-125(4) | Income Tax Assessment Act 1997 subsection 328-125(5) | Income Tax Assessment Act 1997 subsection 328-125(6) | Income Tax Assessment Act 1997 subsection 328-125(7)

Reasons for decision: Detailed Reasoning - Small business retirement exemption: The rules covering the small business retirement exemption are contained in Subdivision 152-D of the Income Tax Assessment Act 1997 ( ITAA 1997). A trust can choose to disregard all or part of a capital gain under the small business retirement exemption if: ● the basic conditions in Subdivision 152-A are satisfied for the capital gain ● the trust satisfies the significant individual test, and ● the company or trust conditions in section 152-325 are satisfied. | Detailed Reasoning - Basic conditions: The basic conditions contained in Subdivision 152-A of the ITAA 1997, are: (a) a CGT event happens in relation to an asset that you own (b) the event would (apart from Division 152) have resulted in a capital gain (c) 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 that 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 (iv) the conditions mentioned in subsections 152-10(1A) or 152-10(1B) (for passively held assets) are satisfied in relation to the CGT asset in the income year, and (d) the asset satisfies the active asset test. Connected entity An entity is connected with another entity if either entity controls the other entity, or if both entities are controlled by the same third entity (section 328-125 of the ITAA 1997). Direct control of a discretionary trust 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 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(4) of the ITAA 1997). Alternatively, 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 (subsection 328-125(3) of the ITAA 1997). Passively held assets – entities connected with you The conditions in subsection 152-10(1A) of the ITAA 1997 allow you to access the concessions for a CGT asset you own where you are not carrying on a business, but that CGT asset is used in the business of your affiliate or an entity connected with you. 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 small business entity for the income year, that is, the income year in which the CGT event happens to your CGT asset (b) you do not carry on a business in the income year other than in partnership (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 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 subparagraph152-40(1)(a)(ii) or (iii) or paragraph 152-40(1)(b)) in relation to the CGT asset. Active asset test The active asset test is contained in section 152-35 of the ITAA 1997. The active asset test is satisfied if: ● 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 detailed below, or ● you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of least 7.5 years during the test period. The test period: ● begins when you acquired the asset, and ● ends at the earlier of ● the CGT event, and ● when the business ceased, if the business in question ceased in the 12 months before the CGT event (under subparagraph 152-35(2)(b)(ii) of the ITAA 1997 the Commissioner can allow a longer period than 12 months). 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. | Detailed Reasoning - Significant individual test: An entity satisfies the significant individual test if the entity had at least one significant individual just before the CGT event (section 152-50 of the ITAA 1997). Significant individual An individual is a significant individual in a trust if they have a small business participation percentage in the trust of at least 20% (section 152-55 of the ITAA 1997). | Detailed Reasoning - CGT concession stakeholder: An individual is a CGT concession stakeholder of a trust if they are a significant individual in the trust, or the spouse of a significant individual, if the spouse has a small business participation percentage in the trust at that time that is greater than zero (section 152-60 of the ITAA 1997). | Detailed Reasoning - Trust conditions – section 152-325 of the ITAA 1997: A trust must make a payment to at least one of its CGT concessions stakeholders if the trust receives an amount of capital proceeds from a CGT event for which it makes a choice (to apply the small business retirement exemption) under Subdivision 152-D of the ITAA 1997 (subsection 152-325(1)). If the trust receives the capital proceeds from the CGT event in instalments, subsection (1) applies to each instalment in succession (up to the relevant CGT exempt amount) (subsection 152-325(2) of the ITAA 1997). The payment must be made by the later of seven days after making the choice or seven days after the trust receives the capital proceeds from the relevant CGT event (subsection 152-325(4) of the ITAA 1997). The amount of the payment, or the sum of the amount of the payments required to be made under section 152-325 of the ITAA 1997 must be equal to the lesser of the amount of the capital proceeds received and the relevant CGT exempt amount (subsection 152-325(5)). If the trust is required (under section 152-325 of the ITAA 1997) to make 2 or more payments to a single CGT concession stakeholder (whether or not by the same time), the trust may meet this requirement by making one payment or by making separate payments (subsection 152-325(6)). If a CGT concession stakeholder is under 55 years of age just before a payment is made in relation to them, the trust must make the payment by contributing it to a complying superannuation fund or RSA on their behalf, and the trust must notify the trustee of the fund or the RSA provider at the time the contribution is made that the contribution is made in accordance with section 152-325 of the ITAA 1997 (subsection 152-325(7)). Any payment or part of one the trust makes to a CGT concession stakeholder to comply with section 152-325 of the ITAA 1997 is not assessable income, and is not exempt income, of the CGT concession stakeholder to whom it is made and cannot be deducted from the trust’s assessable income (subsection 152-310(2)). | Detailed Reasoning - Choosing the amount to disregard: A trust can choose to disregard all or part of each capital gain to which Subdivision 152-D of the ITAA 1997 applies (subsection 152-315(1)). However, the choice must be made in a way that, for a trust, the CGT retirement limit of each individual for whom the choice is made is not exceeded (subsection 152-315(2)). The amount chosen for the asset is the CGT exempt amount (subsection 152-315(3) of the ITAA 1997). The CGT exempt amount must be specified in writing (subsection 152-315(4)). An individual’s CGT retirement limit at a time is $500,000, reduced by the CGT exempt amounts specified in choices previously made by or for the individual under Subdivision 152-D of the ITAA 1997 (subsection 152-320(1)). | Detailed Reasoning - Small business roll-over: The rules covering the small business roll-over are contained in Subdivision 152-E of the Income Tax Assessment Act 1997 (ITAA 1997). The small business rollover allows you to defer the making of a capital gain from a CGT event happening if the basic conditions in Subdivision 152-A of the ITAA 1997 are satisfied (section 152-400 of the ITAA 1997). | Detailed Reasoning - Application to your circumstances: The basic conditions contained in Subdivision 152-A of the ITAA 1997 are satisfied for the gain because: ● CGT event A1 happened when you disposed of the CGT asset ● the event (apart from Division 152) resulted in the capital gain ● you did not carry on a business during the year ended 30 June 2017 and the CGT asset has been used exclusively by a small business entity that is a connected entity of yours, and ● the CGT asset satisfies the active asset test (in relation to that use by the connected entity. The significant individual test is also satisfied as Individual A was a significant individual in you just before the CGT event. In addition, you will: ● keep a written record of the amount you will choose to disregard (the CGT exempt amount) under the small business retirement exemption ● you will make a payment to Individual A (a CGT concession stakeholder) by contributing an amount equal to the CGT exempt amount to a complying superannuation fund on their behalf ● you will notify the trustee of the complying superannuation fund at the time of making the contribution that the contribution is being made in accordance with section 152-325 of the ITAA 1997, and ● you will make the payment by the later of seven days after making the choice to disregard the capital gain or seven days after you receive the capital proceeds from the CGT event. Therefore, you are entitled to apply the small business 50% (active asset) reduction to the net capital gain remaining after applying any current year capital losses and any unapplied prior year net capital losses, and the general 50% CGT discount. Note that you can choose not to apply the 50% active asset reduction. You may then choose to disregard part of the remaining net capital gain under the small business retirement exemption. The amount of the capital gain that you can choose to disregard under the retirement exemption must not exceed the CGT retirement exemption limit of each CGT concession stakeholder receiving a payment. After applying the small business retirement exemption you may choose to defer all or part of the remaining capital gain under the small business roll-over.