Private ruling: Small Business Capital Gains Tax Concessions
Published: April 2013
Ruling period: Year ended 30 June 2012 | Year ending 30 June 2013 | Year ending 30 June 2014
Date scheme commenced: 1 July 2012

Ruling: Q1: Can the trust apply the 50% general discount to the capital gain? | A1: Yes. | Q2: Will the trust satisfy the basic conditions for the small business capital gains tax concessions in relation to property A? | A2: Yes. | Q3: Can the trust apply the retirement exemption to the capital gain? | A3: Yes. | Q4: Will the trust satisfy the basic conditions for the small business capital gains tax concessions in relation to the units at property B used in the business carried on by the company? | A4: Yes.

Relevant facts and circumstances: An individual is the appointer of the trust and received 100% of the distributions of the trust in the 2010-11 and 2011-12 financial years. The trust acquired property A. The property had X units X of the X units were withdrawn from the business. The remainder of the units were withdrawn from the business at a later date. X of the units sold in 2012 and a further X in 2013. X properties are at various stages of being placed on the market. Sales of the units are slow due to the real estate market. It also takes time to prepare the units for sale as they need to be repaired, renovated and appropriate Council permits need to be acquired. The trust is intending to sell these units prior to the 30 June 2014. The trust purpose built units at property B. Property B had X units. The trust was operating a business in relation to both sets of units up until 30 June 2011. A lease agreement (the agreement) was entered into between the company and the trust. From this point in time, the company operated a business in relation to property B. It is proposed that the property B units be sold in the near future. The company is a small business entity. The trust holds at least 40% of the shares in the company. The shares have voting rights.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 115-10, | Income Tax Assessment Act 1997 Subdivision 152-A, | Income Tax Assessment Act 1997 Subdivision 152-C, | Income Tax Assessment Act 1997 Subdivision 152-D, | Income Tax Assessment Act 1997 subsection 152-10(1A), | Income Tax Assessment Act 1997 section 152-35, | Income Tax Assessment Act 1997 section 152-40, | Income Tax Assessment Act 1997 subsection 152-40(1), | Income Tax Assessment Act 1997 subsection 152-40(4), | Income Tax Assessment Act 1997 section 152-10, | Income Tax Assessment Act 1997 section 152-60, | Income Tax Assessment Act 1997 section 328-125, | Income Tax Assessment Act 1997 subsection 328-110(5).

Reasons for decision: Summary: Under section 115-10 of the Income Tax Assessment Act 1997 (ITAA 1997), to qualify for the 50% general discount a capital gain must be made by an individual, a complying superannuation entity, a trust or a life insurance company. The capital gain must result from a capital gains tax (CGT) event happening after 11:45am on 21 September 1999 and must not have an indexed cost base. Also, the gain must result from a CGT event happening to an asset that was acquired at least 12 months before the CGT event. | Detailed Reasoning - Application to your circumstances: In this case, the trust acquired property. The property will be gradually sold during the 2012-13 and 2013-14 financial years. The property will have been held for more than 12 months; therefore the trust is entitled to apply the 50% discount to the capital gain. | Detailed Reasoning - Question 2: Basic conditions To qualify for the small business CGT concessions, you must satisfy several conditions that are common to all the concessions. These are called the basic conditions. Subdivision 152-C of the ITAA 1997 applies the small business 50% active asset reduction provided the basic conditions are satisfied. · A capital gain that you make may be reduced or disregarded under Division 152 of the 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 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. Winding up a business previously carried on Subsection 328-110(5) applied to you as if you carried on a business in an income year if in that year you were winding up a business you previously carried on and you were a small business entity for the income year in which you stopped carrying on that business. | Detailed Reasoning - Application to your circumstances: In this case, the trust was carrying on a business up until 30 June 2011. Prior to this the trust removed some property from the business. It would be reasonable to expect that the winding up of the student accommodation business could take some time as the trust requires appropriate permits to be granted by Council. Also, the trust has experienced some difficultly in disposing of the properties due to the market conditions. Taking into consideration the timeframe involved, being that it is anticipated that the units will be sold within 3 financial years following the cessation of the business, it would be reasonable to conclude that the business is still being wound up during this period. Accordingly, subsection 328-110(5) of the ITAA 1997 will apply to treat the trust as a small business entity. Active asset test A requirement of the active asset test contained in section 152-35 of the ITAA 1997 is that the CGT asset must be an active asset for at least half of the period from when you acquired it until the earlier of the CGT event or when you ceased business, if the relevant business had ceased to be carried on in the 12 months before the CGT event. The meaning of an active asset is set out in section 152-40 of the ITAA 1997. It must firstly satisfy one of the 'positive tests' in subsection 152-40(1) of the ITAA 1997 and then also not be excluded by one of the exceptions in subsection 152-40(4) of the ITAA 1997. Under subsection 152-40(1) of the ITAA 1997 a CGT asset is an active asset (subject to the exclusions) if it is owned and used, or held ready for use, in the course of carrying on a business by you or your small business CGT affiliate or another entity that is connected with you under paragraph 152-40(1)(c) of the ITAA 1997. The combined effect of sections 152-35 and 152-40 of the ITAA 1997 is that the asset will meet the active asset test if the asset was used, or held ready for use, in the course of carrying on a business for at least half of the time period it was owned, subject to the exclusions in subsection 152-40(4) of the ITAA 1997. The following assets cannot be active assets (subsection 152-40(4) of the ITAA 1997): · interests in a connected entity (other than those satisfying the 80% test) · shares in companies and interests in trusts (other than those satisfying the 80% test) · shares in widely held companies unless they are held by a CGT concession stakeholder of the company · shares in trusts that are similar to widely held companies unless they are held by a CGT concession stakeholder of the trust or other exceptions for trusts with 20 members or less apply · financial instruments, including loans, debentures, bonds, promissory notes, futures contracts, forward contracts, currency swap contracts, rights and options · an asset whose main use in the course of carrying on the business is to derive interest, an annuity, rent, royalties or foreign exchange gains. However, such an asset can still be an active asset if it is an intangible asset that has been substantially developed, altered or improved by the taxpayer so that its market value has been substantially enhanced or its main use for deriving rent was only temporary. | Detailed Reasoning - Application to your circumstances: In this case, the information provided is that property has been active for more than half the ownership period. Therefore, the trust has satisfied all of the basic conditions for the small business capital gains tax concessions. As the trust has satisfied the basic conditions, they are entitled to apply the 50% active asset reduction to the capital gain. | Detailed Reasoning - Question 3: A company or trust can choose to disregard all or part of a capital gain under the retirement exemption in Subdivision 152-D of the ITAA 1997 if: · the basic conditions are satisfied · the significant individual test is satisfied · a written record is kept of the amount disregarded · a payment is made to at least one of the CGT concessions stakeholders worked out by reference to each individual's percentage of the exempt amount · the payment is equal to the exempt amount or the amount of capital proceeds, whichever is less, and · where the capital proceeds are received in instalments, a payment is made to a CGT concession stakeholder for each instalment in succession. If a CGT concession stakeholder is under 55 years old just before receiving a payment, an amount equal to the payment must be immediately paid to a complying superannuation fund on their behalf. The company or trust must notify the trustee of the fund at the time of the contribution that the contribution is being made in accordance with the requirements of the retirement exemption. CGT concession stakeholder As per section 152-60 of the ITAA 1997 an individual is a CGT concession stakeholder of a company or trust if they are a significant individual or the spouse of a significant individual where the spouse has a small business participation percentage in the company or trust at that time that is greater than zero. Significant individual An individual is a significant individual in a company or trust if they have a small business participation percentage in the company or trust of at least 20%. This 20% can be made up of direct and indirect percentages. An entities direct small business participation percentage in a trust is the percentage of: · the income of the trust that the entity is beneficially entitled to receive, or · the capital of the trust that the entity is beneficially entitled to received. An entities indirect small business participation percentage in a company (or trust) is calculated by multiplying together an entity's direct participation percentage in an interposed entity and the interposed entity's total participation percentage (both direct and indirect) in the company or trust. | Detailed Reasoning - Application to your circumstances: In this case, the individual has received 100% of the distributions from the trust. The individual is considered a significant individual and CGT concession stakeholder of the trust. The trust is eligible to choose the retirement exemption, provided the conditions associated with making the payment are satisfied. | Detailed Reasoning - Question 4: As outlined in question 2, to qualify for the small business CGT concessions, you must satisfy several conditions that are common to all the concessions. These are called the basic conditions. From 30 June 2011, the trust no longer carried on a business in relation to property B. However, the company used the units in their business. If the company is an affiliate or connected entity of the trust, then the trust may satisfy the basic conditions. Connected entity (other than a discretionary trust) Under section 328-125 of the ITAA 1997, an entity controls another entity if it or its affiliate (or all of them together): · beneficially owns or has the right to acquire beneficial ownership of, interest in the other entity that give the right to receive at least 40% of any distribution of income or capital by the other entity, or · if the other entity is a company, beneficially owns, or has the right to acquire beneficial ownership of, equity interest in the company that give at least 40% of the voting power in the company. | Detailed Reasoning - Application to your circumstances: In this case, the trust is not currently carrying on a business in relation to the proeprty. The units owned by the trust are used by IHRSC which is a small business entity carrying on a student accommodation business. The trust owns at least 40% of the shares in the company. The trust is connected with the company. Therefore, the units are used in a business carried on by a small business entity that is connected with the trust. Passively held assets - affiliates and entities connected with you The conditions in subsection 152-10(1A) of the ITAA 1997 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; 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 small business entity referred to in paragraph (a) is the entity that, at a time in the income year, carries on the business in relation to the CGT asset. Provided the company carries on a business in relation to the asset during the income year they are sold, the conditions in subsection 152-10(1A) of the ITAA 1997 will be satisfied. Active asset test As outlined in question 2, the CGT asset must be an active asset for at least half of the period from when you acquired it until the earlier of the CGT event or when you ceased business. | Detailed Reasoning - Application to your circumstances: In this case, the property has been active for at least half the ownership period. Therefore, the trust has satisfied all of the basic conditions for the small business capital gains tax concessions in relation to property B. As the trust has satisfied the basic conditions, they are entitled to apply the 50% active asset reduction to the capital gain.