Private ruling: Small business CGT concessions
Date of advice: 5 September 2016
Published: November 2016
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Is the Trust an entity that is 'connected with you'? | A1: Yes. | Q2: Was your interest in the property an active asset under section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A2: Yes. | Q3: If the maximum net asset value and/or small business entity tests are passed, will you meet the basic conditions for the small business CGT concessions? | A3: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 152-10 | Income Tax Assessment Act 1997 Subsection 152-10(1A) | Income Tax Assessment Act 1997 Paragraph 152-10(1)(b). | Income Tax Assessment Act 1997 Paragraph 152-10(1)(d). | Income Tax Assessment Act 1997 Subsection 152-10(1B) | Income Tax Assessment Act 1997 Section 152-35. | Income Tax Assessment Act 1997 Paragraph 152-35(1)(a). | Income Tax Assessment Act 1997 Paragraph 152-35(1)(b). | Income Tax Assessment Act 1997 Subparagraph 152-40(1)(a)(ii). | Income Tax Assessment Act 1997 Subparagraph 152-40(1)(a)(iii). | Income Tax Assessment Act 1997 Section 152-110 | Income Tax Assessment Act 1997 Subsection 328-110(1) | Income Tax Assessment Act 1997 Section 328-115 | 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(3) | Income Tax Assessment Act 1997 Subsection 328-125(4) | Income Tax Assessment Act 1997 Section 328-130 | Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for decision: Summary: You and the other co-owners are affiliates as you all act in concert with each other in relation to your business affairs due to your close family relationship. You all are trustees of the Trust and therefore control the Trust. As you and your affiliates control the Trust, you are connected with the Trust. Your CGT asset (your interest in the property) was used in a business carried on by an entity connected with you (the Trust). Although part of the property was rented out, its main use was not to derive rent and therefore is not excluded from being an active asset. The asset was an active asset for more than the 7.5 years required. Consequently, if the maximum net asset value and/or small business entity tests are passed, you will meet the basic conditions for the small business CGT concessions. | Detailed Reasoning - Detailed reasoning: Small Business Concessions Section 152-10 of the ITAA 1997 contains the basic conditions you must satisfy to be eligible for the small business capital gains tax (CGT) concessions. These conditions are: (a) a CGT event happens in relation to a CGT asset in an income year. (b) the event would have resulted in a 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 in section 152-15 of the ITAA 1997 (iii) you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an asset of the partnership or (iv) the conditions in subsection 152-10(1A) or (1B) of the ITAA 1997 are satisfied in relation to the CGT asset in the income year. (d) the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997. | Detailed Reasoning - 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 (as referred to in subparagraph 152-40(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 at least 7.5 years during the test period. 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 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. Importantly, paragraph 152-40(4)(e) of the ITAA 1997 provides that an asset whose main use is to derive rent cannot be an active asset. | Detailed Reasoning - Connected entities: The term 'connected with' is defined in subsection 995-1(1) of the ITAA 1997 as: 'an entity is connected with you in the circumstances described in section 328-125 of the ITAA 1997.' Subsection 328-125(1) of the ITAA 1997 states that an entity is connected with another entity if: a) either entity controls the other entity in a way described in this section, or b) both entities are controlled in a way described in this section by the same third entity. Direct control of a discretionary trust may be established via either of two paths: subsection 328-125(3) or subsection 328-125(4) of the ITAA 1997. Subsection 328-125(3) of the ITAA 1997 provides that an entity controls a discretionary trust if the trustee of that trust acts, or could reasonably be expected to act, in accordance with the directions or wishes of the entity, its affiliates, or the entity together with its affiliates. Subsection 328-125(4) provides, in part, that an entity directly controls a discretionary trust for an income year if, for any of the preceding four income years, the discretionary trust distributed at least 40% of any income or capital paid for that year to either the entity, its affiliates, or to the entity together with any of its affiliates. | Detailed Reasoning - Affiliates: An affiliate is, according to section 328-130 of the ITAA 1997, an individual or a company who acts, or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you, in relation to the affairs of the business of the individual or company. | Detailed Reasoning - Application to your circumstances: You and the other co-owners sold the property giving rise to CGT event A1 and a gain was made on the sale. Your interest in the property was a passive asset so for it to qualify for the small business CGT concessions it must have been used in a business carried on by an entity connected with you. The property was used by the Trust to carry on its business. You and your co-owners are members of the same family and managed the day to day operation of the business for the entire period the business operated. It is accepted that you and your co-owners are affiliates as you all act in concert with each other in relation to your business affairs due to your close family relationship. It is also accepted that you and your affiliates control the Trust as you are all trustees of the Trust. Therefore, the Trust is connected with you. With respect to the active asset test it was noted that part of the property was rented out. Taxation Determination TD 2006/78 considers, amongst other issues, the situation where there is part business and part rental use of an asset. It states that an asset owned by the taxpayer and used partly for business purposes and partly to derive rent can be an active asset under subsection 152-40(4) of the ITAA 1997 where it is considered that the main use of the premises is not to derive rent. In deciding if the property was mainly used to earn rent the Commissioner will consider a range of factors such as: • the comparative times of use of the premises (between rent and business), and • the comparative levels of income derived from the different uses of the asset. A review of the information provided indicates the trust used approximately Z% of the area of the property to operate a business and X% of the property was used to derive rent. In relation to the proportion of income earned from the property, a review of tax office's records shows that the business income generated from the property was more than Y% of the total income derived from the property . In this case, after considering a range of factors such as the area of the premises used and the levels of income we consider that the main use of the property during your period of ownership was not to derive rent. You owned the asset for more than 15 years and it was an active asset for more than 7.5 years. Consequently the active asset test is met. As your asset was an active asset used in a business carried on by an entity connected with you, if the maximum net asset value and/or small business entity tests are passed, you will meet the basic conditions for the small business CGT concessions.

Relevant facts: You and some family members acquired a property as co-owners more than 15 years ago. | A discretionary trust (the Trust) was created that carried on a business on the property during the entire period you had an ownership interest in it. | There was no lease agreement covering the use of the property by the Trust. | You and the co-owners of the property: | • are the trustees and beneficiaries of the Trust | • operated the business without a formal agreement | • operated the business as members of a family to make a profit. | Approximately X% of the floor area of the property was rented out at various times to various entities. | During the period you had an ownership interest in the property, more than Y% of the income generated by the property was from business income with the remainder being rental income. | The sale of the property resulted in a capital gain.