Private ruling: CGT concessions for small business
Published: June 2012
Ruling period: Year ended 30 June 2012 | Year ended 30 June 2013
Date scheme commenced: 1 July 2011

Ruling: Q1: Based on the valuation provided, does the Trust meet the maximum net asset test in section 152-15 of the Income Tax Assessment Act 1997 ? | A1: Yes | Q2: Can the valuation provided be reasonably relied upon notwithstanding the fact the value may change after the time the Commissioner takes to finalise this ruling? | A2: No | Q3: When the capital gain flows through to the beneficiaries, will the beneficiaries be able to access the CGT 50% active asset discount? | A3: Yes | Q4: Is Beneficiary 1 a significant individual under section 152-55 of the Income Tax Assessment Act 1997 ? | A4: Yes | Q5: Are both beneficiaries concession stakeholders under section 152-60 of the Income Tax Assessment Act 1997 ? | A5: Yes | Q6: Will the Trust be able to access the CGT retirement exemption? | A6: Yes

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. The business was established more than 12 years ago and is currently being traded via a discretionary trust (the Trust). To sell part of the business equity, it is not feasible to do it through a discretionary trust as the legal structure does not give fixed entitlements and rights to equity holders. Therefore the aim is to convert the existing business structure, at market value, so that a corporate entity, for example a private company can be set up and new equity partners can buy shares into the structure at its business market value. The disposing of the existing business structure will inevitably trigger a CGT event, notably CGT event A1 section 104-10. Based on a recent business valuation obtained from an independent business valuer, it shows that a capital gain will be realised by the trust and subsequently at the hand of the beneficiaries. (A copy of the valuation has been provided.) The Trust wishes to apply the CGT concession for small business. The beneficiaries of the trust are Beneficiary 1 and Beneficiary 2. For the year ended 30 June 2011, Beneficiary 1 and Beneficiary 2 were presently entitled to trust profit of 20% and 4% respectively. The combined total of net assets for the Trust and Beneficiary 1 and Beneficiary 2 is $x,xxx.ooo. The Trust will be making a payment to either or both of Beneficiary 1 and Beneficiary 2 and that amount will be paid to a complying superannuation fund or retirement savings account on their behalf. This will occur within seven days after it chooses to disregard the capital gain. If the payment is made to both Beneficiary 1 and Beneficiary 2 it will be worked out by reference to each of their percentage of the exempt amount. The payment will be equal to whichever is the lesser of the exempt amount or the amount of capital proceeds. Assumptions For the purposes of questions 3 and 6 it is assumed that the trust will meet the basic conditions in 152-10 of the Income Tax Assessment Act 1997 . In relation to questions 4 and 5 it is assumed that Beneficiary 1 is entitled to trust profit for the 2012 and 2013 income years to the same extent as for the 2011 income year. The Trust will obtain valuations for the properties held by Beneficiary 1 and Beneficiary 2.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 102-5, | Income Tax Assessment Act 1997 Section 115-215, | Income Tax Assessment Act 1997 Section 152-10, | Income Tax Assessment Act 1997 Section 152-15, | 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 152-60, | Income Tax Assessment Act 1997 Section 152-65 and | Income Tax Assessment Act 1997 Section 152-305.

Reasons for decision: Summary: Based on the valuation provided, the Trust does meet the maximum asset test in section 152-15 of the Income Tax Assessment Act 1997 (ITAA 1997). | Detailed Reasoning - Detailed reasoning: To qualify for the small business CGT concessions the Trust must satisfy several conditions that are common to all the concessions. These are called the basic conditions. Subsection 152-10 (1) of the ITAA 1997 sets out the basic conditions: A capital gain (except a capital gain from CGT event K7) you make may be reduced or disregarded under this Division if the following basic conditions are satisfied for the gain: (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 small business entity for the income year; (ii) you satisfy the maximum net asset value test (see section 152-15); (iii) 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; (iv) the conditions mentioned in subsection (1A) or (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). The tax agent for the Trust has indicated that as it would not be a small business entity, subparagraph 152-10(1)(a)(ii) of the ITAA 1997 will need to be satisfied. Section 152-15 states the following: You satisfy the maximum net asset value test, if just before the CGT event, the sum of the following amounts does not exceed $6,000,000: · the net value of the CGT assets of yours; · the net value of the CGT assets of any entities connected with you; · the net value of the CGT assets of any affiliates of yours or entities connected with your affiliates (not counting any assets already counted under paragraph (b)). In determining the maximum net asset value, the CGT assets of the Trust and of Beneficiary 1 and Beneficiary 2 have been included. The meaning of net value of the CGT assets can be found in section 152-20 of the ITAA 1997. Subsection (1) states: The net value of the CGT assets of an entity is the amount (whether positive, negative or nil) obtained by subtracting from the sum of the market values of those assets the sum of: (a) the liabilities of the entity that are related to the assets; and (b) the following provisions made by the entity: (c) provisions for annual leave; (d) provisions for long service leave; (e) provisions for unearned income; (f) provisions for tax liabilities. Assets to be included in determining the net value of the CGT assets are not restricted to business assets. They include all CGT assets of the entity, unless the assets are specifically excluded. In the case of a dwelling, an individual only includes the current market value of a dwelling in their net assets to the extent that it is reasonable, having regard to the amount that the dwelling has been used to produce assessable income which gives rise to deductions for interest payments or would give rise to deductions for interest if interest had been paid. The assets included in the calculation of the Trust's maximum net asset value are all CGT assets. This includes the debts owed to the business and cash in bank accounts of Beneficiary 1 and Beneficiary 2. The family home of Beneficiary 1 and Beneficiary 2 has correctly been excluded in the calculation. A liability must be related to the CGT assets of an entity to be taken into account in determining the net value of the CGT assets of the entity. The sum of the market value of the Trust's CGT assets has been reduced by liabilities related either to the business or to the investment properties of Beneficiary 1 and Beneficiary 2. Based on the valuations provided the net value of the CGT assets is less than $6,000,000, therefore the Trust satisfies the maximum net asset value test. | Summary: The valuation provided cannot be reasonably relied upon as the Trust needs to take into account any changes that occur until just before the CGT event. | Detailed Reasoning - Detailed reasoning: The basic conditions which the Trust must satisfy in order to qualify for the small business CGT concessions are set out in subsection 152-10(1) of the ITAA 1997. As the Trust is not a small business entity it will need to satisfy subparagraph 152-10(1)(a)(ii) of the ITAA 1997, the maximum net asset test. Section 152-15 states that: You satisfy the maximum net asset value test, if just before the CGT event, the sum of the following amounts does not exceed $6,000,000: · the net value of the CGT assets of yours; · the net value of the CGT assets of any entities connected with you; · the net value of the CGT assets of any affiliates of yours or entities connected with your affiliates (not counting any assets already counted under paragraph (b)). The words 'just before' in section 152-15 of the ITAA 1997 effectively mean 'immediately before'. If there was an increase in the market value of some of the Trust's CGT assets on the same day, but prior to, the CGT event such that the $6,000,000 threshold was exceeded, the Trust would no longer satisfy the maximum net asset value test 'just before' the CGT event. Consequently, the estimate cannot be relied upon alone to determine if the maximum net asset value test is satisfied. The Trust would need to take into account any changes in the net asset value that may occur up to the time of the CGT event occurring. | Summary: When the capital gain flows through to the beneficiaries they will be able to access the CGT 50% active asset discount as the Trust qualifies for the active asset discount. | Detailed Reasoning - Detailed reasoning: In order to establish whether Beneficiary 1 and Beneficiary 2 would be able to access the CGT 50% active asset discount, it is necessary for the Trust to qualify for the discount. The small business 50% active asset reduction applies automatically if the basic conditions for the concessions for small business are satisfied. Those conditions in subsection 152-10 of the ITAA 1997 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 small business entity for the income year; (ii) you satisfy the maximum net asset value test (see section 152-15); (iii) 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; (iv) the conditions mentioned in subsection (1A) or (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). We have made the assumption that the basic conditions will be satisfied, however a consideration of the active asset test in paragraph (d) is provided. Under subsection 152-35(1) of the ITAA 1997, a CGT asset satisfies the active asset test if: · you have owned the asset for 15 years or less and the asset was an active asset of yours for at least half of the period specified in subsection (2); or · you have owned the asset for more than 15 years and the asset was an active asset of yours for at least 7½ years during the period specified in subsection (2). In subsection 152-35(2) of the ITAA 1997, the period: · begins 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 or any longer period that the Commissioner allows - the cessation of the business. The meaning of an active asset is found in section 152-40 of the ITAA 1997. Subsection (1) it states that: A CGT asset is an active asset at a time if, at that time: you own the asset (whether the asset is tangible or intangible) and it is used, or held ready for use, in the course of carrying on a business that is carried on (whether alone or in partnership) by: · you; or · your affiliate; or · another entity that is connected with you; or · if the asset is an intangible asset - you own it and it is inherently connected with a business that is carried on (whether alone or in partnership) by you, your affiliate, or another entity that is connected with you. The business was established over 12 years ago and was carried on during all of that time. The CGT asset would satisfy the active asset test in paragraph 152-10 (1)(d) of the ITAA 1997 is satisfied. As the Trust will meet the basic conditions it will be entitled to the CGT 50% active asset discount. This concession can then be passed on to the beneficiaries. There are special rules in section 115-215 of the ITAA 1997 that enable concessions obtained by a trust to be passed on to the beneficiaries of the trust who are entitled to a share of the trust's net capital gain. A beneficiary must 'gross up' their share of any capital gain received from a trust by: · multiplying that amount by two, if the trust has applied either the CGT discount or the small business 50% active asset reduction, or · multiplying that amount by four, if the trust has applied both the CGT discount and the small business 50% active asset reduction. The beneficiary's share of the trust capital gains (grossed up if required) is then taken into account in the method statement for calculating the beneficiary's net capital gain to be included in their assessable income (section 102-5 of the ITAA 1997): · the trust capital gains are firstly reduced by an capital losses of the beneficiary, and · any trust capital gain remaining is then reduced by the CGT discount (unless the beneficiary is a company) and the small business 50% active asset reduction, if the trust's capital gain was reduced by these two concessions to arrive at the beneficiary's net capital gain. | Summary: Beneficiary 1 is a significant individual under section 152-55 of the ITAA 1997 as the individual's small business participation percentage in the trust is at least 20%. | Detailed Reasoning - Detailed reasoning: Section 152-55 of the ITAA 1997 states that: An individual is 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%. Under section 152-65 of the ITAA 1997: An entity's small business participation percentage in another entity at a time is the percentage that is the sum of: · the entity's direct small business participation percentage in the other entity at that time; and · the entity's indirect small business participation percentage in the other entity at that time. An entity's direct small business participation percentage in a trust, where entities do not have entitlements to all the income and capital of the trust, and the trust makes a distribution of income or capital, is the percentage of: · distributions of income that the entity is beneficially entitled to during the income year, or · distributions of capital that the entity is beneficially entitled to during the income year. For the year ended 30 June 2011 Beneficiary 1 was presently entitled to trust profit of 20%. We have made the assumption that the entitlement for the 2012 income year will be the same. This means that Beneficiary 1 will have a small business participation percentage of at least 20%. Therefore for the 2011 and 2012 years of income, Beneficiary 1 is a significant individual. | Summary: Beneficiary 1 and Beneficiary 2 are concession stakeholders under section 152-60 of the ITAA 1997 as Beneficiary 1 is a significant individual and is married to Beneficiary 2. | Detailed Reasoning - Detailed reasoning: Under section 152-60 of the ITAA 1997: An individual is a CGT concession stakeholder of a company or trust at a time if the individual is: · a significant individual in the company or trust; or · a spouse of a significant individual in the company or trust, if the spouse has a small business participation percentage in the company or trust at that time that is greater than zero. Beneficiary 1 is a significant individual in the Trust. Beneficiary 2 is the spouse of Beneficiary 1. Therefore they are CGT stakeholders under section 152-60 of the ITAA 1997. | Summary: The Trust can access the retirement exemption. The payments to a complying superannuation fund or retirement savings account on behalf of Beneficiary 1 and Beneficiary 2 will be exempt from income tax. | Detailed Reasoning - Detailed reasoning: In accordance with subsection 152-305(2) of the ITAA 1997 the Trust can choose to disregard all or part of a capital gain if it meets all of the following conditions: · the Trust satisfies the basic conditions · the Trust satisfies the significant individual test · the Trust keeps a written record of the amount it chooses to disregard and, if there are more than one CGT concession stakeholders, each stakeholder's percentage of the exempt amount · the Trust makes a payment to at least one of its CGT concession 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 · where the Trust receives the capital proceeds in instalments, it makes a payment 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 that payment must be immediately paid to a complying superannuation fund or retirement savings account on their behalf. The Trust must notify the trustee of the fund or the retirement savings account at the time of the contribution that the contribution is being made in accordance with the requirements of the retirement exemption. The Trust must make the payments by the later of: · seven days after it chooses to disregard the capital gain, and · seven days after it receives the capital proceeds from the CGT event. As noted previously, we have assumed that the Trust will satisfy the basic conditions in section 152-10 of the ITAA 1997. It will also satisfy the significant individual test. The Trust will be making a payment to either or both of Beneficiary 1 and Beneficiary 2 and that amount will be paid to a complying superannuation fund or retirement savings account on their behalf. This will occur within seven days after it chooses to disregard the capital gain. If the payment is made to both Beneficiary 1 and Beneficiary 2 it will be worked out by reference to each of their percentage of the exempt amount. The payment will be equal to whichever is the lesser of the exempt amount or the amount of capital proceeds. Therefore the Trust meets the conditions in of the ITAA 1997 and it will therefore be able to access the retirement exemption. Any payments to a complying superannuation fund or retirement savings account on behalf of Beneficiary 1 and Beneficiary 2 will be exempt from income tax.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Reasons for decision: While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.