Private ruling: CGT Small business concessions
Published: July 2012
Ruling period: Year ended 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: 1. Will the capital gain made by the Trust on the disposal of the property be reduced under the small business 50% reduction? | A3: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 - Section 103-25 | Income Tax Assessment Act 1997 - Section 104-10 | Income Tax Assessment Act 1997 - Division 152 | Income Tax Assessment Act 1997 - Subdivision 152-A | Income Tax Assessment Act 1997 - Subdivision 152-C | Income Tax Assessment Act 1997 - Section 152-10 | Income Tax Assessment Act 1997 - section 152-35 | Income Tax Assessment Act 1997 - section 152-40 | Income Tax Assessment Act 1997 - Section 152-60 | Income Tax Assessment Act 1997 - Section 152-70 | Income Tax Assessment Act 1997 - section 152-205 | Income Tax Assessment Act 1997 - Section 152-315 | Income Tax Assessment Act 1997 - Section 152-320 | Income Tax Assessment Act 1997 - section 328-110 | Income Tax Assessment Act 1997 - section 328-120 | Income Tax Assessment Act 1997 - section 328-125

Reasons for decision: Summary: A capital gain may be reduced or disregarded under Division 152 of the ITAA 1997 if the following basic conditions are satisfied for the gain: 1. A CGT event happens in relation to a CGT asset in an income year; 2. The event would have resulted in a gain; 3. The conditions in subsection 152-10(1A) of the ITAA 1997 are satisfied; and 4. The CGT asset satisfies the active asset test. | Detailed Reasoning - Conditions 1 & 2: In this case, CGT event A1 happened when the contract of sale was entered into in 2010 to sell the property. The property is a CGT asset and the disposal resulted in a gain. Therefore, the first two conditions are satisfied. | Detailed Reasoning - Condition 3: The conditions in subsection 152-10(1A) of the ITAA 1997 will be satisfied if: · the Trust did not carry on a business in the income year; and · an affiliate of the Trust or an entity that is connected with the Trust is a small business entity for the income year and carries on a business in relation to the CGT asset. | Detailed Reasoning - Trust not carrying on a business: The Trust received rental income from leasing the property to the Company. The receipt of income from the lease of an asset does not of itself amount to the carrying on of a business ( FC of T v. McDonald 87 ATC 4541; (1987) 18 ATR 957), but instead would generally be the passive receipt of income from property. Therefore, the Trust did not carry on a business itself. | Detailed Reasoning - Connected entity: Under subsection 328-125(1) of the ITAA 1997, an entity is connected with another entity if both entities are controlled by the same third entity. Subsection 328-125(3) of the ITAA 1997 states that an entity is taken to control 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. In this case, A is a director and shareholder of the trustee company and is also the appointor of the Trust. It is reasonable to expect that the trustee would act in accordance with the wishes of A. Therefore, A would control the Trust for the purposes of this test. A also owns more than 40% of the shares in the Company, this ownership would entitle A to exercise more than 40% of the voting power of the Company and, consequently, A would be considered to control the Company (paragraph 328-125(2)(b) of the ITAA 1997). As A is controller of both the Company and the Trust, the Company is considered to be connected with the Trust pursuant to section 328-125 of the ITAA 1997. | Detailed Reasoning - Small business entity: Under section 328-110 of the ITAA 1997, you are a small business entity if you are carrying on a business in the current year and your aggregate turnover for the previous year, and/or current year, was less than $2 million. the Company carried on an operation on the property of significant scale such that it would satisfy the definition of a business in the current year (2011) and previous year (2010) and had done so since the property was purchased by the Trust around 20 years ago. In this case, the Company's business turnover for the 2008-09 and 2009-10 financial years was less than $2 million. In the 2010-11 financial year, the aggregate turnover is also less than $2 million. Subsection 328-120(5) of the ITAA 1997 does require that turnover be adjusted where a business is carried on for only part of the financial year. However, in this case, the business continued to be carried on throughout the whole year, although there was a reduction in the volume of business in the last quarter of the 2011 financial year. An entity's aggregated annual turnover also includes the turnover of any connected entities and affiliates for relevant years. However, an entity's aggregated annual turnover does not include income from dealings between you and a relevant business entity or from dealings between any of your relevant business entities. In this case, the relevant entities include A, B, C and the Trust. None of these entities had any ordinary income arising from the ordinary course of carrying on a business and their income for the income year was from dealings between the Company and the entities or from dealings between the entities and is not included in the aggregated annual turnover of the Company. Therefore, it is accepted that the Company was a small business entity, pursuant to section 328-110 of the ITAA 1997, for the income year. As the Company is connected with the Trust, is a small business entity for the income year and carried on a business in relation to the CGT asset, condition 3 is satisfied. | Detailed Reasoning - Active asset: The requirements of an active asset and the active asset test are set out in Subdivision 152-A of the ITAA 1997. For a CGT asset of a business to be an active asset for the purposes of Division 152 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 paragraph 152-40(1)(a) 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. However, paragraph 152-40(4)(e) of the ITAA 1997 provides that an asset whose main use in the course of carrying on the business is to derive rent cannot be an active asset (unless that main use was only temporary). That is, even if the asset is used in a business it will not be an active asset if its main use is to derive rent. Taxation Determination TD 2006/78 states (paragraph 22) that whether an assets main use is to derive rent will depend on the particular circumstances surrounding the derivation of income. The issue to be considered is whether an occupant of part of the premises is a tenant or a lodger/boarder with a licence to occupy, and ultimately, this is a question of fact depending on all the circumstances involved. Relevant factors include whether the occupier has a right to exclusive possession ( Radaich v. Smith (1959) 101 CLR 209 at 222), the degree of control retained by the owner and the extent of any services provided by the owner such as room cleaning, provision of meals, supply of linen and shared amenities (Appah v. Parncliffe Investments Ltd [1964] 1 All ER 838 ; Marchant v. Charters [1977] 3 All ER 918). In this case, the arrangements between the Company and long term tenants could potentially amount to a landlord tenant relationship. The nature of arrangements between the Company and short term guests did not amount to a landlord tenant relationship. The guests did not have the right to exclusive possession, only a right to occupy the facilities on limited terms. The Company was responsible for cleaning and general management of the accommodation and retained the right to access the property to carry out these responsibilities. At least 60% of total income earned by the Company was from short term guests and approximately 65% of all accommodation on the property was used for short term guests. These facts indicate that the relationship between the Company and their short term guests was not that of landlord/tenant under a lease agreement. Accordingly, the income derived from short term accommodation was not 'rent' and therefore the paragraph 152-40(4)(e) exclusion would not apply. Thus, taking into account all the necessary factors the main use of the Property in this case was not to derive rent and accordingly the land would satisfy the definition of an active asset. | Detailed Reasoning - Active asset test: 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. In this case, the CGT asset was owned by the Trust for more than 15 years. Of this, the CGT asset was an active asset for at least 7.5 years. Therefore, the CGT asset satisfies the active asset test for the purposes of section 152-35 of the ITAA 1997, as it was an active asset for at least half of the test period. | Detailed Reasoning - Conclusion:: Based on the above analysis, the Trust satisfies all the basic conditions to gain access to the small business relief under section 152-10 of the ITAA 1997 and is eligible to access the small business 50% reduction under section 152-205 of the ITAA 1997. | Detailed Reasoning - Retirement exemption: Under subdivision 152-C of the ITAA 1997, the trust can also choose to disregard part of the remaining capital gain, up to the CGT retirement exemption limit, where the proceeds are used in connection with retirement. An individual's lifetime CGT retirement exemption limit is $500,000, reduced by any previous CGT exempt amounts the individual has disregarded under the retirement exemption. When choosing this exemption, the following conditions must be met: · the basic conditions of Subdivision 152A (as discussed above) · the significant individual test · a valid choice to apply the retirement exemption is made; and · a payment to or on behalf of at least one CGT concession stakeholder is made within the required timeframe equal to the amount of the gain disregarded. | Detailed Reasoning - Condition 1: The Trust satisfies the basic CGT small business concession conditions as already discussed above. | Detailed Reasoning - Condition 2: Under subdivision 152-A of the ITAA 1997, the Trust is required to have at least one significant individual just before the CGT event to satisfy the significant individual test. As it is a discretionary trust, any individual who receives at least 20% of the income or capital distributions (whichever is smaller) of the Trust for the year ended 30 June 2011 (the year in which the CGT event occurred) will be considered a significant individual of the Trust. In the 2011 financial year, there were no capital distributions and 50% of the income of the Trust was distributed to both A and B. Therefore, they were both significant individuals of the Trust immediately before the CGT event and Condition 2 is satisfied. | Detailed Reasoning - Condition 3: Section 152-315 of the ITAA 1997 requires that the Trust evidence its choice to apply this concession by specifying in writing the CGT exempt amount and the percentage of the exempt amount attributable to each stakeholder. For the purposes of this exemption, the latest date on which the choice may be made is the date of lodgement of the relevant tax return of the Trust for the 2010-11 financial year (section 103-25 of the ITAA 1997). As the above documentation will be completed prior to the lodgement of the tax return for the year ended 30 June 2011, and the amount specified in each case will be $Y, this condition will be satisfied. The exempt amount cannot exceed $Y per CGT concession stakeholder, and will be $Y per concession stakeholder provided they have not previously utilised this exemption. | Detailed Reasoning - Condition 4: This condition requires that a payment be made to a CGT concession stakeholder. The definition of a CGT concession stakeholder includes a significant individual and. As already discussed, both A and B are significant individuals. The Trust is required to make the payments within seven days of making the choice to apply this exemption (subsection 152-325(4) of the ITAA 1997). 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 (RSA) on their behalf. The trust must notify the trustee of the fund or the RSA at the time of the contribution that the contribution is being made in accordance with the requirements of the retirement exemption. If the stakeholder was 55 years old or older there is no requirement to make this contribution. A was not 55 years of age when the CGT event happened, but turned 55 before lodging the Trust's 2010-11 income tax return. B is under 55 years of age. In 2010, the Trust paid $Y into superannuation on behalf of B, before the lodgement of the Trust's tax return for the year ended 30 June 2011. The Trust also paid $Y into superannuation on behalf of A; a total contribution $Y. The requirement to make the payments within seven days of making the choice, outlined in subsection 152-325(4) of the ITAA 1997, is the latest time the payments must be made by, and does not prevent payments being made at an earlier time. The formalities of the written choice can be done later when the return is lodged. As a superannuation contribution has already been made for B, the payment conditions have been satisfied. At the time the Trust 'chooses' to apply the CGT retirement exemption, A will be 55 years and there will be no requirement to contribute the exempt amount into superannuation. However, under subsection 103-10(1) of the ITAA 1997 a taxpayer is taken to have received money or other property if it has been applied for their benefit or as they direct. Therefore, A will be considered to have received the funds for the purposes of this exemption. | Detailed Reasoning - Conclusion: Based on the above analysis, the Trust will be entitled to disregard $Y of the remaining capital gain under the small business retirement exemption. | Detailed Reasoning - Small business rollover exemption: To qualify for the small business rollover exemption, the Trust must satisfy the basic conditions (as discussed above) and also met the rollover conditions. The rollover conditions must be satisfied by the end of the replacement asset period. This period starts one year before and ends two years after the last CGT event that occurs in the income year for which you choose the roll over. You satisfy the rollover conditions where you meet all the following conditions: · you acquire one or more CGT assets as replacement assets or make a capital improvement to one or more existing assets, or both, within the replacement asset period · the replacement asset, or the asset to which the capital improvement was made, is an active asset at the end of the replacement asset period (a depreciating asset such as plant can be a replacement asset) · if the replacement asset is a share in a company or an interest in a trust, at the end of the replacement asset period: · you, or an entity connected with you, are a CGT concession stakeholder in the company or trust, or CGT concession stakeholders in the company or trust have a small business participation percentage in the interposed entity of at least 90% · the capital gain that is being rolled over is not more than the sum of the following · the amount paid to acquire the replacement asset (that is, the first element of the cost base of the replacement asset) · any incidental costs incurred in acquiring that asset, which can include giving property (that is, the second element of the cost base of the replacement asset), and · the amount expended on capital improvements to one or more assets that were acquired or already owned (that is, fourth element expenditure). As the share or interest also needs to be an active asset, the trust must satisfy the 80% test. That is, the market value of the active assets and certain financial instruments of the trust must be 80% or more of the total of the market value of all the assets of the trust. | Detailed Reasoning - Conclusion: The Trust can choose to apply the small business rollover exemption to the remaining capital gain and has two years after the last CGT event to meet the above rollover conditions. If the rollover conditions are not met within the replacement asset period the gain will become assessable.

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. | 2. Is the Trust able to disregard the $X paid to superannuation pursuant to the small business retirement exemption? | 3. Is the Trust able to defer the remaining gain under the small business rollover? | Relevant facts: The Trust has owned a property for around 20 years and leased it to an associated company (the Company) which used it in carrying on their business operations. | The Trust is a discretionary trust and does not actively carry on any business activity; it is the holder of a passive asset from which it receives rental income. | The Trust sold the property in 2010 resulting in a capital gain. The Trust has no capital losses to offset against the gain. | The Trust has a corporate trustee and A and B are directors and shareholders of the trustee, owning 50% of the shares each. | A is the appointer of the Trust which has three primary beneficiaries, A, B and C. | A and B are also the directors of the Company and are the sole shareholders; owning 85% and 15% respectively. | The trustee can nominate the Company as a beneficiary, given that at least one of the primary beneficiaries has an interest in it. | The shares in the Company provide the shareholders with rights to income, capital and voting rights in proportion to their shareholding. | The Company has been providing both short and long term accommodation to the general public on the land since the property was purchased by the Trust. | The Company employees were responsible for taking bookings, checking guests in and out and cleaning. | Short term guests did not have the right to exclusive possession of the accommodation and there were no written agreements. The accommodation was serviced at least once a week for cleaning and maintenance. | The majority of the revenue received by the Company was from short term guests. Guests are considered to be short term if their stay is less than 28 days. | Over the past eight years, the proportion of total revenue from short term guests was more than 60% | Long term guests entered into lease agreements with the Company and had exclusive possession. | The Company's ordinary income in each of the last three years was less than $2 million. | The business ceased operating in 2011 financial year. The volume of activity and revenue declined significantly during the last quarter of the year, however accommodation was still being provided immediately prior to 30 June 2011. | No associates or entities connected with the Company had any ordinary income derived from business activities (excluding transactions with associates). These associates and related entities are A, B, C and the Trust. | The Trust made no capital distributions in the 2010-11 financial year. | The Trust made 50% distributions of trust income to both A and B in the 2010-11 financial year. | In 2010, the Trust paid $Y into superannuation on behalf of both A and B; total contribution $X. | Neither A nor B has previously used any of their lifetime retirement exemption limits.