Private ruling: Small business capital gains tax concessions
Date of advice: 5 August 2020
Published: September 2020
Ruling period: Year ending 30 June 2021
Date scheme commenced: 1 July 2020

Ruling: Q1: In respect of the gain that will be realised on the transfer of the asset in-specie to the individual unit holder, will the Unit Trust be required to make a payment to the unit holder under subsection 152-325(1) of the Income Tax Assessment Act 1997 (ITAA 1997) to access the Small Business Retirement Exemption? | A1: Yes. | Q2: If the answer to Question 1 is yes, will the transfer of the asset in-specie to the individual unit holder constitute a payment for the purposes of section 152-325 of the ITAA 1997? | A2: No. | Q3: If the answer to Question 2 is no, will a transfer of cash from the Unit Trust to the individual unit holder, equal to the CGT exempt amount, constitute a payment for the purposes of section 152-325 of the ITAA 1997? | A3: Yes, to the extent that the payment of cash is made by 7 days after the Unit Trust makes the choice to utilise the Small Business Retirement Exemption.

Relevant facts and circumstances: The Unit Trust proposes to transfer one of its assets in-specie to its sole unit holder. The asset satisfies the active asset test for the purposes of the Small Business CGT concessions. The unit holder is over the age of 55. The Unit Trust satisfies the basic conditions to access the Small Business CGT Concessions in relation to the asset and seeks to access the Active Asset Reduction and the Retirement Exemption. The Unit Trust will have sufficient funds to make a cash payment to the unit holder for the purposes of section 152-325 of the ITAA 1997 if the payment requirement under that section is not satisfied by the transfer of the asset.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 section 106-50 | Income Tax Assessment Act 1997 section 116-30 | Income Tax Assessment Act 1997 section 152-305 | Income Tax Assessment Act 1997 section 152-315 | Income Tax Assessment Act 1997 section 152-325

Reasons for decision: Summary: For a company or trust to be able to access the Small Business Retirement Exemption, the payment requirement under section 152-325 must be satisfied (paragraph 152-305(2)(c)). Paragraph 152-325(1)(b) requires a company or trust that receives an amount of capital proceeds from a CGT event for which it chooses to apply the Small Business Retirement Exemption, to make a payment to at least one of its CGT concession stakeholders. The amount of the payment must be equal to the lesser of the amount of capital proceeds received and the relevant CGT exempt amount. The Unit Trust will not receive any actual proceeds from transferring the asset in-specie to its sole unit holder. However, subsection 116-30(1) states: If you received no *capital proceeds from a *CGT event, you are taken to have received the *market value of the *CGT asset that is the subject of the event. (The market value is worked out as at the time of the event.) Therefore, the Unit Trust will be taken to receive capital proceeds equal to the market value of the CGT asset transferred to the unit holder and will be required to make a payment under section 152-325 equal to the lesser of the capital proceeds and the relevant CGT exempt amount. The Small Business Retirement Exemption under Subdivision 152-D allows an entity the choice to disregard up to $500,000 per CGT concession stakeholder in qualifying capital gains. A company or trust may choose to disregard all or part of a capital gain under the Small Business Retirement Exemption by satisfying the conditions outlined below: (1) A CGT event happens in relation to a CGT asset in an income year; (2) The event would have, apart from Division 152, resulted in a capital gain; (3) The basic conditions in Subdivision 152-A are met; (4) The entity satisfied the significant individual test; (5) A choice is made to disregard all or part of the capital gain under subsection 152-305(2). This disregarded amount is known as the asset's 'CGT exempt amount'; and (6) The payment conditions for a company or trust in section 152-325 of the ITAA 1997 are satisfied. Amount and timing of payments Section 152-315 provides that a company or trust may choose to disregard all or part of a capital gain eligible for the Small Business Retirement Exemption but must make the choice in a way that ensures that the CGT retirement exemption limit of each CGT concession stakeholder for whom the choice is made is not exceeded. The CGT exempt amount chosen for an asset must be specified in writing. Subsection 152-320(1) provides that an individual's CGT retirement exemption limit at a time is $500,000 reduced by the CGT exempt amounts of CGT assets specified in choices previously made by or for the individual. Subsection 152-315(5) provides that if a company or trust is making the choice and it has more than one CGT concession stakeholder, it must specify in writing the percentage of each CGT asset's CGT exempt amount that is attributable to each of those stakeholders. One or more of the percentages may be nil, but all of the percentages must add up to 100%. Subsection 152-325(3) provides that if a payment is made to more than one CGT concession stakeholder, the amount of each payment is to be worked out by reference to each individual's percentage of the relevant CGT exempt amount. Subsection 152-325(5) provides that the amount of the payment, or the sum of the amounts of the payments, made to the CGT concession stakeholder/s must be equal to the lesser of the: a) amount of capital proceeds received b) relevant CGT exempt amount. In addition to the above, paragraph 152-325(4)(b) provides that the payment must be made by the later of 7 days after the company or trust receives the capital proceeds or makes the choice. For a CGT event, proceeds can be received in a number of different ways and the capital proceeds rules in Division 116 are relevant in calculating any capital gain that arises from the CGT event. As a result, capital proceeds can be money, the market value of property received, or the market value of the CGT asset that is the subject of the event. When the Unit Trust transfers the asset in-specie to the unit holder, CGT event A1 happens to the Unit Trust under section 104-10 and the Unit Trust is taken to have received capital proceeds equal to the market value of the asset under section 116-30. Once the capital proceeds are calculated, the trustee is able to calculate their capital gain and subsequently make the choice to disregard all or part of that capital gain. Subdivision 152-D does not contemplate that the CGT event, choice and payment of the CGT exempt amount can all take place simultaneously. The determination of the capital proceeds, the calculation of the capital gains and the making of a choice under section 152-305 is the correct construction of the order required for the Small Business Retirement Exemption provisions. A necessary consequence of this ordering is that the payment in relation to the CGT exempt amount must be made after the capital proceeds are received and the choice is made. Therefore, it is not considered that the transfer of the asset in-specie to the unit holder will constitute a payment for the purposes of section 152-325. Even if we did consider that the in-specie transfer of the asset could qualify as the 'payment', it is considered that it would not meet the requirements of subsection 152-325(5) as the value of the asset would be more than the CGT exempt amount. The legislation is specific where it states that the payment must be equal to the lesser of the CGT exempt amount or the capital proceeds. You have advised that the Unit Trust will have sufficient funds to make a cash payment to the unit holder for the purposes of section 152-325 if the payment requirement under that section is not satisfied by the transfer of the asset. A payment of cash clearly falls within the meaning of 'payment'. Consequently, a payment of cash equal to the CGT exempt amount, made to the unit holder by 7 days after the Unit Trust makes the choice to utilise the Small Business Retirement Exemption, will constitute a payment for the purposes of section 152-325.

Reasons for Decision: All of the legislative references that follow are to the Income Tax Assessment Act 1997 .