Private ruling: Small Business CGT Concessions
Date of advice: 16 March 2018
Published: June 2018
Ruling period: Income year ending 30 June 2018 | Income year ending 30 June 2019 | Income year ending 30 June 2020 | Income year ending 30 June 2021

Ruling: Q1: Will the Trust satisfy the basic conditions under Subdivision 152-A of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of the sale of its business assets? | A1: Yes | Q2: Will the Trust be able to access the small business capital gains tax concessions under Division 152 of the ITAA 1997 upon sale of its business assets? | A2: Yes, subject to satisfaction of any extra conditions that must be satisfied for the concessions to be available

Relevant facts and circumstances: 1. The Trust commenced business in the 1990’s. 2. The turnover of the Trust’s business exceeds $2 million. 3. As at 30 June 2016, the net value of the Trust’s CGT assets was less than $5,000,000. 4. It is intended that the Trust will sell its business in the near future. 5. No entity is ‘connected with’ or an ‘affiliate’ of the Trust in accordance with section 328-125 and section 328-130 of the ITAA 1997 respectively. Assumptions 1. The assets to be disposed of by the Trust as part of the sale of its business are used, or held ready for use, in the course of carrying on the Trust’s business, or (to the extent they’re intangible) are inherently connected with the Trust’s business, and are not excepted from being an active asset under subsection 152-40(4). 2. The Trust will derive capital gains upon the sale of its business assets. 3. If each reference in section 328-110 of the ITAA 1997 to $10 million were a reference to $2 million, the Trust will not satisfy any of the aggregated turnover tests under that section in respect of the income year in which it sells its business assets. 4. The net value of the Trust’s CGT assets just before the sale of the business will continue to be less than $6 million.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 subsection 104-10(4) | Income Tax Assessment Act 1997 section 108-5 | Income Tax Assessment Act 1997 Division 152 | Income Tax Assessment Act 1997 Subdivision 152-A | Income Tax Assessment Act 1997 subsection 152-10(1) | Income Tax Assessment Act 1997 paragraph 152-10(1)(a) | Income Tax Assessment Act 1997 paragraph 152-10(1)(b) | Income Tax Assessment Act 1997 subparagraph 152-10(1)(c)(i) | Income Tax Assessment Act 1997 subparagraph 152-10(1)(c)(ii) | Income Tax Assessment Act 1997 paragraph 152-10(1)(d) | Income Tax Assessment Act 1997 subsection 152-10(1AA) | Income Tax Assessment Act 1997 paragraph 152-10(1AA)(b) | Income Tax Assessment Act 1997 section 152-15 | Income Tax Assessment Act 1997 subsection 152-20(1) | Income Tax Assessment Act 1997 subsection 152-20(2) | Income Tax Assessment Act 1997 section 152-35 | Income Tax Assessment Act 1997 section 152-40 | Income Tax Assessment Act 1997 subsection 152-40(4) | Income Tax Assessment Act 1997 Subdivision 152-B | Income Tax Assessment Act 1997 Subdivision 152-C | Income Tax Assessment Act 1997 Subdivision 152-D | Income Tax Assessment Act 1997 Subdivision 152-E | Income Tax Assessment Act 1997 Subdivision 328-C | Income Tax Assessment Act 1997 section 328-110 | Income Tax Assessment Act 1997 section 328-125 | Income Tax Assessment Act 1997 section 328-130

Reasons for decision: Summary: The Trust will satisfy the basic conditions under Subdivision 152-A of the ITAA 97 in respect of the sale of its business assets. | Detailed Reasoning - Detailed Reasoning: A number of concessions that provide relief from CGT, for small businesses, are set out in Division 152 of the ITAA 1997. If the basic conditions for relief are satisfied, capital gains may be reduced or disregarded under Division 152. The basic conditions that apply to all four small business concessions are detailed in Subdivision 152-A. The other four Subdivisions (152-B, 152-C, 152-D, and 152-E) deal with each of the concessions and, in some instances, contain further conditions specific to each of those concessions. The basic conditions in Subdivision 152-A that need to be satisfied in order to access a concession, as relevant to the Trust and pursuant to subsection 152-10(1), are: ● a CGT event happening in relation to a CGT asset of the Trust (paragraph 152-10(1)(a)); ● apart from the application of Division 152, that event resulting in a capital gain ● (paragraph 152-10(1)(b)); ● the Trust being a ‘CGT small business entity’ and/or satisfying the maximum net asset value test (subparagraphs 152-10(1)(c)(i) and (ii)); and ● the relevant CGT asset satisfying the active asset test (paragraph 152-10(1)(d)). | Detailed Reasoning - Basic condition 1: CGT event relating to a CGT asset: The sale of the Trust’s business assets (CGT assets pursuant to section 108-5) will give rise to a CGT event A1 under section 104-10, thereby satisfying the first basic condition. | Detailed Reasoning - Basic condition 2: CGT event results in a capital gain: The sale of the Trust’s business assets will, as assumed for the purposes of this ruling, result in a capital gain (as per subsection 104-10(4)), thereby satisfying the second basic condition. | Detailed Reasoning - Basic condition 3(i): The CGT small business entity test: A CGT small business entity is defined in subsection 152-10(1AA) as follows: You are a CGT small business entity for an income year if: (a) you are a *small business entity for the income year; and (b) you would be a small business entity for the income year if each reference in section 328-110 to $10 million were a reference to $2 million. Subdivision 328-C explains the meaning of ‘small business entity’, together with related concepts. In order to qualify as a small business entity for an income year, as per section 328-110, the entity must be carrying on a business in that year and satisfy any one of three tests based on the aggregated turnover of the entity and of other entities that are connected or affiliated to it. Whilst the Trust may satisfy the aggregated turnover test under section 328-110 for the income year in which it sells its business assets, it will not (as assumed for the purposes of this ruling and paragraph 152-10(1AA)(b)) if each reference in section 328-110 to $10 million were a reference to $2 million. The Trust will therefore not, for the purposes of satisfying the third basic condition, be a CGT small business entity for the relevant income year. | Detailed Reasoning - Basic condition 3(ii): The maximum net asset value test: The Trust will satisfy the maximum net asset value test (MNAV test) if, just before the time of the CGT event that results in the capital gain, the sum of the following amounts does not exceed $6 million: ● the net value of the CGT assets of the Trust; ● the net value of the CGT assets of entities connected with the Trust; ● the net value of the CGT assets of any affiliates of the Trust or entities connected with the Trust’s affiliates (section 152-15). The net value of the CGT assets Subsection 152-20(1) provides the meaning of the net value of the CGT assets of an entity as being the sum of the market values of those assets less: ● the sum of the liabilities of the entity that are related to those assets; and ● provisions made by the entity for annual leave, long service leave, unearned income and tax liabilities. Shares, units or other interests (except debt) in a connected or affiliated entity are disregarded. However, any liabilities related to any such shares, units or interests are included (subsection 152-20(2)). As assumed for the purposes of this ruling, the net value of the CGT assets of the Trust just before the sale of its business will be less than $6 million, thereby satisfying the MNAV test and the third basic condition. | Detailed Reasoning - Basic condition 4: The active asset test: Pursuant to section 152-35, the CGT assets to be disposed by the Trust will satisfy the active asset test if: ● they were owned for 15 years or less and were an active asset of the Trust for at least half of the period the Trust owned them; or ● they were owned for more than 15 years and were an active asset of the Trust for at least 7.5 years. An asset may be an active asset of the Trust pursuant to section 152-40 where it is owned by the Trust and: ● is used, or held ready for use, in the course of carrying on the Trust’s business; or ● is an intangible asset that is inherently connected with the Trust’s business; and ● is not excepted from being an active asset under subsection 152-40(4). As assumed for the purposes of this ruling, the business assets to be disposed of by the Trust are, used, or held ready for use, in the course of carrying on the Trust’s business, or (to the extent they’re intangible) are inherently connected with the Trust’s business, and are not excepted from being an active asset under subsection 152-40(4), thereby satisfying the fourth and final basic condition. | Detailed Reasoning - Question 2: The Trust will be able to access the small business capital gains tax concessions under Division 152 upon sale of its business asset s. | Detailed Reasoning - Detailed Reasoning: Given the Trust will satisfy the basic conditions in Subdivision 152-A, the small business capital gains tax concessions will be available to utilise subject to satisfaction of any further conditions that must be satisfied for those concessions to be available.