Private ruling: Small business CGT concessions
Date of advice: 27 May 2026
Published: 17 August 2026
Ruling period: Income year ending DD MM 2XXX

Ruling: Q1: Will Company A satisfy the requirements in section 152-110 of the Income Tax Assessment Act 1997 (ITAA 1997) to apply the 15-year exemption with respect to a capital gain it makes on the disposal of Land A, and if not, will Company A satisfy the requirements in section 152-305 of the ITAA 1997 to apply the retirement exemption? | A1: No. As the Company does not satisfy the basic conditions in Subdivision 152-A of the ITAA 1997, it does not satisfy the requirements in section 152-110 of the ITAA 1997 to apply the 15-year exemption, nor does it satisfy the requirements in section 152-305 to apply the retirement exemption. | Q2: Will the Trustee for Trust A satisfy the requirements in section 152-110 of the ITAA 1997 to apply the 15-year exemption with respect to a capital gain it makes on the disposal of Land B, and if not, will the Trustee for Trust A satisfy the requirements in section 152-305 of the ITAA 1997 to apply the retirement exemption? | A2: No. As the Trustee for Trust A does not satisfy the basic conditions in Subdivision 152-A of the ITAA 1997, it does not satisfy the requirements in section 152-110 of the ITAA 1997 to apply the 15-year exemption, nor does it satisfy the requirements in section 152-305 to apply the retirement exemption.

Relevant facts and circumstances: Company A 1. Company A currently holds the title for Land A. This is the only asset held by Company A. 2. Land A is zoned as primary production land. 3. Land A was purchased by Company A in 1XXX for $XXX,XXX and has continuously held it since that time. 4. The estimated market value of Land A is $X,XXX,XXX. 5. The directors and shareholders of Company A are and have been Individual A and Individual B jointly, since its registration. Trust A 6. The Trustee for Trust A currently holds other titles. 7. Only Land B is relevant for the purposes of this ruling application. 8. Trust A acquired Land B in 2XXX for $XXX,XXX and has continuously held it since that time. 9. Land B is zoned as primary production land. 10. The estimated market value of Land B is $X,XXX,XXX. 11. The trustees of Trust A are Individual A, Individual B and their two children, Child A and Child B. The trustees of the Trust A were updated on DD MM 2XXX to include Child A and Child B as additional trustees. The powers of the trustees include power to distribute income and capital, variation powers and the power to appoint and remove trustees. 12. Trust A has not made any distributions of income or capital since the 2XXX financial year. In those income years, the trust either had no net income or incurred a tax loss, as its land was used for no consideration by Trust B. 13. In the income year in which the proposed CGT event will occur, the trustee of Trust A intends to make distributions of income and/or capital of 50% to Individual A and 50% to Individual B. 14. In income years in which trust distributions were made, including the 2XXX, 2XXX, 2XXX and 2XXX income years, beneficiaries received distributions that resulted in a direct small business participation percentage exceeding 20%. 15. The trustees and beneficiaries of Trust A have signed a nominated beneficiary form to nominate Individual A and Individual B to be controllers of the trust for the 2XXX income year. Trust B 16. Company B is trustee of Trust B. 17. The directors of Company B are Child A and Child B (the directors have been Child A and Child B jointly, at all times, since its registration). 18. The shareholdings of Company B since registration have been as follows: a. Child A has 4 Ordinary shares b. Child B has 4 Ordinary shares c. Individual A has 2 Ordinary shares and d. Individual B has 2 Ordinary shares. 19. The appointors of Trust B are Child A and Child B (Child A and Child B have been the appointors of Trust B at all times since its establishment). The appointors have the authority to remove any trustee and appoint any new or additional trustee. The trustee power includes income and capital distribution, power of amendment, broad administrative powers. 20. The beneficiaries of Trust B are Child A, Child B, Individual A and Individual B. 21. The aggregated turnover for Trust B for the income year ending 30 June 2XXX was $X,XXX,XXX. Company A and Trust A are unsure what is the expected turnover for the income year ending 30 June 2XXX. 22. Trust B was established in 2XXX and has run a primary production business (Business) since this date. The disposal of Land A and Land B 23. Land A and Land B (collectively, the Properties for convenience) have been used in the Business carried on by the Trust B since the Trust B was established in 2XXX. There were no formal leases in place with the Trust B due to the close intertwined relationship between the relevant entities. 24. The Properties will be transferred to a newly established discretionary trust (the New Trust) during the 2XXX income year as part of a restructure. 25. The transfers will give rise to a capital gain with respect to each property. 26. The Properties will continue to be used by the Trust B in the Business. 27. In the income year of the CGT event, the capital gain made by Trust A on the transfer of Land B will be distributed 50% to Individual A and 50% to Individual B. Individuals 28. Individual A's date of birth is DD MM 1XXX, and they would be XX at the time of transfer. 29. Individual B's date of birth is DD MM 1XXX, and they would be XX at the time of transfer. 30. No individual carries on any other business in partnership or alone either directly or indirectly. 31. Individual A has significantly reduced their involvement in the primary production business due to age and health issues, and the proposed restructure is intended to facilitate their transition to retirement. Previously, Individual A was an active participant in the business, undertaking roles as an owner, worker, and joint decision-maker. 32. Individual B has been actively involved in the business, undertaking roles as an owner, primary bookkeeper, and joint decision-maker, and has not yet retired. Other relevant information 33. There are no additional entities connected with, or affiliated with, Trust B, Company A, or Trust A other than those disclosed in the ruling application. 34. Individual A, Individual B, Child A and Child B work together in running, managing and conducting the Business. 35. The annual turnovers for both the Trust A and Company A are nil. 36. Neither Property has been used to derive rent or any other passive income at any time. Company A and Trust A do not meet the maximum net asset value test. 37. In each of the no-distribution years, Trust A either had no net income or incurred a tax loss, such that paragraph 152-70(6)(a) did not apply in those years. Assumption 38. The aggregated turnover of the Trust B for the income year ending 30 June 2XXX will be less than $2 million.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 152-A | Income Tax Assessment Act 1997 section 104-10 | 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 152-78 | Income Tax Assessment Act 1997 section 152-110 | Income Tax Assessment Act 1997 section 152-305 | Income Tax Assessment Act 1997 section 328-110 | Income Tax Assessment Act 1997 section 328-115 | Income Tax Assessment Act 1997 section 328-125 | Income Tax Assessment Act 1997 section 328-130 | Income Tax Assessment Act 1997 section 995-1 Question 1 | Will Company A satisfy the requirements in section 152-110 to apply the 15-year exemption with respect to a capital gain it makes on the disposal of Land A, and if not, will Company A satisfy the requirements in section 152-305 to apply the retirement exemption? | Summary | As Company A does not satisfy paragraph 152-10(1)(c) and paragraph 152-10(1)(d), the basic conditions in Subdivision 152-A are not satisfied. Therefore, Company A is not eligible to apply the 15-year exemption under section 152-110 or the retirement exemption under section 152-305. | Detailed reasoning | Basic conditions in Subdivision 152-A | 1. To qualify for the CGT small business concessions, you must satisfy the basic conditions in subsection 152-10(1), which states: | 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 CGT small business entity for the income year; | (ii) you satisfy the maximum net asset value test; | (iii) you are a partner in a partnership that is a CGT 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. | 2. To be eligible to apply the small business CGT concession you must satisfy all 4 of the basic conditions above. | Basic condition (a) - A CGT event happens in relation to a CGT asset of yours in an income year | 2. In the 2XXX income year, Land A will be transferred to the New Trust. The transfer of the property constitutes a disposal of a CGT asset for the purposes of subsection 104-10(1), resulting in CGT event A1 occurring at the time the disposal contracts are entered into. | 3. The requirement in paragraph 152-10(1)(a) is satisfied. | Basic condition (b) - The event would have resulted in the gain | 4. Subsection 104-10(4) provides that you make a capital gain from CGT event A1 if the capital proceeds from the disposal are more than the asset's cost base. | 5. In this case, the capital proceeds from the transfer of Land A will exceed its respective cost base. Accordingly, Company A will make a capital gain upon the disposal of the property under section 104-10. | 6. The requirement in paragraph 152-10(1)(b) will be satisfied with respect to the transfer of Land A. | Basic condition (c) - You are a CGT small business entity | 7. Subsection 152-10(1AA) provides that an entity is a CGT small business entity for an income year if: | (a) the entity is a small business entity for the income year; and the entity would be a small business entity for the income year if each reference in section 328-110 to $10 million were instead a reference to $2 million. | 8. As defined in section 995-1, a small business entity has the meaning given in Subdivision 328-C of the ITAA 1997. Broadly, section 328-110 requires that to qualify as a small business entity, the entity must: | a. be carrying on a business; and | b. satisfy any 1 of 3 tests based on turnover: | (a) the entity carried on a business in the income year (the previous year) before the current year and the entity's *aggregated turnover for the previous year was less than $10 million* (subparagraph 328-110(1)(b)(i)); | (b) the entity's aggregated turnover for the current year is likely to be less than $10 million* provided the turnover when the business was carried on in both of the 2 previous years was not $10 million* or more (subparagraph 328-110(1)(b)(ii) and subsection 328-110(3)); or | (c) the aggregated turnover of the entity for the current year (worked out as at the end of that year) is less than $10 million* (subsection 328-110(4)). | 9. Pursuant to subsection 328-110(5) an entity is a small business entity if: | (5) ... you carried on a *business in an income year if: | (a) in that year you were winding up a business you previously carried on; and | (b) you were a *small business entity for the income year in which you stopped carrying on that business. | 10. Under section 328-110, an entity is a small business entity for an income year if it carries on a business in that year and its aggregated turnover for the year is less than the relevant threshold. Aggregated turnover includes the entity's own annual turnover together with the annual turnovers of any entities that are connected with , or affiliates of, the entity under section 328-115. | Application to your circumstances | 11. The primary production business (Business) is carried on solely by the Trust B. Company A does not carry on a business for the purposes of section 328-110. Accordingly, it cannot be a small business entity, or a CGT small business entity, under subsection 152-10(1AA). Therefore, paragraph 152-10(1)(c)(i) is not satisfied. | 12. However, the CGT small business entity status of the Trust B is relevant for the purposes of subparagraph 152-10(1)(c)(iv), which allows the basic condition in subsection 152-10(1)(c) to be satisfied where the CGT asset is used in a business carried on by a CGT small business entity that is connected with, or an affiliateof Company A. | (iv) the Passively held assets - affiliates and entities connected with you | 13. Subsection 152-10(1A) states: | Passively held assets - affiliates and entities connected with you | 152-10(1A) | The conditions in this subsection 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 *CGT 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 CGT 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. | 14. To satisfy the condition in paragraph 152-10(1A)(a), it must first be determined whether an affiliate of the entity, or an entity that is connected with the entity, is a CGT small business entity for the income year. | Affiliates | 15. As defined in section 995-1, 'affiliates' has the meaning given by section 328-130. | 16. Affiliate is defined in subsection 328-130(1) as an individual or company that acts, or could reasonably be expected to act, in accordance with the entity's directions or wishes, or in concert with the taxpayer, in relation to the business affairs of that individual or company A trust cannot be your affiliate - only an individual or a company, however, a trust may have an affiliate who is an individual or company. The individual or company can only be your affiliate if they are carrying on business in their own right. | 17. An individual or company is not automatically an affiliate merely because of the legal nature of a business relationship under subsection 328-130(2). For example, a company and its directors are not affiliates by reason only of the nature of the business relationship they share. | Application to your circumstances | 18. In this case, it is accepted that Individual A, Individual B, Child A and Child B: | a. are members of the same family group and | b. are involved in related business activities. | 19. It is noted: | a. Child A and Child B exercise formal decision-making authority in respect of Trust B in their capacities as directors, shareholders and appointors of the corporate trustee | b. there is no evidence that decisions made by Child A and Child B in relation to Trust B are made under the direction or influence of Individual A or Individual B, or that they are accustomed to act in accordance with their wishes | c. the arrangement described is equally consistent with a family group conducting related or complementary activities, rather than one in which the affairs of each individual's business are directed or coordinated in the manner contemplated by subsection 328-130(1) and | d. while non-arm's length dealings and long-standing family arrangements are relevant contextual factors, they do not, without more, demonstrate the requisite degree of influence or coordinated decision-making required to establish that the parties act in concert for the purposes of the provision. | 20. Having regard to the above, even if it were accepted any of the individuals were carrying on a business in their own right it cannot be concluded on the available information that Child A and Child B are affiliates of Individual A and Individual B for the purposes of section 328-130. Even if it were accepted that these individuals act, or could reasonably be expected to act, in accordance with each other's directions or wishes, or in concert, in the sense required by subsection 328-130(1), the relevant entity for the purposes of paragraph 152-10(1A)(a) is Trust B. | Connected entity test | 21. Under section 328-125 of the ITAA 1997, an entity is connected with another entity if: | SECTION 328-125 Meaning of connected with an entity | 328-125(1) | An entity is connected with another entity if: | (a) your *affiliate, or an entity that is *connected with you, is a *CGT small business entity for the income year; and | (b) both entities are controlled in a way described in this section by the same third entity. | Direct control of an entity other than a discretionary trust | 328-125(2) | An entity (the first entity ) controls another entity if the first entity, its * affiliates, or the first entity together with its affiliates: | (a) except if the other entity is a discretionary trust - own, or have the right to acquire the ownership of, interests in the other entity that carry between them the right to receive a percentage (the control percentage ) that is at least 40% of: | (i) any distribution of income by the other entity; or | (ii) if the other entity is a partnership - the net income of the partnership; | or | (iii) any distribution of capital by the other entity; or | (b) if the other entity is a company - own, or have the right to acquire the ownership of, • equity interests in the company that carry between them the right to exercise, or control the exercise of, a percentage (the control percentage ) that is at least 40% of the voting power in the company. | Direct control of a discretionary trust | 328-125(3) | An entity (the first entity ) controls 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, its * affiliates, or the first entity together with its affiliates. | 328-125(4) | An entity (the first entity ) controls a discretionary trust for an income year if, for any of the 4 income years before that year: | (a) the trustee of the trust paid to, or applied for the benefit of: | (ii) the first entity; or | (iii) any of the first entity ' s * affiliates; or | (iv) the first entity and any of its affiliates; | any of the income or capital of the trust; and | (b) the percentage (the control percentage ) of the income or capital paid or applied is at least 40% of the total amount of income or capital paid or applied by the trustee for that year. | Influence over trustee | 22. Whether an entity acts in accordance with the directions or wishes of an entity and/or its affiliates depends on the particular facts and circumstances. | 23. Re Gutteridge and Commissioner of Taxation 2013 ATC 10-347 sets out the principles that are relevant to determining whether a person or entity exercised effective control over the trustee of a discretionary trust for the purposes of subsection 328-125(3): | a. treating another person's instructions or wishes as a sufficient reason so to act, rather than making personal decisions where those wishes or instructions are merely a factor considered, meets the test of being accustomed so to act; | b. it is not necessary that the behaviour be universal, at least some decisions, one or more important decisions, would be enough, some or all decision making is the focus; | c. decisions made in pursuit of one's own business goals even, if consistent with the wishes of another party, do not necessarily render the decision maker accustomed to acting in accordance with the other party's wishes. The other party may have superior bargaining power; | d. while not significantly different, acting in accordance with a person's wishes covers a wider field than acting in accordance with a person's instructions, and | e. it is necessary to undertake a critical assessment of the way in which the trustee is managed. | 24. Decision Impact Statement Gutteridge and Commissioner of Taxation explains that the Commissioner does not accept that the reasonable expectation test can be substituted with an accustomed to act test in all cases: | a. However, while the circumstances in this case allow for a finding that a person could reasonably be expected to act in a certain way because they were 'accustomed to act' in that way, the Commissioner does not accept that the 'reasonable expectation' test in subsection 328-125(3) of the ITAA 1997 can be substituted with an 'accustomed to act' test in all cases. It depends, as the AAT said at paragraph 21, on an examination of all the circumstances of a case. For example, if there is no history at all of a trustee having acted on the directions of another, there may nonetheless be an expectation (reasonably founded) that they would act on the directions of a particular person, were such directions to be given. | Control of Company A | 25. Company A is a company whose only directors and shareholders are Individual A and Individual B (joint directors and shareholders). Individual A and Individual B together hold 100% (each holding 50%) of the shares in Company A and control all voting power, as well as any rights to dividends and capital distributions. Therefore, Company A is controlled by Individual A and Individual B for the purposes of subsection 328-125(2). | Control of Trust B | 26. The corporate trustee of Trust B, Company B, is controlled by Child A and Child B in their capacity as sole directors, and they hold most shares (4 shares each, compared with 2 shares each held by Individual A and Individual B). Child A and Child B are also the appointors of Trust B and, thus, have legal authority to remove and replace the trustee. Child A and Child B exercise effective legal control over the trustee and the trust structure. | 27. Subsection 328-125(3) requires that the trustee acts, or could reasonably be expected to act, in accordance with the directions or wishes of the relevant entity (or its affiliates, or together with its affiliates). | 28. In applying this test, regard must be had to the principles in Gutteridge , which are relevant to assessing both whether a trustee acts in accordance with another's wishes, and whether it could reasonably be expected to do so. These include: | a. evidence that decisions are made because of another person's wishes | b. a critical assessment of the way in which the trustee is managed and | c. more than mere alignment of interests or consistency of action. | 29. On the facts: | a. there is no evidence in the available information that the trustee acts in accordance with the directions or wishes of Individual A or Individual B | b. decisions made by Child A and Child B may reflect their own business objectives, even if aligned with the broader family enterprise and | c. there is no established pattern of conduct demonstrating that the trustee is accustomed to act, or could reasonably be expected to act, in accordance with Individual A's or Individual B's wishes. | 30. Consistent with Decision Impact Statement Gutteridge and Commissioner of Taxation , the "reasonable expectation" test cannot be satisfied merely by inferring influence from family relationships, non-arm's length arrangements, or commercial alignment. While such factors may provide context, they do not, without more, establish that a trustee acts, or could reasonably be expected to act, in accordance with the directions or wishes of another entity. In the absence of evidence demonstrating actual influence over decision-making or a reasonable expectation of such influence, the requirements of subsection 328-125(3) are not satisfied. | Connected entity conclusion | 31. Accordingly: | a. Company A is controlled by Individual A and Individual B and | b. Trust B is controlled by Child A and Child B. | 32. It cannot be concluded that Individual A controls Trust B either alone or together with affiliates. Nor can it be said that that Individual B controls Trust B either alone or together with affiliates. Accordingly, paragraph 328-125(1)(b) is not satisfied. | 33. Furthermore, as no affiliate relationship has been established paragraph 328-125(1)(a) cannot be relied upon. Therefore, Trust B is not connected with Company A within the meaning of section 328-125. | 34. As Trust B is neither an affiliate of, nor connected with, Company A subsection 152-10(1A) is not satisfied. Therefore, the basic conditions in Subdivision 152-A are not satisfied, and the small business CGT concessions are not available. | 35. Trust B is the small business entity for the purposes of paragraph 152-10(1)(c). Consequently, Company A will satisfy the requirements in subsection 150-10(1A) if it can establish that Trust B is an affiliate or an entity connected with Company A. | 36. In these circumstances, as a trust cannot be an affiliate, the control tests in subsections 328-125(3) or (4) of the ITAA 1997 will need to be satisfied. Subsection 328-125(3) can be satisfied if it can be demonstrated that the trustee of Trust B acts, or could reasonably be expected to act, in accordance with the directions or wishes of Company A. Alternatively, the facts required to satisfy subsection 328-125(4) are about distributions to Company A in any of the 4 years before a year of control. | 37. Individual A and Individual B, will need to satisfy the control tests in subsections 328-125(3) or (4) of the ITAA 1997 to establish that Company A and Trust B, is a connected entity to each individual. Subsection 328-125(3) can be satisfied if it can be demonstrated that the trustee acts, or could reasonably be expected to act, in accordance with the directions or wishes of Individual A and Individual B. | 38. In the circumstances, it cannot be said that Company A controls Trust B for the purposes of subsection 328-125(3) (Individual A, Individual B, Child A and Child B do not jointly control Company A and Trust B). | CGT small business entity status | 39. Trust B had an aggregated turnover of $X,XXX,XXX for the income year ended 30 June 2XXX. As the expected turnover for the income year ending 30 June 2XXX is uncertain, it is assumed for the purposes of this ruling that the aggregated turnover of Trust B will be less than $2 million for that income year. | 40. As there are no additional entities whose turnover is required to be included under section 328-115, the aggregated turnover of Trust B remains below $2 million. | 41. Therefore, based on this assumption, Trust B is a CGT small business entity for the purposes of subsection 152-10(1AA). | Conclusion - basic condition (c) | 42. While: | a. Trust B is assumed to be a CGT small business entity and | b. Trust B carries on the business in which Land A is used, | c. Trust B is not connected with Company A. Therefore, the requirements of subsection 152-10(1A) are not satisfied. | Basic condition (d) - Active asset test | 43. Paragraph 152-10(1)(d) requires that the CGT asset satisfies the active asset test. | 44. Section 152-35 states: | (1) A CGT asset satisfies the active asset test if: | (a) 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 period specified in subsection (2); or | (b) 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 7½ years during the period specified in subsection (2). | (2) The period | (a) begins when you * acquired the asset; and | (b) ends at the earlier of: | (i) the * CGT event; and | (ii) 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. | Application to your circumstances | 45. Company A has owned Land A for more than 15 years prior to the relevant CGT event. The property must have been an active asset for a total period of at least 7½ years. | 46. Under subsection 152-40(1), a CGT asset is an active asset if it is owned by the taxpayer and is used, or held ready for use, in the course of carrying on a business by: | a. the taxpayer or | b. an affiliate of the taxpayer or | c. an entity that is connected with the taxpayer. | 47. While Land A has been used in the primary production business carried on by Trust B since 2XXX, it has not been established that Trust B is an affiliate of, or connected with Company A, within the meaning of sections 328-130 and 328-125. | 48. As Trust B is neither an affiliate nor a connected entity, its use of Land A in carrying on the business cannot be treated as use by Company A for the purposes of subsection 152-40(1). | 49. Company A does not carry on a business. Therefore, Land A is not used, or held ready for use, in a business carried on by Company A. | 50. As the use of Land A cannot be attributed to Company A, Land A does not satisfy the definition of an active asset under subsection 152-40(1). Therefore, the statutory requirement that the asset be used in a business carried on by Company A, or by a connected entity or affiliate, is not satisfied. | 51. As Land A does not satisfy subsection 152-40(1), it is unnecessary to consider the exclusions in subsection 152-40(4). Therefore, Land A does not satisfy the active asset test in section 152-35. | Conclusion | 52. As paragraph 152-10(1)(d) is not satisfied, Company A does not satisfy the basic conditions in section 152-10 in respect of the capital gain arising from the proposed disposal of Land A. | 15-year and retirement exemption | 53. Company A does not satisfy the basic conditions in Subdivision 152-A. It has not been established that Trust B is an affiliate of, or connected with, Company A for the purposes of sections 328-125 or 328-130. | 54. As a result, the requirement in subsection 152-10(1) is not met, and access to the small business CGT concessions is denied at the threshold stage. Therefore, Company A is not eligible to apply the 15-year exemption or the retirement exemption. | Question 2 | Will the Trustee for Trust A satisfy the requirements in section 152-110 to apply the 15-year exemption with respect to a capital gain it makes on the disposal of Land B, and if not, will Trust A satisfy the requirements in section 152-305 to apply the retirement exemption? | Summary | As Trust A does not satisfy paragraph 152-10(1)(c) and paragraph 152-10(1)(d), the basic conditions in Subdivision 152-A are not satisfied. Therefore, the Trustee for Trust A is not eligible to apply the 15-year exemption under section 152-110 or the retirement exemption under section 152-305. | Detailed reasoning | Basic conditions in Subdivision 152-A | 55. See paragraphs 1-2 for the discussion on the basic conditions in Subdivision 152-A. | Basic condition (a) - A CGT event happens in relation to a CGT asset of yours in an income year | 56. In the 2XXX income year, Land B will be transferred to the New Trust. The transfer of the property constitutes a disposal of a CGT asset for the purposes of subsection 104-10(1), resulting in CGT event A1 occurring at the time the disposal contracts are entered into. | 57. The requirement in paragraph 152-10(1)(a) is satisfied. | Basic condition (b) - The event would have resulted in the gain | 58. Subsection 104-10(4) provides that you make a capital gain from CGT event A1 if the capital proceeds from the disposal are more than the asset's cost base. | 59. In this case, the capital proceeds from the transfer of Land B will exceed its respective cost base. Accordingly, Trust A will make a capital gain upon the disposal of the property under section 104-10. | 60. The requirement in paragraph 152-10(1)(b) will be satisfied with respect to the transfer of Land B. | Basic condition (c) - You are a CGT small business entity | 61. See paragraphs 8-11 for the discussion on the basic conditions for being a CGT small business entity. | Application to your circumstances | 62. The Business is carried on solely by Trust B. Trust A does not carry on a business for the purposes of section 328-110. Accordingly, it cannot be a small business entity, or a CGT small business entity, under subsection 152-10(1AA). Therefore, paragraph 152-10(1)(c)(i) is not satisfied. | 63. However, the CGT small business entity status of Trust B is relevant for the purposes of subparagraph 152-10(1)(c)(iv), which allows the basic condition in subsection 152-10(1)(c) to be satisfied where the CGT asset is used in a business carried on by a CGT small business entity that is connected with, or an affiliate of Trust A. | (iv) the Passively held assets - affiliates and entities connected with you | 64. See paragraphs 14-15 for the discussion on the basic conditions for the passively held assets - affiliates and entities connected with you. | Affiliates | 65. See paragraphs 16-18 for the meaning of affiliates. | Application to your circumstances | 66. In this case, it is accepted that Individual A, Individual B, Child A and Child B: | a. are members of the same family group and | b. are involved in related business activities. | 67. In is noted: | a. Child A and Child B exercise formal decision-making authority in respect of Trust B in their capacities as directors, shareholders and appointors of the corporate trustee | b. there is no evidence that decisions made by Child A and Child B in relation to Trust B are made under the direction or influence of Individual A or Individual B, or that they are accustomed to act in accordance with their wishes | c. the arrangement described is equally consistent with a family group conducting related or complementary activities, rather than one in which the affairs of each individual's business are directed or coordinated in the manner contemplated by subsection 328-130(1) and | d. while non-arm's length dealings and long-standing family arrangements are relevant contextual factors, they do not, without more, demonstrate the requisite degree of influence or coordinated decision-making required to establish that the parties act in concert for the purposes of the provision. | 68. Even if it were accepted that these individuals act, or could reasonably be expected to act, in accordance with each other's directions or wishes, or in concert, in the sense required by subsection 328-130(1), the relevant entity for the purposes of paragraph 152-10(1A)(a) is Trust B. | Connected entity test | 69. See paragraph 23 for the connected entity test. | Influence over trustee | 70. See paragraphs 24-26 for the principles that are relevant to determining whether a person or entity exercised effective control over the trustee of a discretionary trust for the purposes of subsection 328-125(3). | Control of Trust A | 71. Trust A is a discretionary trust of which Individual A and Individual B are longstanding trustees and appointors. As appointors, Individual A and Individual B hold the power to appoint and remove trustees and therefore retain ultimate control over the composition of the trustee and, indirectly, the exercise of trustee powers, including decisions regarding distributions of income and capital. | 72. Child A and Child B were appointed as additional trustees on DD MM 2XXX. While they participate in trustee decision-making, their involvement does not displace the control retained by Individual A and Individual B in their capacity as appointors. | 73. In these circumstances, the trustee of Trust A could reasonably be expected to act in accordance with the directions or wishes of Individual A and Individual B, within the meaning of subsection 328-125(3). This conclusion is supported by: | a. the continuing appointor powers held by Individual A and Individual B and | b. their ability to remove and replace trustees where necessary to secure outcomes consistent with their wishes. | 74. Individual A and Individual B have also been formally nominated as controllers of the trust for the income years ended 30 June 2XXX and 30 June 2XXX pursuant to section 152-78. Under subsection 152-78(3), this nomination has effect as if Individual A and Individual B each controlled the trust in a manner described in section 328-125 for those income years. | 75. Therefore, Individual A and Individual B control Trust A for the purposes of section 328-125. | Control of Trust B | 76. The corporate trustee of Trust B, Company B, is controlled by Child A and Child B in their capacity as sole directors, and they hold most shares (4 shares each, compared with 2 shares each held by Individual A and Individual B). Child A and Child B are also the appointors of Trust B and therefore have legal authority to remove and replace the trustee. Child A and Child B exercise effective legal control over the trustee and the trust structure. | 77. Subsection 328-125(3) requires that the trustee acts, or could reasonably be expected to act, in accordance with the directions or wishes of the relevant entity (or its affiliates, or together with its affiliates). | 78. In applying this test, regard must be had to the principles in Gutteridge , which are relevant to assessing both whether a trustee acts in accordance with another's wishes, and whether it could reasonably be expected to do so. These include: | a. evidence that decisions are made because of another person's wishes | b. a critical assessment of the way in which the trustee is managed and | c. more than mere alignment of interests or consistency of action. | 79. On the facts: | a. there is no evidence in the available information that the trustee acts in accordance with the directions or wishes of Individual A or Individual B | b. decisions made by Child A and Child B may reflect their own business objectives, even if aligned with the broader family enterprise and | c. there is no established pattern of conduct demonstrating that the trustee is accustomed to act, or could reasonably be expected to act, in accordance with Individual A's or Individual B's wishes. | 80. Consistent with Decision Impact Statement Gutteridge and Commissioner of Taxation , the "reasonable expectation" test cannot be satisfied merely by inferring influence from family relationships, non-arm's length arrangements, or commercial alignment. While such factors may provide context, they do not, without more, establish that a trustee acts, or could reasonably be expected to act, in accordance with the directions or wishes of another entity. In the absence of evidence demonstrating actual influence over decision-making or a reasonable expectation of such influence, the requirements of subsection 328-125(3) are not satisfied. | Connected entity conclusion | 81. Accordingly: | a. Trust A is controlled by Individual A and Individual B and | b. Trust B is controlled by Child A and Child B. | 82. It cannot be concluded that Individual A controls Trust B either alone or together with affiliates. Nor can it be said that Individual B controls Trust B either alone or together with affiliates. Accordingly, paragraph 328-125(1)(b) is not satisfied. | 83. Furthermore, as no affiliate relationship has been established, paragraph 328-125(1)(a) is not satisfied. Therefore, Trust B is not connected with Trust A within the meaning of section 328-125. Although Individual A and Individual B control Trust A, it has not been established that they control Trust B. | 84. As Trust B is neither an affiliate of, nor connected with, Trust A subsection 152-10(1A) is not satisfied. Therefore, the basic conditions in Subdivision 152-A are not satisfied, and the small business CGT concessions are not available. | 85. Trust B is the small business entity for the purposes of paragraph 152-10(1)(c). Consequently, Trust A will satisfy the requirements in subsection 150-10(1A) if it can establish that Trust B is an affiliate or an entity connected with Trust A. | 86. In these circumstances, as a trust cannot be an affiliate, Individual A, Individual B, Child A and Child B will need to satisfy the control tests in subsections 328-125(3) or (4) of the ITAA 1997 to establish Trust A and the Trust B is a connected entity to each individual. Subsection 328-125(3) can be satisfied if it can be demonstrated that the trustee acts, or could reasonably be expected to act, in accordance with the directions or wishes of the four individuals. Alternatively, the facts required to satisfy subsection 328-125(4) are about distributions to any individual in any of the 4 years before a year of control. | 87. In the circumstances, it cannot be said that: Trust A controls Trust B for the purposes of subsection 328-125(3) (Individual A, Individual B, Child A and Child B do not jointly control Trust A and Trust B. | CGT small business entity status | 88. Trust B had an aggregated turnover of $X,XXX,XXX for the income year ended 30 June 2XXX. As the expected turnover for the income year ending 30 June 2XXX is uncertain, it is assumed for the purposes of this ruling that the aggregated turnover of Trust B will be less than $2 million for that income year. | 89. As there are no additional entities whose turnover is required to be included under section 328-115, the aggregated turnover of Trust B remains below $2 million. As there are no additional entities whose turnover is required to be included under section 328-115, the aggregated turnover of Trust B remains below $2 million. | 90. Therefore, based on this assumption, Trust B is a CGT small business entity for the purposes of subsection 152-10(1AA). | Conclusion - basic condition (c) | 91. While: | a. Trust B is assumed to be a CGT small business entity and | b. Trust B carries on the business in which Land B is used, | c. Trust B is not connected with Trust A. Therefore, the requirements of subsection 152-10(1A) are not satisfied. | Basic condition (d) - Active asset test | 92. See paragraphs 41-42 for the requirements of the active asset test. | Application to your circumstances | 93. Trust A has owned Land B for more than 15 years prior to the relevant CGT event. The property must have been an active asset for a total period of at least 7½ years. | 94. Under subsection 152-40(1), a CGT asset is an active asset if it is owned by the taxpayer and is used, or held ready for use, in the course of carrying on a business by: | a. the taxpayer or | b. an affiliate of the taxpayer or | c. an entity that is connected with the taxpayer. | 95. While Land B has been used in the primary production business carried on by Trust B since 2XXX, it has not been established that Trust B is an affiliate of, or connected with Trust A, within the meaning of sections 328-130 and 328-125. | 96. As Trust B is neither an affiliate nor a connected entity, its use of Land B in carrying on the business cannot be treated as use by Trust A for the purposes of subsection 152-40(1). | 97. Trust A does not carry on a business. Therefore, Land B is not used, or held ready for use, in a business carried on by Trust A. | 98. As the use of Land B cannot be attributed to Trust A, Land B does not satisfy the definition of an active asset under subsection 152-40(1). Therefore, the statutory requirement that the asset be used in a business carried on by Trust A, or by a connected entity or affiliate, is not satisfied. | 99. As Land B does not satisfy subsection 152-40(1), it is unnecessary to consider the exclusions in subsection 152-40(4). Therefore, Land B does not satisfy the active asset test in section 152-35. | Conclusion | 100. As paragraph 152-10(1)(d) is not satisfied, Trust A does not satisfy the basic conditions in section 152-10 in respect of the capital gain arising from the proposed disposal of Land B. | 15-year and retirement exemption | 101. Trust A does not satisfy the basic conditions in Subdivision 152-A of the ITAA 1997. It has not been established that Trust B is an affiliate of, or connected with, Trust A for the purposes of section 328-125. | 102. As a result, the requirement in subsection 152-10(1) is not met, and access to the small business CGT concessions is denied at the threshold stage. Therefore, Trust A is not eligible to apply the 15-year exemption or the retirement exemption.