Private ruling: Small business CGT concessions
Published: July 2014
Ruling period: 1 July 2013 to 30 June 2015
Date scheme commenced: During the year ended 30 June 2015.

Ruling: Q1: Will the property satisfy the active asset test in section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997) at the time of the CGT event? | A1: Yes. | Q2: If the answer to Question 1 is Yes, does subsection 152-325(1) of the ITAA 1997 apply to require the trust to make a 'payment' to a CGT concession stakeholder if the CGT event for which the trust makes a choice under Subdivision 152-D of the ITAA 1997 arises upon vesting of a CGT asset, being a half interest in the property, from the trust in specie in that stakeholder (and the other half interest in the property is vested in specie in another beneficiary of the trust) in respect of which the trust receives no actual capital proceeds? | A2: Yes. | Q3: If the answer to Question 2 is Yes, will the transfer of the CGT asset upon its vesting in specie in the relevant CGT concession stakeholder constitute a 'payment' for the purposes of section 152-325 of the ITAA 1997? | A3: Yes. | Q4: If the answer to Question 3 is Yes: (a) Will the timing of the 'payment' to the CGT concession stakeholder for the purposes of section 152-325 of the ITAA 1997 be upon vesting the CGT asset in that stakeholder, being after the Deed of Vesting has been executed by the trustee of the trust and any applicable conditions precedent contained in the Deed of Vesting are satisfied or waived (as the case may be), which vests the CGT asset in that stakeholder, takes effect? | A5: Yes.

Relevant facts and circumstances: The Trust has a Special Right Unit Holder (A) who has a number of Special Right Units. The Trust also has an Ordinary Unit Holder (B) who holds a number of Ordinary Units. The Trust also has a Fixed Right Unit Holder (A & B), who hold 2 Fixed Rights Units in their capacity as trustee of a superannuation fund. A and B are husband and wife and are also discretionary beneficiaries of the Trust. A turned 55 years of age in 20XX. A is the sole director and secretary of the Trustee company for the trust. Clauses of the Trust's deed deal with how income and capital may be distributed between the unit holders and the discretionary Beneficiaries. The Property The capital of the Trust includes (among other things) the fee simple in a property which it had purchased in the 1990s. The property's use enables it to qualify as an active asset for CGT Small Business concession purposes. The property's use over the years of ownership makes it eligible to satisfy the active asset test at the time of the proposed vesting transaction. The Property was recently valued by an independent valuer. The Proposed Vesting Based on the Valuation, the Trustee proposes to distribute an amount of the capital of the Trust as follows: (a) An amount to A & B as trustees of the superannuation fund in respect of their Fixed Right Units; (b) An amount to A in respect of his Special Rights Units (c) An amount to A distributed to him as a discretionary beneficiary; (d) An amount to B in respect of her Ordinary Units; (e) An amount to B distributed to her as a discretionary beneficiary. The amount in (a) above will be represented by cash. The amounts referred to in (b) to (e) will be represented by an in specie distribution of the subject property. Draft Trustee Resolutions reflecting the proposed distribution as outlined above have been provided. The proposed Deed of Vesting contains a condition precedent to the completion of the vesting. Clauses in the Deed of Vesting indicate that the effective date of the transfer under the Deed will be upon satisfaction or waiver of the condition precedent. Based on the recent valuation of the property a capital gain will arise from the in specie distribution of the property to which the general CGT discount is applicable.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 103-5 | Income Tax Assessment Act 1997 paragraph 104-10(3)(b) | Income Tax Assessment Act 1997 section 104-70 | Income Tax Assessment Act 1997 subsection 104-70(2) | Income Tax Assessment Act 1997 section 152-15 | Income Tax Assessment Act 1997 S ubdivision 152-C | Income Tax Assessment Act 1997 Subdivision 152-D | Income Tax Assessment Act 1997 paragraph 152-35(1)(b) | Income Tax Assessment Act 1997 subsection 152-35(2) | Income Tax Assessment Act 1997 section 152-40 | Income Tax Assessment Act 1997 subsection 152-40(1) | Income Tax Assessment Act 1997 paragraph 152-40(1)(a) | Income Tax Assessment Act 1997 paragraph 152-40(4)(e) | Income Tax Assessment Act 1997 subsection 152-40(4A) | Income Tax Assessment Act 1997 section 152-60 | Income Tax Assessment Act 1997 section 152-315 | Income Tax Assessment Act 1997 subsection 152-315(3) | Income Tax Assessment Act 1997 section 152-325 | Income Tax Assessment Act 1997 subsection 152-325(1) | Income Tax Assessment Act 1997 paragraph 152-325(1)(a) | Income Tax Assessment Act 1997 section 328-125 | Income Tax Assessment Act 1997 subsection 328-125(2) | Income Tax Assessment Act 1997 paragraph 328-125(2)(b) | Income Tax Assessment Act 1997 subsection 328-125(3) | Income Tax Assessment Act 1997 subsection 328-125(4) | Income Tax Assessment Act 1997 subsection 328-130(1)

Reasons for decision: Summary: The property is considered to be an active asset and the active asset test will be satisfied at the time of the proposed vesting of the property. | Detailed Reasoning - Detailed reasoning: The Trustee has owned the CGT asset for greater than 15 years. Therefore paragraph 152-35(1)(b) of the ITAA 1997 is the applicable provision for determining whether this asset satisfies the active asset test. Under this provision, it is necessary for the Trustee to have owned the asset for more than 15 years and that the asset was an active asset of the Trustee for a total of at least seven and a half years during the time specified in subsection 152-35(2) of the ITAA 1997. This period begins when the Trustee acquired the CGT asset and ends at the time of the CGT event, so far as is relevant. The meaning of the term 'active asset' is contained in section 152-40 of the ITAA 1997. As the asset in question is land (a tangible asset) subsection 152-40(1) of the ITAA 1997 is the applicable provision. As the Trustee does not directly use the asset in any business that it conducts it is necessary to look to the use of the asset by affiliates and/or entities that are connected with the Trustee to determine this issue. The term 'affiliate' is defined in section 328-130 of the ITAA 1997 while the meaning of the term 'connected with' (another entity) is defined in section 328-125 of the ITAA 1997. While parts of the property are used by entities not associated with A or B or the Trustee, the use of the property by the Trustee and its affiliates or entities connected with it is sufficient to lead to a conclusion that the property satisfies the tests of being an active asset and is not denied such status by any of the exclusions contained in section 152-40 of the ITAA 1997. Furthermore, it can also be concluded that the property will satisfy the active asset test in paragraph 152-35(1)(b) of the ITAA 1997 at the time of the proposed CGT event (the vesting of the property) due to length of time it has been an active asset. | Summary: If the trust receives no physical capital proceeds from a CGT event it still must make a payment of the associated capital gain to a CGT concession stakeholder if it wants to claim the Small Business Retirement Exemption for that capital gain. | Detailed Reasoning - Detailed reasoning: Choosing to use the Small Business Retirement Exemption in Subdivision 152-D of the Income Tax Assessment Act 1997 (ITA 1997) is voluntary and requires adherence to the provisions of the Subdivision so that the choice will be effective. Under paragraph 152-325(1)(a) of the ITAA 1997 a trust intending to make a choice to use the Retirement Exemption in respect of a CGT event for which it has received capital proceeds must make a payment to at least one of the trust's CGT Concession Stakeholders. It could be argued that in circumstances where the CGT event arises from an in specie distribution of a CGT asset from a trust for no consideration that the trust has not received capital proceeds. However the following paragraphs from the Explanatory Memorandum for the Bill that became Tax Laws Amendment (2006 Measures No 7) Act 2007, which inserted the present section 152-325 into the ITAA 1997, make it clear that in these circumstances the trust is deemed to have received market value capital proceeds for the CGT event and that the trust must make a payment of the disregarded capital gain to at least one of its CGT Concession Stakeholders if the trust wants to disregard the capital gain through use of the Retirement Exemption. 1.71 It is not necessary to receive actual capital proceeds in order to access the retirement exemption - the retirement exemption is available where a capital gain is made when an active asset is gifted and the market value substitution rule has applied or where CGT event J2, J5 or J6 happens. This is achieved by repealing subsections 152-310(3) and 325(4). [ Schedule 1, item 17, subsection 116-30(1 ) ] 1.72 Therefore if the individual disposing of the asset is aged 55 or over, they can use the retirement exemption if they meet the basic conditions. If they are less than 55, they can access the retirement exemption provided that they meet the basic conditions and pay an amount equal to the disregarded capital gain into a superannuation fund. In order to access the exemption on a gain made by a company or trust for which there are no actual proceeds, the company or trust must make a payment of the disregarded capital gain to at least one of its CGT concession stakeholders. This amendment is in addition to those recommended by the Board of Taxation. According to these paragraphs, where a trust has not received actual capital proceeds from the CGT event, it still must make a payment equal to the disregarded capital gain to at least one of the CGT concession stakeholders to be able to claim the Retirement Exemption. | Summary: The transfer in specie of the interest in the CGT asset will constitute a payment for the purposes of section 152-325 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: As explained in ATOID 2010/84 when a trustee makes an in specie distribution of trust property to unit holders in a trust, CGT event A1 occurs in respect of the trustee under section 104-10 of the ITAA 1997 and a corresponding CGT event E4 happens in respect of the unit holders' interests in the trust as a non-assessable payment under section 104-70 of the ITAA 1997. Under subsection 104-70(2) of the ITAA 1997 such a payment can include the giving of property while section 103-5 of the ITAA 1997 confirms that if the payment is the giving of property, the amount of such payment would be the market value of the property transferred. Therefore the vesting of the interest in the property in respect of the units held by the CGT concession stakeholder will constitute a payment for the purposes of section 152-325 of the ITAA 1997. | Summary: The time for when the payment is made to the CGT concession stakeholder for the purposes of section 152-325 will be when the CGT event A1 occurs in respect of the property. | Detailed Reasoning - Detailed reasoning: In the circumstances described, the Trustee intends to dispose of its ownership of the subject property to A & B. The disposal will not be taking place under a contract - rather, a Deed of Vesting will be executed by the Trustee. Under paragraph 104-10(3)(b) of the ITAA 1997 the time for a CGT event A1 to occur when there is no contract is when the change of ownership occurs. The principal stemming from Corin v Patton (1990) 169 CLR 540 is that the time of disposal for the purposes of paragraph 104-10(3)(b) of the ITAA 1997 is the time when the donor has done everything which is necessary to enable the legal transfer to be effected by the donee without any further action by the donor. This will involve providing the donee with the title to the property or the means of obtaining that title so that they can register the transfer of title. In the present case, when the Trustee executes the deed it will still be necessary for the condition precedent to be fulfilled in order for the change of ownership of the property to be effective, unless that condition is waived by A and B. If the condition is not waived the CGT event will take place at the time the condition is satisfied but if the condition is waived then the time of the CGT event will be when the waiving of the condition takes place. Paragraph 152-325(4) of the ITAA 1997 specifies that the payment referred to in subsection 152-325(1) of the ITAA 1997 must be made to a CGT concession stakeholder by a certain time as set out in the provision. Such a time would ordinarily be after the relevant CGT event takes place. However in the circumstances of this case, where the trustee will not be physically receiving the capital proceeds from the CGT event, the operation of the CGT provisions deem that the payment will have been made to the stakeholder upon the occurrence of the disposing CGT event A1. | Detailed Reasoning - Question 4(b): As the CGT concession stakeholder will have turned 55 years of age when the proposed transaction takes place, the Trustee can make a choice to disregard the CGT exempt amount arising from the transaction, under section 152-315 of the ITAA 1997.

The advice in the Register has been edited and may not contain all the factual details relevant to each decision. Do not use the Register to predict ATO policy or decisions. | (b) On the basis that the CGT concession stakeholder is 55 or over when the CGT asset vests in that stakeholder, can the Trustee as trustee of the DIT choose to disregard the asset's CGT exempt amount pursuant to Subdivision 152-D of the ITAA 1997?