Private ruling: CGT SB retirement exemption
Published: January 2014
Ruling period: Year ended 30 June 2007
Date scheme commenced: 1 July 2008

Ruling: Q1: 1. Can the Trust apply the capital gains tax (CGT) small business retirement exemption in subdivision 152-D of the Income Tax Assessment Act 1997 (ITAA 1997)? | A2: Yes

Relevant facts and circumstances: The Trust is a discretionary trust. The beneficiaries of the Trust include individual A, individual B and company A. The original trust return lodged for the 2006-07 financial year on behalf of the Trust did not include a capital gain. As a result of an audit of the Trust, a net capital gain was included for the 2006-07 financial year. The CGT small business concessions were not considered to apply at this time. An objection was lodged arguing that the Trust was eligible to apply the CGT small business concessions. The objection was disallowed. An appeal to the objection decision was lodged and the decision was overturned and the objection allowed in full. As a result: · the Trust made a capital gain in the 2006-07 financial year. · The trust satisfied the CGT small business basic conditions in the 2006-07 financial year. · The Trust did not request that the active asset reduction not apply to the capital gain in the 2006-07 financial year. Individual A received approximately 65% of the distributions of net capital gain from the Trust in the 2006-07 financial year. Individual B received approximately 23% of the distributions of net capital gain from the Trust in the 2006-07 financial year. Company A received 100% of the net income of the Trust and the remaining distributions of net capital gain from the Trust in the 2006-07 financial year. Individuals A and B each held a 50% interest in Company A. Both individual A and individual B were over 55 years of age in the 2006-07 financial year. Neither individual A nor individual B have previously used any of their lifetime retirement exemption limits.

Relevant legislative provisions: Income Tax Assessment Act 1997 - Division 152 | Income Tax Assessment Act 1997 - Sub-division 152-A | Income Tax Assessment Act 1997 - Sub-division 152-D | Income Tax Assessment Act 1997 - Section 103-25 | Income Tax Assessment Act 1997 - Section 152-315 | Income Tax Assessment Act 1997 - Section 152-325

Reasons for decision: Detailed Reasoning - Retirement exemption: Under subdivision 152-D of the ITAA 1997, the trust can choose to disregard part of a 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: 1. the basic conditions of Subdivision 152A of the ITAA 1997 2. the significant individual test 3. a valid choice to apply the retirement exemption is made; and 4. 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. | 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. The significant individual test is not the same as the control tests used to determine if an entity is 'connected with' another entity for the purposes of the $6 million maximum net asset value test or the $2 million aggregated turnover test. An individual is a significant individual in a trust if they have a small business participation percentage in the trust of at least 20% - this 20% can be made up of direct and indirect percentages. As 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 2007 (the year in which the CGT event occurred) will be considered a significant individual of the Trust. In the 2006-07 financial year, individual A and individual B directly received capital distributions of more than 20% and indirectly received 50% of the income distributions, as they each held a 50% interest in company A. 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 or within a further time allowed by the Commissioner (section 103-25 of the ITAA 1997). Whether the lodgement of tax returns including a capital gain constitutes a choice was considered in ATO interpretive decision ATO ID 2003/103. The general rule is that a taxpayer who has considered the application of the CGT concessions and chosen a particular concession has made a choice which cannot later be changed. However, a taxpayer who did not consider the CGT concessions and accordingly included a capital gain in their income tax return has not made a choice and can, if the Commissioner allows further time, later make a choice for a CGT concession and amend their return to reduce or disregard the capital gain. The original trust return lodged for the 2006-07 financial year on behalf of the Trust did not include a capital gain and subsequent audit and objection processes determined the concessions would not apply. In this case, the Trust did not consider any of the CGT concessions and hence did not make any choice. In these circumstances, it is reasonable for the Commissioner to allow further time to make a choice under paragraph 103-25(1)(b) of the ITAA 1997. The exempt amount cannot exceed $500,000 per CGT concession stakeholder, and will be $500,000 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. As already discussed, both individual A and individual 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. If the stakeholder was 55 years old or older there is no requirement to make this contribution. Both individual A and individual B were over 55 years of age in the 2006-07 financial year. 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. As the capital gain has already been distributed to individual A and individual B, the payment conditions have been satisfied. | Detailed Reasoning - Conclusion: Based on the above analysis, the Trust will be entitled to disregard up to $500,000 of the capital gain per concession stakeholder under the small business retirement exemption.

2. Will the Commissioner exercise the discretion pursuant to section 103-25(1)(b) of the ITAA 1997 to extend the time for the Trust to make the choice to apply the exemption?