Private ruling: Small business - CGT concession - aggregated turnover test
Date of advice: 11 July 2017
Published: November 2017
Ruling period: Year ended 30 June 2016
Date scheme commenced: 1 July 2011

Ruling: Q1: Where a business was sold part way through a year, can you 'reasonably estimate’ the turnover for the period after the sale, by using the actual figures of the new owners of the business? | A1: Yes. | Q2: Is the methodology of your alternative calculation, based on the average daily turnover for the same period over the prior four financial years, acceptable for a reasonable estimate? | A2: Yes. | Q3: Will the rental income received on a property held jointly by the four individuals be excluded from the aggregated turnover calculation? | A3: Yes. | Q4: Where a connected entity purchased six rural properties, and has been renting them out since purchase, will the rental income be excluded from the aggregated turnover calculation, as passive income? | A4: Yes. | Q5: Where a connected entity sold various items of plant and equipment, will the resultant balancing charge from the sale of these items be excluded from the aggregated turnover calculation? | A5: Yes. | Q6: Where a trust is jointly controlled by you and several of their adult children, will the entity be 'connected’ for aggregated turnover estimates? | A6: No.

Relevant facts and circumstances: Partnership The partners sold their 50% share of a business, which resulted in a capital gain. Due to the seasonal nature of the business, it is not reasonable to extrapolate the turnover based on a daily average of the entire period. On this basis you have calculated the average daily turnover for the different periods, over the prior four financial years. The four individuals in the partnership have owned a property which includes a couple of sheds. The property is completely separate from either of the businesses and not geographically near either. It has been leased out to unrelated parties over the years since purchase, and was subsequently sold. Trust 1 A connected entity purchased X properties, which have been rented out since purchase. The properties have been included on the Trust Balance Sheet since acquisition, as capital assets. There are currently no plans to develop these properties. The intent is to sell them when the market improves, and the value increases to a figure that is closer to the amount paid for them. All properties are completely managed by Real Estate Agents, the Trustee’s don’t handle the management of any of these rental properties directly. Trust 2 A connected entity develops property for sale. During the year it sold blocks of land. The entity uses plant and equipment to develop the properties for sale. During the year it sold some of these capital assets and made a profit. You have provided a copy of the Trading Account, Detailed Profit and Loss Statement and Depreciation Schedule for the year. Trust 3 The directors of the company are you and two of your adult children. The shareholders are three of your children. The business has been operated within this trust by the two children. While the taxpayer is one of the three directors of the trustee company, they are not directly involved in the operation of the business, and none of the business profits have been or will be paid or distributed to them.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 6-10 | Income Tax Assessment Act 1997 section 10-5 | Income Tax Assessment Act 1997 section 328-110 | Income Tax Assessment Act 1997 section 328-115 | Income Tax Assessment Act 1997 section 328-120 | Income Tax Assessment Act 1997 section 328-125 | Income Tax Assessment Act 1997 section 328-130 | Income Tax Assessment Act 1997 subsection 328-110(5) | Income Tax Assessment Act 1997 subsection 328-120(5)

Reasons for decision: Detailed Reasoning - Q 1 & 2 Reasonable estimate of annual turnover: If an entity does not carry on a business for the whole of an income year, its annual turnover for the income year must be worked out using a reasonable estimate of what the annual turnover would be if the entity carried on a business for the whole of the income year (subsections 328-110(5) and 328-120(5) of the ITAA 1997). For example, if the turnover is $250,000 for the three months of the year that the entity is carrying on business, a reasonable estimate may be that the full year’s turnover would be $1m. This may be affected by other factors, such as seasonal demand. You have suggested two possible methodologies for the reasonable estimate. The second method of using historical figures would be an acceptable way of making a reasonable estimate. You have also suggested using the actual figures of the new owners. This method would be acceptable if the new owners conducted the business in the same manner as you did. The estimate has to be based on the consideration that the entity carried on a business for the whole of the income year. This would give a true estimate based on seasonal conditions and other conditions that may affect this type of business in this year provided it is carried on in the same manner as the entity would have carried on the business. Provided that you can get written evidence from the purchasers of the business (to confirm the actual figures) and that the business was carried on the same as before with no substantial changes to the operations, this methodology could be used to make a reasonable estimate. | Detailed Reasoning - Q 3 Rental income from separate property: You have derived rental income from a farming property not associated with either of the holiday parks. The property was sold. An entity’s turnover is the total ordinary income that the entity derives in the income year in the ordinary course of carrying on a business. While this will depend on the specific nature of the business itself, the intention is that income from regular or customary activities in carrying on the business are included. Such income typically includes income from regular and repetitive business activities, such as selling trading stock or providing services. It can also include income from activities that are ancillary to the business, such as interest income on operating cash held at the bank. Generally it does not include income from extraordinary activities, such as selling income producing assets or depreciating assets. The rental income derived from the property that is held jointly by the four individuals who are in the partnership is not considered to be part of the ordinary income of the business. It is something separate and not ancillary to the business activity and is therefore not included in the aggregated turnover calculation. | Detailed Reasoning - Q 4 Connected entity with X rental properties: You have indicated that: ● the entity has acquired X properties over a number of years and each has been rented out since purchase ● the properties each includes a residential house ● the properties have been recorded by the entity on the Balance Sheet as Capital assets, not trading stock ● the properties have been managed by Real Estate Agents since purchase, with no development activities taking place ● there are currently no plans to develop the properties ● the intent is to sell them when the market improves, and the value increases to a figure that is closer to the amount paid for them. Based on these facts the entity does not appear to be carrying on a business in regards to the rental properties. Therefore the rental income of this connected entity would not be included in the aggregated turnover calculation. | Detailed Reasoning - Q 5 Connected entity selling plant and equipment: This connected entity carries on a business of property development. In the 2016 income year it had income from the sale of blocks and a balancing charge amount from the sale of depreciating assets used in the business. The Capital gains tax concessions for small business 2016 guide gives examples of amounts not included in ordinary income. One of these examples is the proceeds from the sale of business capital assets. Therefore the balancing charge from the sale of the capital assets (depreciating assets) will not be included in the aggregated turnover calculation, as it is statutory income and not ordinary income of the business. | Detailed Reasoning - Q 6 Jointly controlled trust: The discretionary trust (with a corporate trustee) conducts a business. ● The directors of the corporate trustee are the taxpayer and his two sons. ● The shareholders of the corporate trustee are the three children. ● The business is operated by the two sons. ● The taxpayer is not directly involved in the operation of the business. ● The taxpayer has not received any distributions from the trust. Control by entity with influence over the trustee An entity controls the discretionary trust if the trustee either acts, or might reasonably be expected to act, in accordance with the directions or wishes of the entity or the entity’s affiliates or both the entity and its affiliates. Control by beneficiary The level of actual distributions made by a discretionary trust is used to determine who controls a trust. A beneficiary is taken to control a discretionary trust only if, for any of the four income years before the year for which relief is sought for a CGT event: ● the trustee paid to, or applied for the benefit of the beneficiary or their affiliates, or both the beneficiary and any of its affiliates, any of the income or capital of the trust, and ● the amounts paid or applied were at least 40% (the control percentage) of the total amount of income or capital paid or applied for that income . Neither of the partners control the business operated by the trust under either of these tests, therefore the income of the trust is not taken into account in the aggregated turnover calculation.