Private ruling: small business capital gains tax concessions
Published: January 2014
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Does the trust satisfy the basic conditions for the small business capital gains tax (CGT) concessions? | A1: Yes.

Relevant facts and circumstances: The trust is a partner in a partnership. Both partners have an equal interest in the partnership. The partnership purchased a commercial property. The trust does not carry on a business. The commercial property was rented to the company for the entire ownership period. The company is a small business entity. The company paid commercial rent to the partnership for the entire ownership period of the property. The equal shareholders of the company are individual A and B in trust their respective family trusts. In individual A's case, the shares are held in trust for the trust that owns the property. There is only one class of shares on offer and these shares have voting rights. The property was sold and settlement occurred in the 2012-13 financial year. The trust made a capital gain.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 152-A | Income Tax Assessment Act 1997 subsection 152-10(1A) | Income Tax Assessment Act 1997 section 152-35 | Income Tax Assessment Act 1997 subsection 152-40(1) | Income Tax Assessment Act 1997 subparagraph 152-40(1)(a)(ii) | Income Tax Assessment Act 1997 subparagraph 152-40(1)(a)(iii) | Income Tax Assessment Act 1997 paragraph 152-40(1)(b) | Income Tax Assessment Act 1997 paragraph 152-40(1)(c) | Income Tax Assessment Act 1997 subsection 152-40(4)

Reasons for decision: Summary: The basic conditions are contained in Subdivision 152-A of the Income Tax Assessment Act 1997 (ITAA 1997). To qualify for the small business CGT concessions, you must satisfy several conditions that are common to all the concessions. The following are the basic conditions: (a) a CGT event happens in relation to a CGT asset of yours in an income year; (b) the event would have resulted in the gain; (c) at least one of the following applies: (i) you are a 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 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 (see section 152-35). Note that the small business 50% active asset reduction will apply if the basic conditions are satisfied. | Detailed Reasoning - Passively held assets: The conditions in subsection 152-10(1A) 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 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 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. In this case, the trust sold a CGT asset and the event resulted in a capital gain. The trust does not operate a business. The property is used in the course of carrying on a business by the company. Therefore, we need to consider whether this company is a connected entity of the trust. | Detailed Reasoning - Connected with - control of a company: An entity controls a company if the entity beneficiary owns, or has the right to acquire beneficial ownership of, equity interests in the company that give at least 40% of the voting power in the company. In this case, the trust owns more than 40% of the shares in the company. Therefore, the the company is connected with the trust. | Detailed Reasoning - Active asset test: A requirement of the active asset test contained in section 152-35 of the ITAA 1997 is that the CGT asset must be an active asset for at least half of the period from when you acquired it until the earlier of the CGT event or when you ceased business, if the relevant business had ceased to be carried on in the 12 months before the CGT event. The meaning of an active asset is set out in section 152-40 of the ITAA 1997. It must firstly satisfy one of the 'positive tests' in subsection 152-40(1) of the ITAA 1997 and then also not be excluded by one of the exceptions in subsection 152-40(4) of the ITAA 1997. Under subsection 152-40(1) of the ITAA 1997 a CGT asset is an active asset (subject to the exclusions) if it is owned and used, or held ready for use, in the course of carrying on a business by you or your small business CGT affiliate or another entity that is connected with you under paragraph 152-40(1)(c) of the ITAA 1997. The combined effect of sections 152-35 and 152-40 of the ITAA 1997 is that the asset will meet the active asset test if the asset was used, or held ready for use, in the course of carrying on a business for at least half of the time period it was owned, subject to the exclusions in subsection 152-40(4) of the ITAA 1997. The following assets cannot be active assets (subsection 152-40(4) of the ITAA 1997): · interests in a connected entity (other than those satisfying the 80% test) · shares in companies and interests in trusts (other than those satisfying the 80% test) · shares in widely held companies unless they are held by a CGT concession stakeholder of the company · shares in trusts that are similar to widely held companies unless they are held by a CGT concession stakeholder of the trust or other exceptions for trusts with 20 members or less apply · financial instruments, including loans, debentures, bonds, promissory notes, futures contracts, forward contracts, currency swap contracts, rights and options · an asset whose main use in the course of carrying on the business is to derive interest, an annuity, rent, royalties or foreign exchange gains. However, such an asset can still be an active asset if it is an intangible asset that has been substantially developed, altered or improved by the taxpayer so that its market value has been substantially enhanced or its main use for deriving rent was only temporary. | Detailed Reasoning - Application to your circumstances: In this case, the property owned by the trust was used in the course of carrying on a business by the company for more than 7 and a half years. The company is a small business entity. As discussed, the company is a connected with the trust. Therefore, the property will satisfy the active asset test. As the basic conditions for the small business concessions have been satisfied, the trust is entitled to apply the 50% active asset reduction.