Private ruling: Small business CGT concessions
Date of advice: 19 August 2025
Published: 27 October 2025
Ruling period: Year ended 30 June 20XX | Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Do Trust A and Trust B, as partners in a partnership, satisfy subsection 152-10(1A) of the Income Tax Assessment Act 1997 (ITAA 1997) for the purposes of satisfying the small business entity test under subparagraph 152-10(1)(c)(iv) of the ITAA 1997? | A1: No. | Q2: Does the Property satisfy the active asset test pursuant to section 152-35 of the ITAA 1997 and the meaning of active asset pursuant to section 152-40 of the ITAA 1997? | A2: Yes. | Q3: Is 100% of the market value of the Property to be included in calculating the $6 million maximum net value asset test under section 152-15 of the ITAA 1997 for each partner, being Trust A and Trust B, where each partner owns 50% interest in the property? | A3: No.

Relevant facts and circumstances: Trust A and Trust B, in partnership (the Partnership), purchased a commercial property (the Property). You provided us with the address of the property and the purchase date. Trust A and Trust B, each acquired 50% of the shares in Company A on a specified date. You provided us with information on Company A being when it was incorporated and its business trading name. Company A has used part of the Property since its acquisition to carry on a business, until Company A was disposed of on a specified date. The Property was not sold when Company A was sold. Part of the Property has been leased to an unrelated party 2 years after the purchase of the Property until present time. Until the sale of Company A, Company A occupied 61.5% of the total estimated Property floor area. The percentage of rental income derived from the Property for 8 years prior to the sale of Company A has been no more than 11% of the total income derived from the use of the Property. A new company, Company B, was incorporated shortly before the sale of Company A with Entity A and Entity B each holding 50% ordinary share. On a specified date, Company B commenced a business. The business is carried on from part of the Property, which is leased from the Partnership, utilising 5% of the Property for this business activity. Since the specified date, the income derived from leasing the Property by the Partnership has exceeded the income derived by Company B in conducting their business. Company B was a CGT small business entity in the relevant income year with an aggregated turnover of less than $2 million. You provided us with details on the estimated market value of the Property.

Relevant legislative provisions: Income Tax Assessment Act 1997 subparagraph 152-10(1)(c)(iv) | Income Tax Assessment Act 1997 subsection 152-10(1A) | Income Tax Assessment Act 1997 section 152-15 | Income Tax Assessment Act 1997 section 152-20 | Income Tax Assessment Act 1997 section 152-35 | Income Tax Assessment Act 1997 section 152-40

Reasons for decision: Summary: All subsequent legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated. Section 152-10 sets out the basic conditions that an entity must satisfy before being entitled to any of the small business CGT concessions in Division 152. The basic condition contained in subparagraph 152-10(1)(c)(iv) provides that, for the purpose of the small business entity test, you satisfy paragraph 152-10(1)(c) if the conditions mentioned in subsection 152-10(1A) or subsection 152-10(1B) are met in relation to the CGT asset in the income year. Subsection152-10(1A) provides that a passively held asset may satisfy the requirement that it be used in the course of carrying on a business if the asset is used for that purpose by 'your affiliate, or an entity that is connected with you'. | Detailed Reasoning - Passively held assets used by affiliates and entities connected with you: Subsection 152-10(1A) states: 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. The Explanatory Memorandum (EM) to the Tax Laws Amendment (2009 Measures No. 2) Act 2009 provides the following information on 152-10(1A): 2.19 This access to the small business CGT concessions via the small business entity test for a taxpayer who owns a CGT asset that is used in the business of an affiliate or an entity connected with the taxpayer occurs when the following conditions are satisfied: • The taxpayer's affiliate, or an entity that is connected with the taxpayer, is a small business entity for the income year (ie, the income year in which the CGT event happens to the taxpayer's CGT asset). • The taxpayer does not carry on a business in the income year other than in partnership. • If the taxpayer carries on a business in partnership, the CGT asset is not an interest in an asset of the partnership. • The small business entity that is the taxpayer's affiliate, or is connected with the taxpayer, is the entity that carries on the business referred to in subparagraph 152-40(1)(a)(ii) in its proposed new form, or new subparagraph 152-40(1)(a)(iii), or paragraph 152-40(1)(b) in its proposed new form in relation to the CGT asset. [ Schedule 2, item 4, subsection 152-10(1A )] 2.20 This access to the small business CGT concessions requires a taxpayer's affiliate or entity connected with the taxpayer to be a small business entity in the income year. The access also requires the small business entity to be the entity that carries on the business at a time in the income year referred to in subparagraph 152-40(1)(a)(ii) in its proposed new form, or new subparagraph 152-40(1)(a)(iii), or paragraph 152-40(1)(b) in its proposed new form in relation to the CGT asset. This link is necessary to prevent access to the concessions in a situation where a taxpayer's affiliate or entity connected with the taxpayer is a small business entity but the asset is used by an affiliate or entity connected with the taxpayer that is not a small business entity. [ Schedule 2, item 4, paragraphs 152-10(1A )( a ) and ( d )] | Detailed Reasoning - Connected entity: Under subsection 328-125(1), an entity is connected with another entity if either entity controls the other entity or both entities are controlled by the same third entity. Subsection 328-125(2) provides that an entity controls another entity if it or its affiliate (or all of them together): (a) owns, or has the right to acquire ownership of, interests in the other entity that give the right to receive at least 40% (the control percentage) 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 (b) if the other entity is a company, owns, or has the right to acquire ownership of, equity interests in the company that give at least 40% of the voting power in the company | Detailed Reasoning - Affiliates: Under section 328-130, an affiliate of yours is an individual or company that, in relation to their business affairs, acts or could reasonably be expected to act: • in accordance with your directions, or • in concert with you. Trusts, partnerships and superannuation funds cannot be your affiliates. However, a trust, partnership or superannuation fund may have an affiliate who is an individual or company. | Detailed Reasoning - Active Asset Test: The active asset test is contained in section 152-35. Where you have owned the asset for more than 15 years, the active asset test is satisfied if the asset was an active asset of yours for a total of 7.5 years of the test period detailed below. The test period: - the CGT event, and - when the business ceased, if the business in question ceased in the 12 months before the CGT event (or such longer time as the Commissioner allows). Section 152-40 explains that a CGT asset is an active asset if it is owned by you and is used or held ready for use in a business carried on (whether alone or in partnership) by you, your affiliate, your spouse or child, or an entity connected with you. However, an asset whose main use by you is to derive rent cannot be an active asset unless its main use for deriving rent was only temporary (subparagraph 152-40(4)(e)(ii)). That is, even if the asset is used in a business, it will not be an active asset if its main use is to derive rent. If an asset is used partly for business and partly to derive rent at any given time, it is a question of fact dependent on all the circumstances as to whether the main use of the asset at that time is to derive rent. No one single factor is necessarily determinative, and consideration is given to a range of factors such as: • the comparative areas of use of the property (between deriving rent and other uses), and • the comparative levels of income derived from the different uses of the property. | Detailed Reasoning - Maximum Net Asset Value Test: The maximum net asset value test is contained under section 152-15. The test is satisfied if, just before the CGT event, the sum of the following amounts does not exceed $6 million: • The net value of the CGT assets you own, • The net value of the CGT assets of any entities connected with you, • The net value of the CGT assets of any affiliates of yours or entities connected with your affiliates. | Detailed Reasoning - Application to your circumstances: Trust A and Trust B have owned the Property for more than 15 years, with each Trust owning 50% interest in the Property. Trust A and Trust B do not carry on a business in their own capacity. The Property has been used in the business of Company A for more than 15 years and Company B for less than 3 years. Company A occupied more than 50% of the Property for their business and Company B occupied 5% of the Property for their business. Company A was a connected entity to Trust A and Trust B as each Trust having owned 50% of Company A since 20XX until Company A was sold. Company B is a connected entity to Trust A and Trust B as each Trust owning 50% of Company B since incorporation in 20XX. The Property is an active asset as it has been used in the business of a connected entity, being Company A, for more than 7 ½ years. During the time the Property was used by Company A the main purpose was not to derive rent, with Company A utilising over 50% of the floor space and the rental income received from unrelated third party entities by Trust A and Trust B represented 11% of their total income. Therefore, the Property has satisfied the active asset test under section 152-35 and 152-40. Subsection 152-10(1A) is not satisfied in the income year due to the following reason: • Company B is a CGT small business entity in the relevant income year, however Company B is not the entity that carried on the business as referred to in subparagraph 152-40(1)(a)(iii). Trust A and Trust B as not affiliates of each other nor connected with each other, therefore they will only be required to use their 50% ownership in the Property when calculating the maximum net asset value test under section 152-15.

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