Private ruling: Capital gains tax-small business concessions-15 year exemption
Date of advice: 12 February 2019
Published: May 2019
Ruling period: Year ended 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Is the Trust a small business entity as defined by section 152-10(1A) of the Income Tax Assessment Act ITAA 1997 (ITAA 1997) up until the time it disposed of the commercial building it held as an asset? | A1: Yes, based on the information provided the Trust is considered a small business entity as the Trust is carrying on a business and its turnover is under $2 million. | Q2: Does the commercial building satisfy the active asset test as defined by section 152-35 of the ITAA 1997? | A2: Yes, the Trust satisfies the conditions of the active asset test as the Trust has owned the asset for more than 15 years and the asset has been use in the course of carrying on a business with a connected entity for at least 7.5 years. It is also considered that the exception under paragraph 152-40(4)(e) of the ITAA 1997 does not apply. | Q3: Can the gain on the sale of a commercial building be exempt under the 15 year exemption? | A3: Yes, the Trust will be entitled to disregard any capital gain made on the disposal of the property under the small business 15-year exemption concession. This is because: ● The Trust meets the basic conditions under section 152-10 of the ITAA 1997. ● The Trust has owned the property for more than 15 years. ● The Trust has had a significant individual for at least 15 years during the period of ownership. ● One significant individual of the Trust is over 55 years of age and intends to retired from work after the CGT event.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 152-10 | Income Tax Assessment Act 1997 Subsection 152-10(1A) | Income Tax Assessment Act 1997 Paragraph 152-10(1)(b) | Income Tax Assessment Act 1997 Paragraph 152-10(1)(d) | Income Tax Assessment Act 1997 Subsection 152-10(1B) | Income Tax Assessment Act 1997 Section 152-35 | Income Tax Assessment Act 1997 Paragraph 152-35(1)(a) | Income Tax Assessment Act 1997 Paragraph 152-35(1)(b) | 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(4)(e) | Income Tax Assessment Act 1997 Section 152-55 | Income Tax Assessment Act 1997 Section 152-110 | Income Tax Assessment Act 1997 Section 328-110 | Income Tax Assessment Act 1997 Subsection 328-125(1) | Income Tax Assessment Act 1997 Subsection 328-125(3) | Income Tax Assessment Act 1997 Section 328-130


Relevant facts: In the 1980s a partnership operated a retail business. | The partnership leased a property from a third party until the property was purchased by a Trust in the early 1990s. | The partnership operated its business out of the property for more than seven and half years. | The partnership ceased its business operation at the property in the 2000s. | The partnership business income was less than $2 million per year. | In the early 1990s a Trust was established for the purposes of purchasing the property. | The property was purchased for $XXX.XXX. | The Trust is a non-fixed trust | The Trust received majority of its rental income from the partnership during the period the partnership leased the property of which the net income derived by the Trust was distributed to the following beneficiaries: | Beneficiaries A and B are married. | Beneficiaries C and D are married. | The Trustee of the Trust is a company (the Trustee). | The Directors of the Trustee Company are beneficiaries A and C. | The Trust is a Small Business Entity (SBE) as its business income is less than $2 million per year. | Beneficiaries A and C have 100% control over the day to day running of the Trust and the partnership. | The Trust and partnership are connected entities for the purpose of Subdivision 328C of the ITAA 1997. | Due to a turndown in the retail industry in the 2000s the Trust started seeking alternative forms of income. | The Trust did not have a business plan. | The Trust made enquiries into leasing out the property as commercial retail space and leasing out of other properties as an alternative source of income. | The Trust enquiries found it could rent the floor space of the property for $XXX a square metre and maximise its income and make a profit. | Parts of the interior of the building were demolished, refitted and partitioned into XX commercial properties. | The redevelopment of the property was completed within a number of years. | The redevelopment of the property was funded by private savings. | The property was rented to multiple unrelated tenants until the property was sold. | The property was sold with current tenancies in place to the new owner. | The property has an on-site office where beneficiaries A and C attended and met with the tenants. | Beneficiaries A and C as directors of the Trustee Company carried out the day to day management of the property on behalf the Trust. This includes the following: | ● Attending to administrative duties such as record keeping, invoicing tenants for the calculation of rates, taxes, insurance, water usage, emergency service levies, collecting mail, banking and attending to BAS and other tax matters. | ● Initially collecting rent from the tenants in person until the rents were paid electronically into a single rental account. | ● Finding new tenants themselves or by contacting real estate agents. | ● Negotiating the terms of a lease with new tenants and existing tenants. | ● Engaging a conveyancer or rental solicitor to drawn up the rental agreement. | ● Checking whether the rental income was paid on time by the tenants and contacting them in person when the rent was not paid on time. | ● Checking the property’s carpark on a daily basis for dumped rubbish. | ● Removing the dumped rubbish from the carpark and contacting the council if the rubbished is dumped outside the property. | ● Contacting tenants to enforce occupancy policies under a lease such as rubbish removal, safety hazards emergency egress and general tidiness and upkeep of individual tenancies. | ● Daily cleaning of the site office and toilets on the property. | ● Resolving tenants dispute over car parking spaces. | ● Reading the main electricity meter and the tenant’s sub-board meters for the electricity supply and calculating the electricity cost between tenants. | ● Maintaining the gardens at the property. | ● Undertaking repairs and maintenance to the property such as cleaning and clearing blocked gutters and downpipes, checking the roof sheeting and attending to septic tanks every two to four weeks. | ● Removing and painting over graffiti placed on the property. | ● Attending to all other repairs and maintenance except in cases that required licenced trades peoples to carrying out the work such as electrical and plumbing repairs. | Beneficiaries A and C worked on average X hours a day. | Beneficiaries A and C worked a number of days a week at the property. | Beneficiaries A and C also worked a few hours a week at other employment activities. | Beneficiary C holds a trades licence. | The Trust keeps records in the form of Quickbooks as well as receipts, lease documents and tax records. | For the XXXX-XX financial year the gross rental income was $XXX, XXX. | The property was sold on XX XXX XXXX. | A capital gain was made in the sale of the property. | Beneficiaries A, B, C and D are over 55 years of age. | After the property is sold beneficiaries A, B, C and D intend to retire. | Beneficiaries A, B and C are significant individuals of the Trust. | After the property was sold, the leasing activity had ceased and beneficiary C‘s intention is to retire and not pursue any other business or employment arrangement from the date of sale of the property. | The Trust has a significant individual.