Private ruling: Capital Gains Tax - Small Business Concessions
Published: January 2014

Ruling: Q2: Are you eligible for the small business 15 year exemption on the disposal of your property, water rights and bore licence? | A1: Yes. Year ended 30 June 2014 1 July 2013 You and your spouse are both over the age of 55. You and your spouse bought a property some time ago. You and your spouse acquired particular rights and a license, in connection with your land, in a subsequent year. Both are inherently connected with the land. You and your spouse intend to sell the property along with the associated rights and license in the 2014 financial year and anticipate, based on the current market value, that you will make a capital gain. The property, including the rights and license, has been used in a business conducted by The Trust. The Trustee of The Trust is The Company. You and your spouse are both directors and hold 50% of the shares each in The Company. The Company is not carrying on a business. The remaining portion of the land has been used in a business conducted by the partnership. The partnership consists of you and your spouse. The property, rights and license have never been rented to another party. Both businesses commenced in the 1970s and the business conducted by the trust has been using the property, water rights and bore license since 1993 and the business conducted by the partnership has been using the property since it was acquired. Your aggregated turnover is less than $2 million. The Trust has made income distributions for the past four financial years. The Trust has not made any distributions of capital for the past four financial years. The sale of the property will be in connection with you and your spouse's retirement. Income Tax Assessment Act 1997 Division 152. Income Tax Assessment Act 1997 section 152-10. Income Tax Assessment Act 1997 subsection 152-10(1A). Income Tax Assessment Act 1997 section 152-35. Income Tax Assessment Act 1997 Paragraph 152-40(4)(e). Income Tax Assessment Act 1997 section 328-110. Income Tax Assessment Act 1997 subsection 328-125(3) Income Tax Assessment Act 1997 subsection 328-125(7)



Reasons for decision: Detailed Reasoning - Basic Conditions: Section 152-10 of the ITAA 1997 contains the basic conditions you must satisfy to be eligible for the small business CGT concessions. These conditions are: (a) a CGT event happens in relation to a CGT asset 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 in section 152-15 of the ITAA 1997 (iii) you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an asset of the partnership or (iv) the conditions in subsection 152-10(1A) or (1B) of the ITAA 1997 are satisfied in relation to the CGT asset in the income year. (d) the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997. In this case, a CGT event will occur when a contract of sale is entered into. The CGT event will result in a capital gain as indicated by the market value of the property. | Detailed Reasoning - Special conditions for passively held assets: The special condition under sub-section 152-10(1A) of the ITAA 1997 is satisfied 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 in relation to the CGT asset. In this case, you and your spouse do not carry on a business, other than your partnership, and the CGT asset is not an interest in an asset of the partnership. Therefore, it needs to be considered whether you and your spouse satisfy paragraph (a) and (d) and therefore meet the special conditions for passively held assets. The basic rule is that an entity is connected with another entity if either entity 'controls' the other, or both entities are controlled by a common third entity. Direct control of a discretionary trust Control of a discretionary trust can be via a beneficiary or by an entity that controls the trustee. A beneficiary is taken to control a discretionary trust where, for any of the four income years before the year for which relief is sought for a CGT event: o 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 o 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 year. Alternatively, an entity will control a discretionary trust if the trustee acts, or could reasonably be expected to act, in accordance with the directions of that entity or its affiliates (subsection 328-125(3) of the ITAA 1997). ATO Interpretive Decision ATO ID 2008/139 provides that a person who has the power to remove the trustee of a discretionary trust and appoint a new trustee will control the trust for the purposes of subsection 328-125(3) of the ITAA 1997. Indirect control of an entity The control tests for the 'connected with' rules are designed to look through business structures that include interposed entities. If an entity (the first entity) directly controls a second entity, the first entity will also be taken to control any entity directly controlled by the second entity (subsection 328-125(7) of the ITAA 1997). In this case, you and your spouse have each received distributions of income of more than 40% directly and indirectly from the trust. You and your spouse directly control the trust and therefore, the trust is connected to you and your spouse. Additionally, as you and your spouse both control the trust and the partnership, you are all connected entities. | Detailed Reasoning - Small business entity: Section 328-110 of the ITAA1997 provides that a small business entity is an individual, partnership, company or trust that: · is carrying on a business, and · has less than $2 million aggregated turnover. In this case, The Trust is conducting a business and their aggregated turnover is less than $2 million. Therefore, The Trust is a small business entity. The property, including the rights and the license, has been used in the business conducted by The Trust. Accordingly, the special conditions for passively held assets under sub-section 152-10(1A) of the ITAA 1997 are satisfied. | Detailed Reasoning - Active asset test: The active asset test is contained in section 152-35 of the ITAA 1997. 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 at least seven and a half years of the test period detailed below. The test period: · begins when you acquired the asset, and · ends at the earlier of o the CGT event, and o 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). A CGT asset is an active asset at a given time if, at that time you own it and it is used (or held ready for use) in the course of carrying on a business by you, a small business CGT affiliate of yours or an entity connected with you. In your case, you and your spouse have owned the assets for more than 15 years and they have been used by your connecting entities for more than seven and a half years. Therefore, the property, rights and license are considered to be active assets under section 152-35 of the ITAA 1997. | Detailed Reasoning - Small business 15 year exemption: For an individual to be eligible for the small business 15-year exemption you must satisfy the basic conditions and these further conditions: (a) you continuously owned the CGT asset for a 15 year period ending just before the CGT event; and (b) either: (i) you are 55 or over at the time of the CGT event and the event happens in connection with your retirement; or (ii) you are permanently incapacitated at the time of the CGT event. In your case, you and your spouse owned the assets for longer than 15 years, the event happened in connection with you and your spouse's retirement and you are both over the age of 55. Therefore, as you and your spouse also satisfy the basic conditions, you are eligible to claim the small business 15 year exemption.

Question 1: Do you satisfy the basic conditions necessary to be eligible for the capital gains tax (CGT) concessions for small business?