Private ruling: CGT concessions for small business
Published: April 2012
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Do the blocks of land sold satisfy the basic conditions relating to the small business capital gains tax (CGT) concessions under section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: 

Relevant facts and circumstances: You purchased some blocks of land in the 2009-10 financial year. The blocks were sold in the 2011-12 financial year. You have requested advice on whether these blocks of land are active assets and therefore eligible for the small business CGT concessions. A related party operated their business from the blocks since the date of purchase. The related party has paid rent to you for the use of the blocks. The rent is paid at market value in accordance with the lease agreement. There is a structure on the property which the business is operated from. The remaining land is used in the business for parking and storage of vehicles. The percentage of area used for the business was approximately 90% of the entire area of the blocks combined. The property also had another unrelated tenant operating a business. The business ceased operating from the premises in the 2011-12 financial year, when their lease expired. When the business was a tenant, you estimate that they had use of 10% of the entire area of the blocks combined (which included part of the building and grounds). Since the unrelated tenant left, the related party has been operating out of the entire blocks. You operate as a discretionary trust. The related entity is a discretionary trust. You state that a 3 rd entity has a controlling interest in both the discretionary trusts. You state that you satisfy the maximum net asset value test.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 152-10 | Income Tax Assessment Act 1997 Section 152-15 | Income Tax Assessment Act 1997 Section 152-35 | Income Tax Assessment Act 1997 Section 152-40 | Income Tax Assessment Act 1997 Paragraph 152-40(4)(e) | Income Tax Assessment Act 1997 Section 328-125 | Income Tax Assessment Act 1997 Subsection 328-125(3) | Income Tax Assessment Act 1997 Section 328-130

Reasons for decision: Detailed Reasoning - Detailed reasoning: 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. This condition does not apply in the case of CGT event D1 (b) the event would (apart from Division 152 of the ITAA 1997) 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. (a) the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997. Condition (a) CGT event A1 under section 104-10 of the ITAA 1997, relating to the disposal of a CGT asset, happened in relation to the sale of the 3 blocks of land in the 2011-12 financial year. Therefore, this basic condition has been satisfied. Condition (b) The event has resulted in a capital gain, therefore, this basic condition has been satisfied. Condition (c) You have stated that you satisfy the maximum net asset value test under section 152-15 of the ITAA 1997, therefore this basic condition has been satisfied. Condition (d) The active asset test in section 152-35 of the ITAA 1997 is satisfied if: (a) you have owned the asset for 15 years or less and the asset was an active asset of yours for a total of at least half of the period detailed below or (b) you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of at least 7 ½ years during the period detailed below: The period: (a) begins when you acquired the asset and (b) ends at the earlier of: (i) the CGT event and (ii) if the relevant business ceased in the 12 months before the CGT event (or such longer time as the Commissioner allows) when the business ceased. Section 152-40 of the ITAA 1997 provides the meaning of 'active asset'. A CGT asset will be an active asset at a time if, at that time, you own the asset and the asset was used or held ready for use by you, an affiliate of yours, or by another entity that is connected with you, in the course of carrying on a business. Paragraph 152-40(4)(e) of the ITAA 1997 states, however, that an asset whose main use in the course of carrying on the business is to derive rent can not be an active asset unless the main use for deriving rent was only temporary. In your case, you purchased the blocks of land in the 2009-10 financial year and sold them in the 2011-12 financial year. The main use for the property in the course of carrying on your business was not temporary and was to derive rent from both a related party, and an unrelated party. The related party operated their business from the blocks of land since the date of purchase. You provide that their share of the building and land space amounted to 90% of the combined blocks. It will therefore need to be determined whether the related party is an affiliate of yours, or is an entity connected with you. Section 328-130 of the ITAA 1997 provides the meaning of 'affiliate'. Under this provision, only an individual or a company can be an affiliate, and therefore the related entity, being a trust, can not be an affiliate of yours. Section 328-125 of the ITAA 1997 provides the meaning of 'connected with' an entity. Under this provision, the related entity will be connected with you if you control the entity in a way described or both entities are controlled in a way described by the same third entity. Under subsection 328-125(3) of the ITAA 1997, you will control the trust if the trustee of the trust acts, or could reasonably be expected to act, in accordance with your directions or wishes. As the 3 rd party is the sole beneficiary of the income and capital of this trust for the 2010-11 financial year, they are considered to be in control of this trust. The 3 rd party is also the sole trustee of the related entity and therefore, it would be reasonable to expect the related entity to act in accordance with the directions or wishes of the 3 rd party. Therefore, as both entities are controlled in a way described by the same third entity, the entities are connected. The related entity would therefore be an entity connected with you under subsection 328-125(3) of the ITAA 1997. The unrelated party utilised approximately 10% of the building and land space of the combined blocks, until their lease expired in the 2011-12 financial year. The exclusion in paragraph 152-40(4)(e) of the ITAA 1997 will not apply in this case as the main use of the blocks of land (90%), was for an entity connected with you to carry on a business and not to derive rent. In this situation, the use by your connected entity is considered to be your use (Taxation Determination TD 2006/63 and subsection 152-40(4A) of the ITAA 1997). Accordingly, the blocks of land would all be considered active assets of your business since the date of purchase and therefore this basic condition will be satisfied. Therefore, as you satisfy all the basic conditions of section 152-10 of the ITAA 1997, you will be eligible for the small business CGT concessions in relation to these assets.

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