Private ruling: Retirement exemption
Date of advice: 26 April 2016
Published: June 2016
Ruling period: Year ending 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Are you eligible to disregard any capital gain made on disposal of the property under the CGT retirement exemption concession for small business? | A1: No.

Relevant facts and circumstances: Company A Pty Ltd is the trustee for the Unit Trust (the unit trust). Family Trust 1 and Family Trust 2 own the units in the unit trust equally. Sibling 1 and Sibling 2 have one share each in Company A Pty Ltd (that comprises the only issued shares). Directors of Company A Pty Ltd are Sibling 1 and Sibling 2 and their respective spouses. The trustee for Family Trust 1 (Sibling 1's trust) is Company A Pty Ltd. The trustee for Family Trust 2 (Sibling 2's trust) is Company A Pty Ltd. Sibling 1 and Sibling 2 are the only recipients of income from their respective trusts. You have advised that Sibling 1 and Sibling 2 will receive 100% of the distributions from their respective trusts for the year ending 30 June 2016. A property was purchased more than 15 years ago by the unit trust. The property was used by the unit trust in the course of carrying on its business for more than, 7 and a half, years. Since then, the property has been used by Sibling 2's trust. You are planning a meeting of unit holders to authorise a Special Resolution. It is expected that by Special Resolution the following will occur during the relevant financial year: (a) at the request of Sibling 1 and Sibling 2 (b) with the agreement of the Settlor and the Trustee as Trustee of the Unit Trust and Family Trust 1 and Family Trust 2 (c) the Unit Trust is wound up immediately by resolution of the Trustee with beneficial ownership of the property vested in Sibling 1 and Sibling 2 personally each as to half share as retirement benefits. You will obtain an independent appraisal for the market value of the property. The property will be disposed of equally to Sibling 1 and Sibling 2. The unit trust will not receive any consideration for the disposal. It is estimated that the unit trust will make a capital gain. The net value of the assets of Sibling 1 and Sibling 2 and their affiliates and connected entities is less than $6 million. Both Sibling 1 and Sibling 2 are aged over 55 years of age. Sibling 1 and Sibling 2 have not used any of their $500,000 capital gains tax (CGT) retirement exemption limit per section 152-320 of the Income Tax Assessment Act 1997 .


Reasons for decision: Summary: The CGT event that resulted in the gain, the choice to apply the particular concession and, the payment to the CGT concession stakeholders cannot all happen simultaneously. Therefore the requirement to make a 'payment' of the CGT exempt amount at a time after the CGT event can never be satisfied by an entity treating the in-specie transfer of a property as the making of a payment of the CGT exempt amount that was disregarded from the transfer of that same property. | Detailed Reasoning - Detailed reasoning: Subdivision 152-D of the Income Tax Assessment Act 1997 (ITAA 1997) contains the small business retirement exemption. You may choose to disregard all or part of a capital gain under the small business retirement exemption if you satisfy certain conditions. If you are a company or trust, other than a public entity, you can choose to disregard all or part of a capital gain where you meet all the following conditions contained in subsection 152-305(2) of the ITAA 1997: • you satisfy the basic conditions • you satisfy the significant individual test under section 152-50 of the ITAA 1997 • you keep a written record of the amount you choose to disregard (the exempt amount) and, if there are more than one CGT concession stakeholder, each stakeholder's percentage of the exempt amount • you make a payment to at least one of your CGT concession stakeholders worked out by reference to each individual's percentage of the exempt amount • the payment is equal to the exempt amount or the amount of capital proceeds, whichever is less and • where you receive the capital proceeds in instalments, you make a payment to a CGT concession stakeholder for each instalment in succession. You have advised that the unit trust satisfies the basic conditions. Therefore we have not examined whether the unit trust has satisfied those conditions. If a CGT concession stakeholder is under 55 years old just before receiving a payment, an amount equal to that payment must be immediately paid to a complying superannuation or retirement savings account on their behalf. There is no requirement to make this contribution if the stakeholder was 55 years old or older. In this case, both Sibling 1 and Sibling 2 are over 55 years of age. CGT concession stakeholder Under section 152-60 of the ITAA 1997, an individual is a CGT concession stakeholder of a company or trust if they are a significant individual or the spouse of a significant individual where the spouse has a small business participation percentage in the company or trust at that time that is greater than zero. This participation percentage can be held directly or indirectly through one or more interposed entities. The percentages are worked out in the same way as for the significant individual test. Significant individual test Under section 152-55 of the ITAA 1997, an individual is a significant individual in a company or trust if they have a small business participation percentage in the company or trust of at least 20%. This 20% can be made up of direct and indirect percentages. A company or trust satisfies the significant individual test if it had at least one significant individual just before the CGT event. Under section 152-70 of the ITAA 1997, an entity's direct small business participation percentage in a trust is the percentage of: • distributions of income that the entity is beneficially entitled to during the income year, or • distributions of capital that the entity is beneficially entitled to during the income year, or • if the two percentages above apply, then the smaller of the two. An entity's indirect small business participation percentage in a company (or trust), as per section 152-75 of the ITAA 1997, is calculated by multiplying together an entity's direct participation percentage in an interposed entity and the interposed entity's total participation percentage (both direct and indirect) in the company or trust. In this case, two separate family trusts each hold 50% of the units in the unit trust. You have advised that Sibling 1 and Sibling 2 will receive 100% of the distributions from their respective family trusts. The beneficiaries of the family trusts hold the following indirect small business participation percentages in the unit trust: Sibling 1 100% x 50% = 50% Sibling 1 100% x 50% = 50% Therefore, both Sibling 1 and Sibling 2 are significant individuals of the unit trust as they hold a small business participation percentage of more than 20%. These individuals will also be CGT concession stakeholders in the unit trust. The unit trust also satisfies the significant individual test as they will have at least one significant individual just before the CGT event. CGT retirement exemption limit Under section 152-320 of the ITAA 1997, an individual's lifetime CGT retirement exemption limit is $500,000 reduced by any previous CGT exempt amounts the individual has disregarded under the retirement exemption. In this case, Sibling 1 and Sibling 2 have not used any of their CGT retirement exemption limit. Making a payment A "payment" for CGT purposes may be defined to include "giving of property". In fact, section 103-5 of the ITAA 1997 provides that there are a number of provisions in the capital gains tax legislation that say that a payment, cost or expenditure can include giving property. The section also states that to the extent that such a provision does say that a payment, cost or expenditure can include giving property, use the market value of the property in working out the amount of the payment, cost or expenditure. Failure to make a payment by the end of seven days after making the choice (or receiving the capital proceeds) to a CGT concession stakeholder (if they are 55 years or older) will mean the conditions are not satisfied and the retirement exemption will not be available. In this case, the trustee for the Unit Trust proposes to transfer the property equally to Sibling 1 and Sibling 2 and claim the retirement exemption concession to disregard any capital gain made from the transfer. The unit trust proposes to treat the transfer of that same property as a payment in respect of the exempt amount (disregarded under the retirement exemption) equally to the CGT concession stakeholders of the unit trust being Sibling 1and Sibling 2. Subdivision 152-D of the ITAA 1997 does not contemplate that the CGT event, the making of the choice and the payment of the CGT exempt amount can all take place simultaneously. The determination of the capital proceeds, the calculation of the capital gains and the making a choice under section 152-305 of the ITAA 1997 is the correct construction of the order required for the small business retirement exemption provisions. A necessary consequence of this ordering is that the contribution of the CGT exempt amount must be made at the later of when the choice is made and when the capital proceeds are received. As the property is being transferred to Sibling 1 and Sibling 2, the market value of the property is the capital proceeds amount. In this case, the CGT event will occur when the unit trust, by a special resolution, makes an in-specie distribution of the proceeds (in this case the land) to Sibling 1 and Sibling 2 personally. The requirement that the payment be made after the happening of the CGT event that gives rise to the capital gain is not met as it occurs simultaneously. Therefore, the trust will not be eligible to apply the retirement exemption.