Private ruling: CGT Small Business Retirement Exemption
Date of advice: 11 December 2017
Published: April 2018
Ruling period: Year ended 30 June 201B
Date scheme commenced: 1 July 201A

Ruling: Q1: Is the Trust eligible to choose to apply the retirement exemption to any capital gain made as a consequence of the proposed restructure under Subdivision 152-D of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes


Relevant legislative provisions: Income Tax Assessment Act section 152-50 | Income Tax Assessment Act section 152-55 | Income Tax Assessment Act section 152-60 | Income Tax Assessment Act section 152-65 | Income Tax Assessment Act 1997 Subdivision 152-D | Income Tax Assessment Act 1997 section 152-305 | Income Tax Assessment Act 1997 section 152-310 | Income Tax Assessment Act 1997 section 152-315 | Income Tax Assessment Act 1997 section 152-320 | Income Tax Assessment Act 1997 section 152-325

Reasons for decision: Summary: The Trustee of the Trust is eligible to choose to apply the retirement exemption to any capital gain made as a consequence of the proposed restructure under Subdivision 152-D of the ITAA 1997, on the assumption that the basic conditions for relief are satisfied for the gain. The requirements for the small business retirement exemption are contained in Subdivision 152-D. The conditions for a trust to be able to choose the exemption are contained in subsection 152-305(2) and are as follows: (a) the basic conditions in Subdivision 152-A are satisfied for the capital gain; and (b) the entity satisfies the significant individual test under section 152-50; and (c) the company or trust conditions in section 152-325 are satisfied. | Detailed Reasoning - Basic conditions in Subdivision 152-A: The following basic conditions for small business CGT relief must be satisfied under section 152-10. (a) A CGT event (other than CGT event K7) happens in relation to a CGT asset of a taxpayer. (b) A capital gain would arise (apart from the application of Division 152 – Small business relief). (c) The taxpayer satisfies one of the following: ● the maximum net asset value test under section 152-15, or ● it is a small business entity or a partner in a partnership that is a small business entity. (d) The CGT asset satisfies the active asset test under section 152-35. (e) If the CGT asset is a share in a company or an interest in a trust, either of the following conditions must be satisfied just before the CGT event: ● the taxpayer making the gain must be a ‘CGT concession stakeholder’ under section 152-60(a) and (b). OR ● where this condition is not satisfied, CGT concession stakeholders must have a ‘small business participation percentage’ of 90% or more. The ruling is issued on the assumption that the basic conditions in section 152-10 are satisfied. | Detailed Reasoning - Company and trust conditions: In order to be able to make a choice to access the retirement exemption in addition to satisfying the relevant basic conditions (as discussed above), companies or trusts (excluding public entities) must: ● have at least one significant individual just before the CGT event; ● keep a written record of the amount they choose to disregard (the exempt amount); and if there is more than one CGT concession stakeholder, a written record of each stakeholder’s percentage of the exempt amount (see section 152-315(5)). The company or the trust can determine the percentage of the exempt amount to be attributed to each CGT concession stakeholder having regard to each stakeholder’s $500,000 lifetime CGT retirement exemption limit. The percentage does not have to be equal to the stakeholder’s interest in the company or the trust (in contrast to the 15 year exemption) and nil percentages may be included so long as the total allocation is 100%; ● make a payment to at least one of the CGT concession stakeholders worked out by reference to each individual’s percentage of the exempt amount by the later of 7 days after the choice is made to disregard the capital gain and 7 days after the capital proceeds from the CGT event are received; and ● where a CGT concession stakeholder is under 55 years of age just before receiving the payment, an amount equal to that payment must be contributed immediately on their behalf to a complying superannuation fund or retirement saving account. Failure to make a payment immediately into a complying superannuation (or similar) fund will mean the conditions are not satisfied and the retirement exemption will not be available. If the stakeholder was 55 or more there is no requirement to make this contribution. | Detailed Reasoning - Significant individual test: Section 152-50 provides that an entity (in this case, a trust) satisfies the ‘significant individual test’ if the entity had at least one ‘significant individual’ just before the CGT event. Section 152-55 provides that a significant individual is an individual who at the relevant time has a small business participation percentage in the company or trust of at least 20%. The small business participation percentage is calculated by considering both the direct and indirect participation percentage (section 152-65). The method for calculating an entity’s direct and indirect small business participation percentage in a trust is outlined in sections 152-70 and 152-75. An individual has a direct small business participation percentage in a discretionary trust (i.e. a trust where entities do not have entitlements to all the income and capital of the trust) equal to: (a) if the trustee makes distributions of income during the income year (the relevant year) in which that time occurs - the percentage of the distributions to which the entity was beneficially entitled; or (b) if the trustee makes distributions of capital during the relevant year - the percentage of the distributions to which the entity was beneficially entitled; or, if 2 different percentages are applicable, the smaller. References to distributions of ‘income’ in the context of section 152-70 means the income of the trust determined according to the general law of trusts to which a beneficiary could be entitled. Thus, income of the trust will depend on the deed and/or actions of the trustee: see ATO Interpretative Decision ATO ID 2012/99 Income Tax Capital gains tax - direct small business participation percentage in a trust - meaning of 'distributions of income' and capital, this may be an amount that differs from the ordinary income of the trust. The relevant time for the purposes of section 152-50 is just before the CGT event, and therefore, the relevant year for the purposes of determining an individual’s direct small business participation percentage is the year in which the CGT event occurs. An entity can use another method to work out their small business participation percentage in a discretionary trust (under subsections 152-70(4), (5) and (6)) if, in the CGT event year, the trustee of the trust: ● did not make a distribution of income or capital during the income year, and ● had no net income or had a tax loss for the income year. In these circumstances, the entity's direct small business participation percentage at the relevant time is worked out using the percentage of the distributions the entity was beneficially entitled to in the last income year before the CGT event year in which the trustee made a distribution. An entity's small business participation percentage is zero if: ● the trust had net income and did not have a tax loss, and the trustee decided not to distribute, or ● the trustee has never made a distribution in the income years up to and including the CGT event year (including where the trust had no net income or had a tax loss in each of those income years). The indirect small business participation percentage in a company or trust is calculated by tracing the individual’s interests through interposed entities (section 152-75). | Detailed Reasoning - Application to your circumstances: The ruling is provided on the assumption that the CGT event will occur in the year ended 30 June 201B. X or Y will be entitled to at least 20% of the income of the trust and the other would receive a distribution of income in the year ended 30 June 201B. In addition, if there are any capital distributions, whichever of X or Y that is entitled at least 20% of the income will also be entitled to at least 20% of the capital in the year ended 30 June 201B. The other individual will also receive a distribution of capital. Therefore, the Trust will have at least one significant individual just before the CGT event. | Detailed Reasoning - CGT Concession stakeholder: An individual is a CGT concession stakeholder of a trust if the individual is either: ● a significant individual in the trust, or ● the spouse of a significant individual in the trust, if the spouse has a small business participation percentage in trust at that time that is greater than zero On the basis described above, X or Y will be a significant individual in the Trust and both will be a CGT Concession Stakeholder. | Detailed Reasoning - Making the choice and satisfying the trust conditions in section 152-325: The Trustee will make a choice to disregard all or part of the capital gain under subdivision 152-D when lodging the Trust Tax Return for the year ended 30 June 201B. The Trust will keep a written record of the amount it chooses to disregard under the small business retirement exemption; including X and Y’s percentage of the exempt amount, which together will add up to 100% and which amount will not exceed the retirement exemption limit for each individual. The Trustee will make a payment to X and Y worked out by reference to their percentage of the exempt amount within seven days after the trust makes the choice. The sum of the payments will be equal to the exempt amount or the amount of capital proceeds, whichever is less. X and Y are over 55 years of age and therefore a payment will not need to be made on their behalf to a complying superannuation fund or retirement saving account.

Background: The Trust is a discretionary trust that was settled over 30 years ago for the benefit of X, their spouse Y, their lineal descendants and their spouses. | The Trust currently runs a child care centre on the Property. | The Trust also conducts a business of conducting childcare management and a business of providing education and training in early childcare education and care services. | The Company is the trustee of the Trust (and in this capacity is referred to as “the Trustee”). The Company is a labour hire company jointly owned by X and Y. The directors are X and Y and their children. | The Trustee owns all of the assets comprising the businesses described above. The Trustee also owns the Property. | The Trustee intends to undertake a business restructure to minimise business risk and to separate ownership of real property, intellectual property and business interests. | Pursuant to its powers under the Trust Deed, the Trustee proposes to make declarations of trust, as follows: | ● The Trustee will declare that it holds all of the right title and interest in the Property upon the trusts of the Property Trust and freed from the trusts of the Trust. | ● The Trustee will declare that it holds all of the right title and interest in the business assets upon the trusts of the Business Trust and freed from the trusts of the Trust. | The Company is the trustee of the Property Trust and the Business Trust which have each been established by a Deed of Settlement. The interests of the beneficiaries of the Property Trust and the Business Trust are the same as the interests of beneficiaries of the Trust. | The Company will arrange for a lease of the Property from which the childcare centre is conducted to the Business Trust. | To the extent that the declaration of trust will be subject to any conditions, these conditions will be capable of being satisfied by 30 June 201B. | Other relevant matters: In the year ended 30 June 201B, X or Y will be entitled to at least 20% of the income of the Trust and the other would receive a distribution of income. In addition, if there are any capital distributions from the Trust, whichever of X and Y that is entitled at least 20% of the income distributions will also be entitled to at least 20% of the capital distributed. The other individual will also receive a distribution of capital. | The Trustee will make the choice to apply the retirement exemption when it lodges the Trust Tax Return for the year ended 30 June 201B. | The Trust will keep a written record of the amount it chooses to disregard under the small business retirement exemption; including X and Y’s percentage of the exempt amount, which together will add up to 100% and which amount will not exceed the retirement exemption limit of each individual. | The Trustee will make a payment to X and Y worked out by reference to their percentage of the exempt amount within seven days after the Trustee makes the choice. The sum of the payments will be equal to the exempt amount or the amount of capital proceeds, whichever is less. | Assumptions: The Trustee will have satisfied the following basic conditions pursuant to Section 152-10 of the ITAA 1997: | ● A CGT event (other than CGT Event K7) will happen in relation to the CGT assets of the Trust described in the facts in the income year ended 30 June 201B, | ● The event would (apart from the application of the small business concessions) have resulted in a capital gain, | ● The Trust satisfies the maximum net asset value test in section 152-15 of the ITAA 1997 just before the CGT event occurs, and | ● The CGT assets satisfy the active asset test found in section 152-35 of the ITAA 1997.