Private ruling: 15 year exemption - individual taxpayer - connected trust business
Published: April 2015
Ruling period: Year ending 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Can you apply the capital gains tax (CGT) 15 year exemption in section 152-105 of the Income Tax Assessment Act 1997 (ITAA 1997) to the profit from the sale of your property? | A1: 

Relevant facts and circumstances: You are an individual taxpayer and over 55 years old. Over 20 years ago, you purchased a property, which was immediately rented to a business carried on by your family trust. You were a director and shareholder of the trustee company since its registration and other family members also served much shorter periods of time as directors (and shareholders). During the year ended 30 June 2013, the business was sold, after which you and your spouse retired. As an incentive for the sale of the business, you entered into a 3 year fixed rent lease agreement with the buyer at below market value Currently, your property is for sale. Currently, for the purpose of the 'maximum net asset value test', the sum of the net value of your relevant CGT assets does not exceed $6,000,000. For the years ended 30 June 1993 to 2014, inclusive (except one year), you, your spouse and/or your private investment company (of which you and your spouse are the shareholders), received over 40% of the income and/or capital distributions from your family trust.

Relevant legislative provisions: Income Tax Assessment Act Section 152-10 | Income Tax Assessment Act Section 152-15 | Income Tax Assessment Act Section 152-20 | Income Tax Assessment Act Section 152-35 | Income Tax Assessment Act Section 152-40 | Income Tax Assessment Act Section 152-105 | Income Tax Assessment Act Section 328-125 | Income Tax Assessment Act Section 328-130

Reasons for decision: Detailed Reasoning - Basic conditions for relief: Section 152-10 of the ITAA 1997 provides the basic conditions for small business relief are: (a) a CGT event happens in relation to a CGT asset of yours in an income year; (b) the event would (apart from this Division) 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 (see section 152-15); (iii) you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an interest in an asset of the partnership; (iv) the conditions mentioned in subsection (1A) or (1B) are satisfied in relation to the CGT asset in the income year; (d) the CGT asset satisfies the active asset test (see section 152-35). Section 152-15 of the ITAA 1997 provides you satisfy the maximum net asset value test if, just before the CGT event, the sum of the net value of the CGT assets of yours, of any entities connected with you and/or of any affiliates of yours or entities connected with your affiliates does not exceed $6 million. Subsection 152-20(2) of the ITAA 1997 excludes, from the maximum net asset value test, items such as: (i) assets used solely for the personal use and enjoyment of the individual or the individual's affiliate; (ii) the market value of a dwelling that is the individual's main residence (including any relevant adjacent land); (iii) a right to assets of a superannuation fund; and (iv) a policy of insurance on the life of an individual. Section 152-35 of the ITAA 1997 provides a CGT asset satisfies the active asset test where 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 7½ years during the period that begins when you acquired the asset and ends at the CGT event (at the latest). Section 152-40 of the ITAA 1997 provides a CGT asset is an active asset at a time if, at that time, you own the asset and it is used or held ready for use in the course of carrying on a business that is carried on by you, your affiliate or another entity that is connected with you. The term 'affiliate' is defined in section 328-130 of the ITAA 1997 and includes an individual who acts, or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you (in relation to the affairs of a business) and includes family, close personal relationships and relationships created through links such as common directors or shareholders. However, the term 'affiliate' does not include a family trust. Subsection 328-125(1) of the ITAA 1997 explains an entity is 'connected' with another entity if: (a) either entity controls the other entity in a way described in this section; or (b) both entities are controlled in a way described in this section by the same third entity. In relation to a discretionary trust, section 328-125 of the ITAA 1997 provides two ways in which an entity (the first entity) can control a discretionary trust: n where the trustee of the trust acts, or could reasonably be expected to act, in accordance with the directions or wishes of the first entity, its affiliates or the first entity together with its affiliates (subsection 328-125(3)); or n where, for any of the 4 income years before that year, the trustee of the trust paid to the first entity and/or any of its affiliates at least 40% of the total amount of income or capital paid by the trustee for that year (subsection 328-125(4)). In your case, if you sell your property, you will satisfy the basic conditions for relief because: (i) you satisfy the maximum net asset value test; and (ii) your property satisfies the active asset test, in that it was used for at least 7½ years by an entity connected with you, namely, your family trust. Your family trust was connected with you because the impression is you always controlled the trustee company. Otherwise, your family trust was connected with you because you, your spouse and/or your investment company received over 40% of the trust distribution in every year (except one) for the years ended 30 June 1993 to 2014, inclusive. | Detailed Reasoning - 15 year exemption: Section 152-105 of the ITAA 1997 provides if you are an individual, you can disregard any capital gain arising from a CGT event if all of the following conditions are satisfied: (a) the basic conditions in Subdivision 152-A are satisfied for the gain; (b) you continuously owned the CGT asset for the 15-year period ending just before the CGT event; (c) if the CGT asset is a share in a company or an interest in a trust - the company or trust had a significant individual for a total of at least 15 years (even if the 15 years was not continuous and it was not always the same significant individual) during which you owned the CGT asset; (d) 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. Whether a CGT event happens in connection with an individual's retirement depends on the particular circumstances of each case. The Explanatory Memorandum (EM) to the New Business Tax System (Capital Gains Tax) Act 1999 makes the following comments about the requirement to be permanently incapacitated or retiring as one of the conditions for the concession: 1.68 One of the requirements of this concession for an individual small business taxpayer is that they must be either permanently incapacitated at the time of the CGT event, or at least 55 years old and using the capital proceeds for their retirement. The provisions relating to the small business 15-year exemption do not define what is meant by the phrase 'in connection with a taxpayer's retirement', nor does it give any indication of the degree of retirement required in order to take advantage of this concession. It could be argued that the phrase 'in connection with retirement' means that the capital gain arising from the disposal of active assets is to be used to provide funds for a person's retirement rather than to precipitate retirement at the time of the CGT event. The words used in the EM support this interpretation. In your case, you are over 55 years of age and retired when the business was sold. It is accepted that the sale of the property is to provide further funds for your retirement and you can disregard any capital gain arising from your sale of the property because you satisfy the conditions in section 152-105 of the ITAA 1997.