Private ruling: CGT – small business concessions – 15 year
Date of advice: 28 March 2019
Published: May 2019
Ruling period: Year ended 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Do you satisfy the basic conditions for the small business capital gains tax concessions? | A1: Yes | Q2: Do you satisfy the conditions to apply the 15 year exemption to the capital gain made on the sale of the property? | A2: No

Relevant facts and circumstances: Entity A as Trustee for the Trust conducted a business. B and S are directors of Entity A. B worked full time running the trust’s business. The trust acquired the property after 20 September 1985. The property was used in the trust’s business from acquisition until December 20XX, when the trust’s business wound up. After the business ceased, the assets of the trust consisted of the property and cash investments. After the cessation of the business, B undertook the management the trust assets which included the following tasks: ● Responding to tenant queries, complaints and maintenance requests ● Preparation of the monthly invoice to tenant and payment of suppliers ● Collecting and sending land and council rates from tenant ● Banking ● Liaising with suppliers regarding maintenance ● Inspection of property ● Annual rental review ● Liaising with agent and lawyers regarding new tenant lease agreements and the sale of the property The activities undertaken by B relating to the management of trust assets took an average of approximately X hours per week. The trust engaged commercial estate agent in June 20XX to advertise, conduct inspections and secure a suitable tenant for the property. The property was leased for X years (with the option of 2 additional X year extensions) on XX July 20XX. The trust engaged commercial estate agent again in January 20XX to advertise, conduct inspections and secure a suitable tenant for the property. The property was leased for X years (with the option of 2 additional X year extensions) on XX June 20XX. On XX March 20XX, the tenant exercised the option and signed a renewal to lease the property until XX June 20XX. On XX July 20XX a commercial estate agent was engaged as the exclusive agent to market and sell the property. A contract of sale for the property was signed on XX September 20XX with settlement occurring on XX February 20XX. The disposal of the property resulted in a capital gain. The trust acquired and commenced operating a business on XX March 20XX. The trust is a small business entity and it has an aggregated turnover of less than $2 million. The trust lodged a family trust election in the 20XX-XX income year naming B as the specified individual. B received 100% of the distribution from the trust in the 20XX-XX financial year. In prior financial years, at least 20% of the income of the trust has been distributed to B and the remainder to his spouse. B was over 55 years of age at the disposal of the property. After the disposal of the property, B intends to reduce his involvement in the trust allowing S to take control.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 152 | Income Tax Assessment Act 1997 subsection 152-40(1) | Income Tax Assessment Act 1997 section 152-110

Reasons for decision: Summary: Basic conditions To qualify for the small business CGT concessions, you must satisfy several conditions that are common to all the concessions. These are called the basic conditions. A capital gain that you make may be reduced or disregarded under Division 152 of the ITAA 1997 if the following basic conditions are satisfied: ● A CGT event happens in relation to a CGT asset of yours in an income year ● The event would have resulted in a gain ● The CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997, and ● At least one of the following applies - you are a small business entity for the income year - you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997 - 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, or - you do not carry on a business, but your CGT asset is used in a business carried on by a small business entity that is your affiliate or an entity connected with you. Active asset test A CGT asset will satisfy the active asset test if: (a) you have owned the asset for 15 years or less and the asset was an active asset of your for a total of at least half of the test period, or (b) you have owned the asset for more than 15 years and the asset was an active asset of your for a total of at least 7½ years during the test period. The test period beings when you acquired the asset and ends at the earlier of the CGT event and if the relevant business ceased to be carried on in the 12 months before that time – the cessation of the business. Subsection 152-40(1) details that a CGT asset is an active asset at a time if it is used, or held ready for use, in the course of carrying on a business that is carried on by you, or your affiliate, or another entity that is connected with you. In your case, the trust has sold the property which resulted in a capital gain. The property was acquired by the trust in 19XX and has been owned for more than 15 years. The trust used the property in the course of carrying on the business for more than 7 and a half years, therefore the property will satisfy the active asset test. As the trust is a small business entity for the 20XX-XX year, the basic conditions for the small business CGT concessions have been met. 15 year exemption Section 152-110 of the ITAA 1997 provides a small business 15-year exemption for companies and trusts. Under this section, a company can disregard the capital gain from the disposal of a CGT asset if: (a) the company or trust satisfies the basic conditions in Subdivision 152-A of the ITAA 1997 for the small business CGT concessions, (b) the company or tr ust continuously owned the CGT asset for the 15-year period ending just before the CGT event happened, (c) 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 the entity owned the CGT asset, and (d) an individual who was a significant individual of the entity just before the CGT event was either: – at least 55 years old at that time and the event happened in connection with their retirement or – permanently incapacitated at that time. In connection with retirement Whether a CGT event happens in connection with an individual’s retirement depends on the particular circumstances of each case. There would need to be at least a significant reduction in the number of hours the individual works or a significant change in the nature of their present activities to be regarded as a retirement. In your case, the trust satisfies the basic conditions for the small business CGT concessions and the trust has owned the property for more than 15 years. It is considered that the trust had a significant individual for a total of at least 15 years and that B is the significant individual of the trust just before the disposal of the property. B was over 55 years at the time of the disposal and although there will be a change to B’s activities, it is not considered that there would be a significant reduction in the number of hours and therefore the disposal of the property is not considered to be in connection with B’s retirement. As such you do not meet the requirements to apply the CGT small business concessions 15 year exemption.