Private ruling: Small business capital gains tax concessions
Published: September 2012
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Do you satisfy the basic conditions in Subdivision 152-A of the Income Tax Assessment Act 1997 (ITAA 1997) for the small business capital gains tax concessions? | A1: No. | Q2: Can you apply the active asset reduction in Subdivision 152-C of the ITAA 1997 to the capital gain? | A2: No. | Q3: Can you apply the small business roll over concession in Subdivision 152-E of the ITAA 1997 to the capital gain? | A3: No. | Q4: Can you apply the small business retirement exemption in Subdivision 152-D of the ITAA 1997 to the capital gain? | A4: No.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are: · the application for private ruling, and · the documents provided in response to the requests for further information. The Trust owns units in the Unit Trust. The Trust sold all of the units it held in the Unit Trust and made a capital gain. The Trust satisfies the maximum net asset value test. The individual is a significant individual of the Trust. The individual is a CGT concession stakeholder in the Trust. The Unit Trust owns a commercial building which it rents out to business. The only assets of the Unit Trust are a building and cash. The business rents the building from the Unit Trust. The business is not an affiliate of the Unit Trust.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 152-A, | Income Tax Assessment Act 1997 subsection 328-125(1), | Income Tax Assessment Act 1997 section 152-35, | Income Tax Assessment Act 1997 section 152-40, | Income Tax Assessment Act 1997 subsection 152-40(1), | Income Tax Assessment Act 1997 paragraph 152-40(1)(c), | Income Tax Assessment Act 1997 subsection 152-40(3), | Income Tax Assessment Act 1997 subsection 152-40(4), | Income Tax Assessment Act 1997 Subdivision 152-C, | Income Tax Assessment Act 1997 Subdivision 152-D, and | Income Tax Assessment Act 1997 Subdivision 152-E.

Reasons for decision: Summary: As the building is not rented to an affiliate of the Unit Trust, it will not satisfy the active asset test. The units sold by the Trust cannot be considered active assets as 80% of the assets held by the Unit Trust are not active. Therefore, the Trust does not satisfy the basic conditions for the small business capital gains tax concessions. | Detailed Reasoning - Detailed Reasoning: The active asset reduction, small business rollover and small business retirement exemption are some of the small business CGT concessions. 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'. | Detailed Reasoning - Basic conditions: The basic conditions in Subdivision 152-A of the ITAA 1997 (as relevant to this case) are: · the $6 million limit on the net value of CGT assets · the active asset test. | Detailed Reasoning - Net value of the CGT assets: You will satisfy the maximum net asset value test if, just before the CGT event that results in the capital gain, the net value of the CGT assets of you and the following entities does not exceed $6 million: · any entities connected with you · your affiliates and any entities connected to your affiliates (subject to certain exclusions). An entity is connected with another entity if either entity controls the other or both entities are controlled by the same third entity under subsection 328-125(1) of the ITAA 1997. | Detailed Reasoning - Application to your circumstances: The information provided is that the maximum net value of the assets of the Trust, and any entities connected with it would be less than $6 million just before the CGT event. Therefore the trust would meet the maximum net asset value test. | Detailed Reasoning - Active asset test: A requirement of the active asset test contained in section 152-35 of the ITAA 1997 is that the CGT asset must be an active asset for at least half of the period from when you acquired it until the earlier of the CGT event or when you ceased business, if the relevant business had ceased to be carried on in the 12 months before the CGT event. The meaning of an active asset is set out in section 152-40 of the ITAA 1997. It must firstly satisfy one of the 'positive tests' in subsection 152-40(1) of the ITAA 1997 and then also not be excluded by one of the exceptions in subsection 152-40(4) of the ITAA 1997. Under subsection 152-40(1) of the ITAA 1997 a CGT asset is an active asset (subject to the exclusions) if it is owned and used, or held ready for use, in the course of carrying on a business by you or your small business CGT affiliate or another entity that is connected with you under paragraph 152-40(1)(c) of the ITAA 1997. The combined effect of sections 152-35 and 152-40 of the ITAA 1997 is that the asset will meet the active asset test if the asset was used, or held ready for use, in the course of carrying on a business for at least half of the time period it was owned, subject to the exclusions in subsection 152-40(4) of the ITAA 1997. Further, subsection 152-40(3) of the ITAA 1997 provides that if the CGT asset is an interest in a trust that is an Australian resident at that time, it will be considered an active asset if the total of the following exceeds 80% or more of the market value of all of the assets of the trust: · the market value of the active assets of the trust · the market value of any financial instruments of the trust that are inherently connected with a business that the trust carries on · any cash of the trust that is inherently connected with such a business. | Detailed Reasoning - Application to your circumstances: In this case, the CGT asset sold by the Trust is units in the Unit Trust. Therefore, 80% of the assets of the Unit trust must be considered active for the units to pass the active asset test. The only asset of the Unit Trust, besides cash, is a building. For this CGT asset to be considered an active asset it must be owned and used, or held ready for use, in the course of carrying on a business by the Unit Trust or their small business CGT affiliate. The Unit Trust is not carrying on a business using the building, but instead leases the premises to a business. The information provided is that the business is not an affiliate of the Unit Trust. As the building is not rented to an affiliate of the Unit Trust, it will not satisfy the active asset test. The units sold by the Trust cannot be considered active assets as 80% of the assets held by the Unit Trust are not active. Therefore, the Trust does not satisfy the basic conditions for the small business capital gains tax concessions. | Detailed Reasoning - Question 2: As the Trust does not satisfy the basic conditions, they are not entitled to the active asset reduction under Subdivision 152-C of the ITAA 1997. | Detailed Reasoning - Question3: As the Trust does not satisfy the basic conditions, they are not entitled to the small business roll over concession under subdivision 152-E of the ITAA 1997. | Detailed Reasoning - Question 4: As the Trust does not satisfy the basic conditions, they are not entitled to the small business retirement exemption under Subdivision 152-D of the ITAA 1997.

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