Private ruling: Capital gains tax small business concessions and marriage breakdown roll-over
Published: April 2013
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Do you satisfy the basic conditions necessary to be eligible for the capital gains tax (CGT) concessions for small business, which therefore automatically entitles you to apply the 50% active asset reduction concession to any capital gain made on disposal of the property? | A1: Yes | Q2: Are you entitled to claim a deduction for the carried forward revenue tax losses? | A2: Yes | Q3: Does the proposed consent order satisfy the conditions for the marriage breakdown roll-over concession? | A3: No

Relevant facts and circumstances: 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: · your application for private ruling · the proposed consent order The X Trust owned farming land and equipment purchased in the early 2000's. X Trust supplied plant, equipment and land to a related entity, Company A. X Trust also runs a business on its land. Company A runs a business with the land, plant and equipment supplied by X Trust. In the relevant financial year, X Trust sold all its land and made a capital gain. Various items of equipment were also sold. The land that was sold is the 'X' property. The cash proceeds of the sale of the 'X' property were deposited to a joint bank account of Mr and Mrs X and are yet to be fully distributed. The proceeds of the sale are intended to be distributed between Mr and Mrs X in line with the proposed consent order. X Trust has substantial carried forward tax losses due to accelerated depreciation claims. The trustee of X Trust is Company X, directors being Mr and Mrs X. The shareholders of Company X are Mr and Mrs X who both hold two shares each. The directors of Company A are Mr and Mrs X. The shareholders of Company A are Mr and Mrs X, who both hold two shares each. X Trust made a family trust election in its 200Y tax return, with the specified year being 200Y. The beneficiaries of X Trust are Mr and Mrs X and their children. There has been no distribution from X Trust to the beneficiaries over the past Z years as the trust has had losses. You state that X Trust is a small business entity as the combined income of X Trust and Company A is under $2 million. You state that the land that was sold was used in the course of carrying on a business by both X Trust and Company A. You state that the land that was sold has been an active asset for more than half the time it has been owned. It has been an active asset for 100% of the time owned. You state that no income has been injected into X Trust from outside the family group. You believe that the proposed consent order satisfies the conditions for the marriage breakdown roll-over because it will be a Family Law Act 1975 consent order. You state that it is the 'X' property sale that you wish the marriage breakdown roll-over to apply to.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 152-10 | Income Tax Assessment Act 1997 Section 152-15 | Income Tax Assessment Act 1997 Section 152-35 | Income Tax Assessment Act 1997 Section 152-40 | Income Tax Assessment Act 1997 Section 328-125 | Income Tax Assessment Act 1936 Schedule 2F | Income Tax Assessment Act 1936 Division 270 | Income Tax Assessment Act 1997 Subdivision 126-A | Income Tax Assessment Act 1997 Section 126-5 | Income Tax Assessment Act 1997 Section 126-15

Reasons for decision: Detailed Reasoning - Small business CGT concession eligibility and the active asset test: Section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997) contains the basic conditions you must satisfy to be eligible for the small business capital gains tax (CGT) concessions. These conditions are: (a) a CGT event happens in relation to a CGT asset in an income year. (b) the event would 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 in section 152-15 of the ITAA 1997 (iii) you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an asset of the partnership or (iv) the conditions in subsection 152-10(1A) or (1B) of the ITAA 1997 are satisfied in relation to the CGT asset in the income year. (a) the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997. Section 152-40 of the ITAA 1997 provides the meaning of 'active asset'. A CGT asset will be an active asset at a time if, at that time, you own the asset and the asset was used or held ready for use by you, an affiliate of yours, or by another entity that is 'connected with' you, in the course of carrying on a business. However, subsection 152-40(4) explains that an asset whose main use is to derive rent can not be an active asset. Paragraph 152-40(4A)(b) of the ITAA 1997 provides that to determine the main use of an asset, treat any use by your affiliate, or an entity that is connected with you, as your use. Subsection 328-125(1) of the ITAA 1997 explains that 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. Subsection 328-125(2) of the ITAA 1997 provides that an entity (the first entity) controls another entity if the first entity, its affiliates, or the first entity together with its affiliates: if the other entity is a company - beneficially owns, or has the right to acquire beneficial ownership of, equity interests in the company that give at least 40% of the voting power in the company. Subsection 328-125(3) of the ITAA 1997 states that an entity (the first entity) controls a discretionary trust if a 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. Mr and Mrs X are the directors and equal 50% shareholders in Company X. Company X is the trustee of X Trust. Therefore, it can reasonably be expected that the trustee acts in accordance with the directions and/or wishes of Mr and Mrs X. Accordingly, Mr and Mrs X control X Trust and X Trust is an entity connected with Mr and Mrs X. Mr and Mrs X are the directors and equal 50% shareholders in Company A. As Mr and Mrs X beneficially own equity interests in Company A that give 50% of the voting power in the company, Company A is controlled by Mr and Mrs X. Accordingly, Company A is also an entity connected with Mr and Mrs X. As such, Company A is an entity connected with X Trust as both entities are controlled by the same first entity, that is, Mr and/or Mrs X. Subsection 152-35(1) of the ITAA 1997 states that a CGT asset satisfies the active asset test if: · you have owned the asset for 15 years or less and the asset was an active asset of yours for a total of at least half of the period of ownership, or · 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 7 and a half years. The asset, the land that is the 'X' property was used by both you, and an entity connected with you in the course of carrying on a business. Further, you have owned the asset for less than 15 years and the asset has been used in the course of carrying on a business by you or an entity that is connected with you for the whole time you have owned it. Therefore, the asset is considered an active asset. As you are a small business entity that has disposed of an active asset (the land that is the 'X' property) and the event has resulted in a capital gain, you satisfy all the basic conditions to be eligible for the CGT small business concessions. As you satisfy all the basic conditions, you automatically qualify for the 50% active asset reduction concession. | Detailed Reasoning - Carried forward tax losses: Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936) contains measures referred to as the trust loss measures. These measures are designed to restrict the recoupment of prior and current year losses and debt deductions of trusts and to prevent the transfer of the tax benefit of those losses or deductions. The tax benefit of losses is transferred where a person, who did not bear the economic loss at the time it was incurred by the trustee, obtains a benefit from a trust by being able to deduct the loss. The measures imposed to restrict the use of losses and the claiming of debt deductions generally revolve around a change in ownership or control of the trust. There are certain tests that must be satisfied if a trust wishes to deduct a tax loss and/or certain debt deductions, the tests are: · control test · 50% stake test · pattern of distributions test · income injection tests Certain tests only apply to certain types of trust. A trust will be able to deduct a tax loss and/or certain debt deductions if it satisfies the trust loss tests that apply to it. The following table summarises the tests that apply to each type of trust. | Detailed Reasoning - Income injection test: Fixed trust other than a widely held unit trust X (1) X Unlisted widely held trust X Listed widely held trust X X (2) X Unlisted very widely held trust X X Wholesale widely held trust X X Non-fixed trust X X (3) X X Family trust X (4) Excepted trust (other than a family trust) 1. An alternate test is also available in certain cases where non-fixed trusts hold fixed entitlements in the fixed trust. 2. This test can be applied if the 50% stake test is failed by a listed widely held trust. 3. This test does not apply for current-year loss purposes. 4. The income injection test does not apply where entities and individuals within a family group inject income into a family trust with losses. X Trust is a family trust (family trust election in place) for the purposes of the trust loss tests. Accordingly, the trust is only subject to the income injection test. | Detailed Reasoning - The income injection test: Division 270 of Schedule 2F to the ITAA 1936 discusses the requirements for the income injection test. If a trust is involved in a scheme to take advantage of losses or other deductions, it may be prevented from making full use of those losses or deductions under the income injection test. Under these schemes, income is injected into trusts with losses or other deductions so that no tax is payable on the income. The income injection test will apply where an 'outsider' to the loss trust seeks to take advantage of the deduction(s). In general terms, the outsider must provide a benefit to the trust and a return benefit must be given to the outsider. Also, either of the benefits (or the income injected under the scheme), must have been provided or derived wholly or partly, but not merely incidentally, because of the deduction(s). The income injection test does not apply to income injection schemes that take place wholly within a family group. It also does not apply to complying superannuation funds, complying approved deposit funds, pooled superannuation trusts, fixed unit trusts where all direct or indirect unit holders are exempt from income tax, and deceased estates within a reasonable administration period. For the purposes of this test, a 'scheme' takes on the same meaning as in Part IVA of the ITAA 1936. 'Scheme' means: (a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings, and (b) any scheme, plan, proposal, action, course of action or course of conduct. The term benefit is broadly defined and will include any benefit or advantage within the ordinary meaning of those expressions. However, it is defined to specifically include money or other property (whether tangible or intangible), rights or entitlements (whether proprietary or not), services and the extinguishment, forgiveness, release or waiver of a debt or other liability. The income injection test applies where the person who has provided, directly or indirectly, a benefit to the trustee or beneficiary of the trust (or an associate), is an outsider to the trust. The meaning of 'outsider' depends on whether or not the trust is a family trust. Generally, in the case of family trusts, members of the defined 'family' or other trusts, companies or partnerships in the defined family group are not 'outsiders' for the purposes of the test. In your case, you have stated that no income has been injected into the trust from outside of the family group. Therefore, X Trust will pass the income injection test. Accordingly, as X Trust passes the income injection test and there are no further tests to be considered, the carried forward tax losses are available as a deduction against future assessable income, including any net capital gain. | Detailed Reasoning - Marriage or relationship breakdown roll-over: A same asset roll-over involves the transferral of an asset from one taxpayer to another. It allows a taxpayer to defer the making of a capital gain from such a CGT event until such time as a later event occurs in respect of the asset. Subdivision 126-A of the ITAA 1997 considers same asset roll-overs in the context of marriage breakdown. Section 126-5 of the ITAA 1997 states there is a roll-over if a CGT event (the trigger event) happens involving an individual (the transferor) and his or her spouse (the transferee), or a former spouse (also the transferee) because of: (a) a court order under the Family Law Act 1975 or under a State law, Territory law or foreign law relating to breakdowns of relationships between spouses; or (b) a maintenance agreement approved by a court under section 87 of the Family Law Act 1975 or a corresponding agreement approved by a court under a corresponding foreign law; or (c) (Repealed by No 144 of 2008) (d) something done under: i. a financial agreement made under Part VIIIA of the Family Law Act 1975 that is binding because of section 90G of that Act; or ii. a corresponding written agreement that is binding because of a corresponding foreign law; or (da) something done under: i. a Part VIIIAB financial agreement (within the meaning of the Family Law Act 1975 ) that is binding because of section 90UJ of that Act; or ii. a corresponding written agreement that is binding because of a corresponding foreign law; or (e) something done under: i. an award made in an arbitration referred to in section 13H of the Family Law Act 1975 ; or ii. a corresponding award made in an arbitration under a corresponding State law, Territory law or foreign law; or (f) something done under a written agreement: i. that is binding because of a State law, Territory law or foreign law relating to breakdowns of relationships between spouses; and ii. that, because of such a law, prevents a court making an order about matters to which the agreement applies, or that is inconsistent with the terms of the agreement in relation to those matters, unless the agreement is varied or set aside. Subsection 126-5(4) of the ITAA 1997 states that a capital gain or a capital loss the transferor makes from the CGT event is disregarded. Subsection 126-15(1) of the ITAA 1997 provides that 'there are the roll-over consequences in section 126-5 if the trigger event involves a company (the transferor) or a trustee (also the transferor) and a spouse or former spouse (the transferee) of another individual because of…'. The subsection then proceeds to list those same qualifying court orders and agreements as detailed in section 126-5 of the ITAA 1997. A critical element in the wording of subsection 126-15(1) of the ITAA 1997 is that the trigger event must occur 'because of' one or more of the matters listed. The common meaning of the term 'because of' is that one event takes place as a consequence of the other. Taxation Determination TD 1999/55, which considers the transferral of assets other than those specified in a court order, states at paragraph 3: 'A CGT event happens 'because of' a court order if the CGT event is caused by the court order.' Therefore, in the context of section 126-15, the phrase 'because of' means that the relevant court order or listed agreement must already be in place when the trigger event occurs and also be the reason for that event. In the present instance, the trigger event is the CGT event pertaining to the disposal of the asset (the 'X' property) which happened in the relevant financial year. To qualify for the rollover, the CGT event must have resulted from one of the items in subsection 126-15(1) of the ITAA 1997. Based on the information provided, none of the qualifying court orders or agreements as listed in section 126-15(1) are currently in place as there is only a proposed consent order currently being considered. As the proposed consent order is not currently in place, the document cannot meet the requirements of section 126-15 of the ITAA 1997, in that the event cannot be said to have occurred 'because of' a court order or any other listed agreement. In any event, the proposed consent order makes no mention of transferring the CGT asset (the 'X' property) to either Mr or Mrs X. The proposed consent order only discusses how the cash proceeds from the disposal of the asset (the 'X' property) should be distributed. Consequently, in the absence of any other form of court order or written agreement dated prior to the time of the CGT event in the relevant financial year, the roll-over provisions in Subdivision 126-A of the ITAA 1997 will not apply. Therefore, any capital gain made by you on the disposal of the asset (the 'X' property) can not be disregarded under subsection 126-5(4) of the ITAA 1997.