Private ruling: Capital gains tax
Date of advice: 27 September 2016
Published: November 2016
Ruling period: Year ended 30 June 2014 | Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018
Date scheme commenced: 1 July 2013

Ruling: Q1: Will any part of the distributions attributable to the sale of the land be included in your assessable income? | A1: No.

Relevant facts and circumstances: You are an Australian resident for tax purposes. Your relative settled a Discretionary Trust with a corporate Trustee overseas. The beneficiaries of the trust are you and your siblings. Your relatives have gone into partnership with the trust. During the 20UU-VV financial year, a block of overseas was sold and the proceeds were distributed by the trust to you and your siblings in equal shares. Subsequent blocks of land have been disposed of in the 20WW-XX, 20XX-YY and 20ZZ-AA financial years. This land was used solely for the business activity and not to derive rental income. The turnover of the business is less than $2 million. You are over 55 years of age. You will not exceed the lifetime CGT retirement exemption limit. You are a significant individual of the trust. If the trust applied the 50% active asset reduction and the retirement exemption, the entire capital gain made on each disposal would be disregarded.

Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 99B(1) | Income Tax Assessment Act 1936 paragraph 99B(2)(a) | Income Tax Assessment Act 1997 section 855-10 | Income Tax Assessment Act 1997 Division 152 | Income Tax Assessment Act 1997 subdivision 152-C | Income Tax Assessment Act 1997 section 152-15 | Income Tax Assessment Act 1997 section 152-35 | Income Tax Assessment Act 1997 subsection 152-40(1) | Income Tax Assessment Act 1997 subdivision 152-D

Reasons for decision: Summary: Under section 855-10 of the Income Tax Assessment Act 1997 (ITAA 1997), an entity can disregard a capital gain or loss from a CGT event if they are a foreign resident, or the trustee of a foreign trust for CGT purposes, just before the CGT event happens and the CGT event happens in relation to a CGT asset that is not taxable Australian property. In this case, the trust is a foreign resident for CGT purposes and the CGT event happened in relation to a CGT asset that is not taxable Australian property. Therefore, the trust itself can disregard the capital gain (or loss) from the CGT event. However, subsection 99B(1) of the ITAA 1936 provides that where an amount, being property of a trust estate, is paid or applied for the benefit of a beneficiary during a year of income, and the beneficiary was a resident at any time during the year, that amount is included in the assessable income of the beneficiary. Paragraph 99B(2)(a) of the ITAA 1936 modifies the rule in subsection 99B(1) and has the effect that the amount included in assessable income under subsection (1) is reduced to the extent that the amount represents corpus of the trust estate, except to the extent to which the amount is attributable to amounts that would be assessable, if they were derived by a resident taxpayer. To determine if the amounts received by you are assessable income under subsection 99B(1) of the ITAA 1936, we need to consider the hypothetical test in paragraph 99B(2)(a) of the ITAA 1936. The hypothetical test is whether amounts received by the trust in relation to the sale of the land would have been assessable to the trust if the trust was a resident of Australia. Had the trust been a resident of Australia at the time its ownership of the land ended, CGT event A1 would have happened to the trust. Any net capital gain from the resulting A1 event would have been included in the assessable income of the trust. However, we must also consider whether the trust could have applied the small business concessions. Small business 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. Subdivision 152-C of the ITAA 1997 applies the small business 50% active asset reduction provided the basic conditions are satisfied. 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 capital gains tax (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 yours 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 yours 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) of the ITAA 1997 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. Retirement exemption - trust The rules covering the small business retirement exemption are contained in Subdivision 152-D of the ITAA 1997. An entity may choose to disregard all or part of a capital gain under the retirement exemption if certain conditions are satisfied. If the entity is a company or trust, they can choose to disregard all or part of a capital gain where all of the following conditions are met: • the trust satisfies the basic conditions • the trust satisfies the significant individual test • a written record of the amount disregarded is kept and if there are more than one CGT concession stakeholders, each stakeholder's per cent of the exempt amount (one may be nil, but together they must add up to 100%) • a payment is made 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 sever days after you choose to disregard the gain and seven days after you receive the capital proceeds from the CGT event) • the payment is equal to the exempt amount or the amount of capital proceeds, whichever is less, and • where the capital proceeds are received in instalments, a payment is made to a CGT concession stakeholder for each instalment in succession. CGT retirement exemption limit The amount of the capital gain that you choose to disregard must not exceed your CGT retirement exemption limit or, in the case of a company or trust, the CGT retirement exemption limit of each CGT concession stakeholder receiving a payment. Under section 152-320 of the ITAA 1997, an individual's lifetime CGT retirement exemption limit is $500,000 reduced by any previous CGT exempt amounts the individual has disregarded under the retirement exemption. | Detailed Reasoning - Application to your circumstances: In this case, the trust would then have been eligible to apply the 50% active asset reduction and the small business retirement exemption to completely disregard the capital gain. Accordingly to the extent that the distribution you received is attributable to a gain from the hypothetical CGT event A1 happening to the trustee of Trust, it will be assessable to you under section 99B of the ITAA 1936. As the trust would have been entitled to completely disregard the capital gain, no amount is assessable to you.