Private ruling: Small business CGT concessions
Date of advice: 7 October 2016
Published: November 2016
Ruling period: Year ended 30 June 2017 | Year ended 30 June 2018
Date scheme commenced: 1 July 2016

Ruling: Q1: Is the trust the owner of the property for tax purposes? | A1: Yes | Q2: Can you apply the retirement exemption to the capital gain made on the sale of the property? | A2: Yes

Relevant facts and circumstances: The property is held in the name of the individuals to meet state legislation requirements. You have provided a copy of an agreement that shows that ownership is in the hands of the trust. You have provided a copy of Taxation Determination TD 93/75 that supports this argument. All income received from the sale of produce has been included in the Income Tax Returns of the trust. The trust is a small business entity for income tax purposes and also meets the Maximum net asset value test. The capital gain from the sale of the property will be less than $500,000. You have provided copies of the following documents: • Copy of agreement about ownership • Extracts from Trust Deed, Clause 3 and 4 and paragraphs (l) and (m) of page 9 of deed • Copy of Taxation Determination TD 93/75 • Copy of previous private ruling about active assets Individual beneficiaries are both over the age of 55 years. Distributions from prior year trust returns show distributions to the individuals in excess of 20% of the available amount for distribution. In the draft of the distribution you have indicated that the payments will be made to the concession stakeholders, possibly in the ratio of XX/YY, so that 100% of the payment is made to these beneficiaries. You have stated that the payments will be made within 7 days after the trust receives the income.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 152 | Income Tax Assessment Act 1997 Division 152-C | Income Tax Assessment Act 1997 Division 152-D | 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 152-305 | Income Tax Assessment Act 1997 Section 152-320 | Income Tax Assessment Act 1997 Section 152-325 | Income Tax Assessment Act 1997 Section 292-90 | Income Tax Assessment Act 1997 Section 292-100

Reasons for decision: Summary: The basic conditions for the small business CGT concessions have been met. Therefore, the trust can apply the small business 50% active asset reduction to the capital gain from the sale of the active assets. The trust is also entitled to apply the retirement exemption. | Detailed Reasoning - Ownership: You have explained that under state legislation the holder of the asset had to be in individual names. You have provided a copy of the agreement you entered into with the trustee of the trust identifying that the trustee will be the owner of the asset and the business will be carried on by the trust. Taxation Determination TD 93/75 gives the Commissioner's view that the licence holder may not be the licence owner and the licence owner can be entitled to the income depending on the agreement. Based on the evidence you have provided the trustee is considered to be the owner of the asset and carrying on the business for income tax purposes. | Detailed Reasoning - Basic conditions for CGT relief: 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. Division 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. | Detailed Reasoning - 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 begins 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. | Detailed Reasoning - Application to your circumstances: In this case, the trust plans to sell the property which will result in a capital gain. The trust is a small business entity for the income year. The asset is used in the business carried on by the trust. The asset has been owned for more than 15 years. The trust used the asset in the course of carrying on a business for more than 7½ years. Therefore, the property will satisfy the active asset test. The basic conditions for the small business CGT concessions have been met. Therefore, the trust can apply the small business 50% active asset reduction to the capital gain from the sale of the asset. | Detailed Reasoning - Small business retirement exemption: You can choose to apply the retirement exemption to any amount of capital gain remaining after you have applied the other concessions or before any other concessions. There is a CGT retirement exemption lifetime limit of $500,000. Subsection 152-305(2) of the ITAA 1997 explains that if you are a trust, you can choose to disregard all or part of a capital gain if: • you satisfy the basic conditions • the entity satisfies the significant individual test • the trust must make a payment (whether directly or indirectly through one or more interposed entities) to at least one of its CGT concession stakeholders • the payment must be made by the later of: (i) 7 days after the trust makes the choice; and (ii) 7 days after the trust receives an amount of capital proceeds from the CGT event • you keep a written record of the amount you have chosen to disregard (the exempt amount) | Detailed Reasoning - Application to your circumstances: As discussed above you meet the basic conditions in Subdivision 152-A in relation to this capital gain. Based on the distributions that have been made by the trustee in the past you satisfy the significant individual test. Both individuals are CGT concession stakeholders and will each receive part of the payment, so that 100% of the payment will be shared between the stakeholders. You have stated that the payment will be paid within the time limits set in subsection 152-325(4). The capital gain will be within the $500,000 lifetime limit for each of the CGT concession stakeholders. You must keep a written record of the amount disregarded. The trust is entitled to apply the retirement exemption to the capital gain made on the sale of the asset.