Private ruling: CGT small business concessions
Published: February 2015
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Questions and Answers | 1. At the time you disposed of Property A do you satisfy the significant individual test? | Yes | 2. Do you satisfy the necessary conditions to be eligible for the 15-year exemption concession on the disposal of Property A? | Yes | 3. Will any payment made to Beneficiary A or Beneficiary B, resulting from the disposal of Property A, be non-assessable non-exempt income in the hands of Beneficiary A or Beneficiary B? | Yes | 4. Do you satisfy the necessary conditions to be eligible for the retirement exemption on the disposal of Property B? | Yes

Relevant facts and circumstances: Beneficiary A and Beneficiary B both have a small business participation percentage in the company or trust of at least 20% in Trust A. The Trust A wholly owns the following properties: • Property A, and • Property B The properties were purchased after 20 September 1985. Property A was purchased more than 15 year before its disposal. Property A and Property B; are active assets for the purposes of the CGT concessions for small business. The properties were disposed of in the 2013-14 financial year. A capital gain was made on the disposal of each individual property. Upon the disposal of Property A, Trust A will make payments in relation to the capital gain to Beneficiary A and Beneficiary B that will not exceed the amount determined by multiplying the CGT concession stakeholder's control percentage by the exempt amount. For the disposal of Property B: • Trust A will keep a written record of all amounts it chooses to disregard and each stakeholder's percentage of the exempt amount. • Trust A will make payments equal to the exempt amount or the amount of capital proceeds, whichever is less, to its CGT concession stakeholders • Upon receiving each instalment of capital proceeds, Trust A will make a payment to a CGT concession stakeholder (up to the asset's CGT exempt amount). Trust A is not carrying on a rental property business. There were distributions of income in each of the relevant income years. The aggregated turnover of Trust A and its affiliates and connected entities is less than $2 for the 2011-12 financial year. The aggregated turnover for the year ended 30 June 2013 (based on draft financial statements) is less than $2 million. Based on management forecasts, the aggregated turnover for the year ended 30 June 2014 should be less than $2 million. Beneficiary A's date of birth is older than 55 years Beneficiary B's date of birth is older than 55 years Neither Beneficiary A or Beneficiary B have previously utilised the lifetime CGT retirement exemption limit of $500,000

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 152-60 | Income Tax Assessment Act 1997 Section 152-55 | Income Tax Assessment Act 1997 Section 152-65 | Income Tax Assessment Act 1997 Section 152-70 | Income Tax Assessment Act 1997 Section 152-75 | Income Tax Assessment Act 1997 Section 152-110 | Income Tax Assessment Act 1997 Section 152-305 | Income Tax Assessment Act 1997 Section 152-410 | Income Tax Assessment Act 1997 Section 152-415 | Income Tax Assessment Act 1997 Section 328-110 | Income Tax Assessment Act 1997 Section 328-115 | Income Tax Assessment Act 1997 Section 328-120 | Income Tax Assessment Act 1997 Section 328-125

Reasons for decision: Detailed Reasoning - CGT concession stakeholder and the significant individual test: Section 152-60 of the ITAA 1997 provides that an individual is a CGT concession stakeholder of a company or trust at a time if the individual is a significant individual in the company or trust, or the spouse of a significant individual where the spouse has a small business participation percentage in the company or trust at that time that is greater than zero. Section 152-50 of the ITAA 1997 provides that an entity satisfies the significant individual test if the entity had at least one significant individual just before the CGT event. Under section 152-55 of the ITAA 1997 an individual is a significant individual in a company or trust if they have a small business participation percentage in the company or trust of at least 20%. This 20% can be made up of direct and indirect percentages. There are two items in the table in section 152-70 of the ITAA 1997 that determine an entity's direct small business participation percentage in a trust. In this entity: Direct participation percentage is: 1 … 2 A trust (where entities have entitlements to all the income and capital to the trust). This percentage: (a) the percentage of any distribution of income that the trustee may make to which the entity would be beneficiary entitled; or (b) the percentage of any distribution of capital that the trustee may make to which the entity would be beneficially entitled; or, if they are different, the smaller. 3 A trust (where entities do not have entitlements to all the income and capital of the trust). This percentage: (a) if the trustee makes distributions of income during the income year (the relevant year) in which that time occurs - the percentage of the distributions to which the entity was beneficially entitled; or (b) if the trustee makes distributions of capital during the relevant year - the percentage of the distributions to which the entity was beneficially entitled; or, if 2 different percentages are applicable, the smaller In Trust As case, • item 2 of the table in section 152-70 applies as there are entitlements to all of the income and capital, and • given there were distributions of income in each of the relevant years, and the entitlement to the distribution exceeded 20%, this is enough to satisfy the significant individual. Therefore, Trust A had at least one significant individual. | Detailed Reasoning - 15-year exemption concession: The small business 15-year exemption takes priority over the other small business concessions and the CGT discount. If the small business 15-year exemption applies, you entirely disregard the capital gain so there is no need to apply any further concessions. Further, you do not reduce the capital gain by any capital losses before you apply the 15-year exemption concession. Subsection 152-110 of the ITAA 1997 provides that an entity that is a company or trust can disregard any capital gain arising from a CGT event if all of the following conditions are satisfied: a) the basic conditions are satisfied for the gain; b) the entity continuously owned the CGT asset for the 15-year period ending just before the CGT event; c) the entity 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; d) an individual who was a significant individual of the company or trust just before the CGT event either: i. was 55 or over at that time and the event happened in connection with the individual's retirement; or ii. was permanently incapacitated at that time. As the basic conditions are met, Trust A owned Property A for over 15 years, there has been a significant individual for at least 15 years and an individual who is a significant individual is over 55 and the event happened in relation to their retirement. The necessary conditions to be eligible for the small business 15-year exemption concession on the disposal of Property A are satisfied. | Detailed Reasoning - Non-assessable non-exempt income: If a capital gain made by a company or trust is disregarded under the small business 15-year exemption, or would have been except that the capital gain was disregarded anyway because the relevant CGT asset was acquired before 20 September 1985, any distributions made by the company or trust of that exempt amount to a CGT concession stakeholder is: • not included in the assessable income of the CGT concession stakeholder, and • not deductible to the company or trust if certain conditions are satisfied. The conditions are: • the company or trust must make a payment within two years after the CGT event that resulted in the capital gain or, in appropriate circumstances, such further time as allowed by the Commissioner • the payment must be made to an individual who was a CGT concession stakeholder of the company or trust just before the CGT event, and • the total payments made to each CGT concession stakeholder must not exceed an amount determined by multiplying the CGT concession stakeholder's control percentage by the exempt amount. These conditions will be met, and the capital gain made by the trust is disregarded under the small business 15-year exemption any distribution by the trust of the CGT amount will not be included in the assessable income of the CGT concession stakeholder. | Detailed Reasoning - Retirement exemption: You may choose to disregard all or part of a capital gain under the small business retirement exemption if you satisfy certain conditions. Subsection 152-305(2) of the ITAA 1997 provides that a company or a trust can choose to disregard all or part of a capital gain if: • you satisfy the basic conditions • you satisfy the significant individual test • you keep a written record of the amount you choose to disregard (the exempt amount) and, if there are more than one CGT concession stakeholder, each stakeholder's percentage of the exempt amount (one may be nil, but together they must add up to 100%) • you make a payment to at least one of your CGT concession stakeholders worked out by reference to each individual's percentage of the exempt amount • the payment is equal to the exempt amount or the amount of capital proceeds, whichever is less, and • where you receive the capital proceeds in instalments, you make a payment to a CGT concession stakeholder for each instalment in succession (up to the asset's CGT exempt amount). The amount of the capital gain that you choose to disregard (that is, the CGT exempt amount) 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. 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. In your case, you satisfy all the conditions to be eligible for the small business retirement exemption concession on the disposal of Property B.