Private ruling: CGT - small business concessions
Date of advice: 19 December 2018
Published: April 2019
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is Partnership A an entity that is connected with you for the purposes of accessing the small business concessions? | A1: Yes. | Q2: Do you meet the aggregated turnover test under subparagraph 328-110(1)(b)(ii) of the Income Tax Assessment Act 1997 in determining if Partnership A is a CGT small business entity? | A2: Yes. | Q3: Does Partnership A qualify as a CGT small business entity? | A3: Yes. | Q4: Do you satisfy the basic conditions contained in subsection 152-10(1A) of the ITAA 1997 in relation to the disposal of the farming land? | A4: Yes.

Relevant facts and circumstances: You were a co-owner of farming land. A farming business has been conducted by Partnership A on the farming lands that you co-owned. The partners of Partnership A are a discretionary trust (Trust A) which is controlled by you, and another discretionary trust (Trust B) controlled by your sibling having an equal share. The trustee of Trust A is a company and you are the sole shareholder and director of this company. Over time the goals and expectations of you and your sibling on ways to grow the Partnership A businesses were no longer congruent and you and your sibling entered into an agreement where you transferred to your sibling your interests in Partnership A and the farming land. You estimate that the likely turnover for Partnership A will be less than $XXX and have provided evidence to support this.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 152-10(1A) | Income Tax Assessment Act 1997 subsection 152-10(1AA) | Income Tax Assessment Act 1997 section 328-110 | Income Tax Assessment Act 1997 section 328-125 | Income Tax Assessment Act 1997 subsection 328-125(3) | Income Tax Assessment Act 1997 subsection 328-125(4) | Income Tax Assessment Act 1997 subsection 328-125(7)

Reasons for decision: Summary: In order to access the small business concessions contained in Division 152 of the ITAA 1997, the basic conditions contained in section 152-10 of the ITAA 1997 (in addition to any conditions relevant to each specific concession) must be satisfied. Subsection 152-10(1A) of the ITAA 1997 provides: The conditions in this subsection are satisfied in relation to the *CGT asset in the income year if: (a) your *affiliate, or an entity that is *connected with you, is a *small business entity for the income year; and (b) you do not carry on a *business in the income year (other than in partnership); and (c) if you carry on a business in partnership - the CGT asset is not an interest in an asset of the partnership; and (d) in any case - the small business entity referred to in paragraph (a) is the entity that, at a time in the income year, carries on the business (as referred to in subparagraph 152-40(1)(a)(ii) or (iii) or paragraph 152-40(1)(b)) in relation to the CGT asset. | Detailed Reasoning - Connected entities: The meaning of a connected entity is defined under section 328-125 of the ITAA 1997 which states: An entity is connected with another entity if: (a) either entity controls the other entity in the 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, for the purposes of the small business capital gains tax concessions, a taxpayer will be taken to have control of a partnership where the taxpayer and their affiliates own, or have the right to acquire ownership of, interests in the partnership that gives them the right to receive at least 40% of the income or capital distributions of the partnership. Direct control of a discretionary trust may be established via either of two paths. Subsection 328-125(3) of the ITAA 1997 or subsection 328-125(4) of the ITAA 1997. Subsection 328-125(3) of the ITAA 1997 provides that an individual controls a discretionary trust if the trustee of that trust acts, or could reasonably be expected to act, in accordance with the directions or wishes of the individual, his/her affiliates, or the individual together with his/her affiliates. Subsection 328-125(4) of the ITAA 1997 provides, in part, that an individual directly controls a discretionary trust for an income year if, for any of the preceding four income years, the discretionary trust distributed at least 40% of any income or capital paid for that year to either the individual, the individual’s affiliates, or to the individual together with any of his/her affiliates. In accordance with subsection 328-125(7) of the ITAA 1997, where an individual fails to establish direct control of the unit trust, he/she may establish indirect control of it via an interposed entity. This can be achieved provided that the individual either directly or indirectly controls the interposed entity and the interposed entity in turn either directly or indirectly controls the unit trust. | Detailed Reasoning - CGT small business entity: The term ‘CGT small business entity’ is defined in subsection 152-10(1AA) of the ITAA 1997. It provides: You are a CGT small business entity for an income year if: (a) you are a small business entity for the income year; and (b) you would be a small business entity for the income year if each reference in section 328-110 to $10 million were a reference to $XXX. The term ‘small business entity’ is defined in section 328-110 of the ITAA 1997. Broadly, an entity will be a small business entity if: (a) it carries on a business in the current year; and (b) one or both of the following applies: (i) it carried on a business in the income year before the current year and its aggregated turnover for the previous year was less than $10 million; (ii) its aggregated turnover for the current year is likely to be less than $10 million. Factors to consider when estimating your likely turnover include: ● your turnover in previous income years ● if you plan to reduce or increase staff in the current income year ● whether your business operating hours will increase or decrease ● if previous extraordinary sales or product lines will be available in the current income year ● whether your business will face increased competition in the current income year ● whether your business activity will increase or decrease because of changing conditions. | Detailed Reasoning - Application to your circumstances: In your case, Trust A is entitled to 50% of the net income of Partnership A and as such is taken to control the Partnership A. Additionally, as the sole director and shareholder of the corporate trustee of Trust A, you control Trust A. Therefore, under subsection 328-125(7) of the ITAA 1997 Partnership A is an entity that is connected with you. Partnership A conducts a farming business and their turnover for the financial year, as determined as at the first day of the year, was likely to be below $XXX. Consequently Partnership A satisfies the conditions of section 152-10(1AA) of the ITAA 1997 and is considered to be a CGT small business entity. As Partnership A is a small business entity and carries on a business on the properties for the relevant income year and you do not carry on a business, the conditions of subsection 152-10(1A) of the ITAA 1997 are satisfied.