Private ruling: CGT – small business concessions – active asset and retirement exemption
Date of advice: 18 March 2019
Published: May 2019
Ruling period: Year ended 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Do you satisfy the basic conditions to apply the CGT small business concessions? | A1: Yes | Q2: Do you satisfy the conditions to apply the CGT small business retirement exemption? | A2: Yes

Relevant facts and circumstances: The trust acquired a property (the property) on XX XXXX 20XX. The property was sold on XX XXXX 20XX with settlement occurring on XX XXXX 20XX resulting in a capital gain. From acquisition until disposal, the property was leased to a company for use in their business. A and B each hold 50% of the issued shares in the company, entitling them to full voting and dividend distribution. In each of the four financial years preceding the disposal of the property, A and B received distributions from the trust of 50% each. The trust intends to make a distribution to A and B in the 20XX-XX financial year of 50% each. The company is a small business entity with aggregate turnover of less than $2 million. The maximum net asset value of the trust, the company and affiliates is less than $6 million. Both A and B were over 55 years old at the time of the disposal of the property.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 152-10 | Income Tax Assessment Act 1997 section 152-40 | Income Tax Assessment Act 1997 subsection 328-125(2) | Income Tax Assessment Act 1997 subsection 328-125(4) | Income Tax Assessment Act 1997 subsection 152-35(1) | Income Tax Assessment Act 1997 subsection 152-40(4) | Income Tax Assessment Act 1997 Subdivision 152-D | Income Tax Assessment Act 1997 subsection 152-305(2) | Income Tax Assessment Act 1997 section 152-55 | Income Tax Assessment Act 1997 section 152-70 | Income Tax Assessment Act 1997 section 152-60 | Income Tax Assessment Act 1997 section 152-320

Reasons for decision: Summary: You disposed of the property which resulted in a capital gain. You do not carry on a business, however the property was used in a business carried on by a connected entity, the company and the property satisfies the active asset test therefore, you have met the basic conditions to apply the CGT small business concessions. You meet the conditions to apply the CGT small business retirement exemption as long as you meet the requirements relating to keeping written records and make the required payments to the CGT concession stakeholders in relation to their participation percentage up to the lifetime CGT retirement exemption limit. | Detailed Reasoning - Basic Conditions: To qualify for the CGT small business concessions, you must satisfy several conditions that are common to all the concessions. 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 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) 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. (d) the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997. To be eligible to apply the small business CGT concessions you must satisfy all four of the basic conditions above. | Detailed Reasoning - Active asset: 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. | Detailed Reasoning - Connected entity: An entity is connected with another entity if either entity controls the other entity, or both entities are controlled by the same third entity. Under subsection 328-125(2) of the ITAA 1997, an entity controls a partnership company or trust (except a discretionary trust) if it: ● beneficially owns or has the right to acquire beneficial ownership of, interest in the other entity that give the right to receive at least 40% of any distribution of income or capital by the other entity, or ● 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. ● The level of actual distributions made by a discretionary trust is used to determine who controls the trust. Under subsection 328-125(4) of the ITAA 1997, an entity is taken to control a discretion trust only if, for any of the four income years before the year for which relief is sought for a CGT event: ● the trustee paid to, or applied for the benefit of, the beneficiary or their affiliates or both the entity and any of its affiliates any of the income or capital of the trust, and ● the amounts paid or applied were at least 40% of the total amount of income or capital paid or applied for that income year. In your case, A and B have each received 50% of the distributions from the Trust in the four years prior to the CGT event. C and H therefore are taken to control the trust. A and B are also shareholders and directors of the company, holding 50% of the shares each which provides them with 50% of the voting power each. As such, the company will be considered an entity that is ‘connected with’ you. | Detailed Reasoning - Active asset test: 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. Importantly, subsection 152-40(4) of the ITAA 1997 provides that an asset whose main use is to derive rent cannot be an active asset. In your case, the company is considered to be an entity ‘connected with’ you and the company used the property in the course of carrying on their business. You have owned the property for less than 15 years and it has been an active asset of an entity ‘connected with’ you for the entire period of your ownership. As such, the property has also satisfied the active asset test. You disposed of the property which resulted in a capital gain. You do not carry on a business; however the property was used in a business carried on by a connected entity, the company. The property satisfied the active asset test and therefore, you have met the basic conditions to apply the CGT small business concessions. | Detailed Reasoning - Retirement exemption: Subdivision 152-D of the ITAA 1997 contains the small business 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. If you are a company or trust, other than a public entity, you can choose to disregard all or part of a capital gain where you meet all the following conditions contained in subsection 152-305(2) of the ITAA 1997: ● You satisfy the basic conditions. ● You satisfy the significant individual test under section 152-55 of the ITAA 1997. ● 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. ● You make 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. If a CGT concession stakeholder is under 55 years old just before receiving a payment, an amount equal to that payment must be immediately paid to a complying superannuation or retirement savings account on their behalf. There is no requirement to make this contribution if the stakeholder was 55 years old or older. | Detailed Reasoning - Significant individual test: 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. A company or trust satisfies the significant individual test if it had at least one significant individual just before the CGT event. Under section 152-70 of the ITAA 1997, an entity’s direct small business participation percentage in a trust is the percentage of: ● Distributions of income that the entity is beneficially entitled to during the income year, or ● Distributions of capital that the entity is beneficially entitled to during the income year, or ● If the two percentages above apply, then the smaller of the two. | Detailed Reasoning - CGT concession stakeholder: Under section 152-60 of the ITAA 1997, an individual is a CGT concession stakeholder of a company or trust if they are a significant individual 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. This participation percentage can be held directly or indirectly through one or more interposed entities. The percentages are worked out in the same way as for the significant individual test. In your case, both A and B would be considered to be significant individuals as the trust intends to make a 50% distribution to each of them in the 20XX-XX financial year. A and B will also be CGT concession stakeholders with a participation percentage of 50% each. As you meet the basic conditions and you satisfy the significant individual test you will be entitled to apply the CGT small business retirement exemption, as long as you keep the required written records and make the required payments to the CGT concession stakeholders (A and B) in relation to their participation percentage. As A and B are both over the age of 55 years, there is no requirement to make a contribution to a complying superannuation fund or retirement savings account on their behalf. | Detailed Reasoning - Further issues for you to consider: The amount of the capital gain that you choose to disregard must not exceed 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.