Private ruling: Small business capital gains tax concession
Published: February 2014
Ruling period: Year ended 30 June 2010
Date scheme commenced: 1 July 2009

Ruling: Q1: Are you entitled to apply the 15 year exemption to the capital gain made on the sale of the property? | A1: Yes.

Relevant facts and circumstances: The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are: · the application for private ruling, and · the further information provided. The company purchased a parcel of land more than 15 years ago. The shareholders of the company were individual A and B. The company does not carry on a business. The property was sold to an unrelated party. The property was used by the trust in the course of carrying on a business. The trustee of the trust is company B. The trust is a small business entity with a turnover of less than $2 million. The shareholders of the trustee company are individuals C and D. Individual C is the appointer of the trust. Individuals A, B, C and D have a close family relationship. The four individuals are affiliates. The trust began using the land in the course of carrying on their business more than 7 and a half years ago. The trust used the land in their business up until it was sold by the company. The sale of the property happened in connection with the retirement of individual A. Individual A was more than 55 years of age when the property was sold.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 102-25(1) | Income Tax Assessment Act 1997 subdivision 152-A | Income Tax Assessment Act 1997 section 152-10 | Income Tax Assessment Act 1997 subsection 152-10(1A) | Income Tax Assessment Act 1997 section 152-15 | Income Tax Assessment Act 1997 subsection 152-125(b) | Income Tax Assessment Act 1997 section 152-35 | Income Tax Assessment Act 1997 subsection 152-40(4) | Income Tax Assessment Act 1997 subparagraph 152-40(1)(a)(i) | Income Tax Assessment Act 1997 subparagraph 152-40(1)(a)(ii) | Income Tax Assessment Act 1997 paragraph 152-40(1)(b) | Income Tax Assessment Act 1997 section 328-125 | Income Tax Assessment Act 1997 subsection 328-125(3)

Reasons for decision: Summary: Basic conditions To qualify for the small business CGT concessions, you must satisfy several conditions that are common to all the concessions. These are the basic conditions: (a) a CGT event happens in relation to a CGT asset of yours in an income year; (b) the event would (apart from this Division) 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 (see 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 interest in an asset of the partnership; (iv) the conditions mentioned in subsection (1A) or (1B) of the ITAA 1997 are satisfied in relation to the CGT asset in the income year; (d) the CGT asset satisfies the active asset test. Passively held assets Subsection 152-10(1A) of the ITAA 1997 outlines the conditions that must be satisfied, for a passively held asset, to apply the small business concessions. (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) of the ITAA 1997) in relation to the CGT asset Connected entity Under section 328-125 of the ITAA 1997 an entity controls a discretionary trust if the trustee either acts, or might reasonably be expected to act, in accordance with the directions or wishes of the entity or the entity's affiliates. Some factors which might be considered include: · The way in which the trustee has acted in the past · The relationship between the trustee and the entity or its affiliates, and the relationship the trustee has with both the entity and its affiliates · The amount of any property or services transferred to the trust by the entity or its affiliates, or both the entity and its affiliates · Any arrangement or understanding between the entity and any person who has benefited under the trust in the past. This entity may control a discretionary trust in addition to any beneficiary with control. ATO Interpretive Decision ATO ID 2008/139 provides that a person who has the power to remove the trustee of a discretionary trust and appoint a new trustee will control the trust for the purposes of subsection 328-125(3) of the ITAA 1997. Affiliates An affiliate is defined by section 328-130 of the Income Tax Assessment Act 1997 as being an individual or company who acts or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you, in relation to the affairs of the individual or company. Relevant factors that may support a finding that a person acts in such a manner include: · the existence of a close family relationship between the parties; · the lack of any formal agreement or formal relationship between the parties dictating how the parties are to act in relation to each other; · the likelihood that the way the parties act, or could reasonably be expected to act, in relation to each other would be based on the relationship between the parties rather than on formal agreements or legal or fiduciary obligations; and · the actions of the parties. Trusts, partnerships and superannuation funds cannot be your affiliates. However a trust, partnership or superannuation fund may have an affiliate who is an individual or company. Whether a person is acting in concert with another is essentially a question of fact. The term 'acting in concert' involves at least an understanding between the parties as to a common purpose or object. Active asset test This test requires the CGT asset to be an active asset for: · 7 years, if owned for more than 15 years, or · half of the ownership period if owned for 15 years or less (section 152-35 of the ITAA 1997). Assets which cannot be active assets The following assets cannot be active assets (subsection 152-40(4) of the ITAA 1997): · interests in a connected entity (other than those satisfying the 80% test) · shares in companies and interests in trusts (other than those satisfying the 80% test) · shares in widely held companies unless they are held by a CGT concession stakeholder of the company · shares in trusts that are similar to widely held companies unless they are held by a CGT concession stakeholder of the trust or other exceptions for trusts with 20 members or less apply · financial instruments, including loans, debentures, bonds, promissory notes, futures contracts, forward contracts, currency swap contracts, rights and options · an asset whose main use in the course of carrying on the business is to derive interest, an annuity, rent, royalties or foreign exchange gains. However, such an asset can still be an active asset if it is an intangible asset that has been substantially developed, altered or improved by the taxpayer so that its market value has been substantially enhanced or its main use for deriving rent was only temporary. Application to your circumstances In this case, a CGT event occurred when the land was. This event resulted in a capital gain. The company owns the land, but does not carry on a business. The trust, which is a small business entity, carries on a business on the land. The shareholders of the trustee company are individuals C and D. The shareholders of the company were individuals A and B. A close family relationship exists between these four individuals. It is accepted that the individuals are affiliates. Individuals C and D, together with their affiliates, control the trust and the company. Therefore, the trust is connected with the company. The trust has owned the property for more than 15 years. The company has used this land in the course of carrying on a business for more than 7.5 years. The land will satisfy the active asset test. Therefore, the trust will satisfy the basic conditions in section 152-10 of the ITAA 1997. Small business 15 year exemption Section 152-110 of the ITAA 1997 provides a small business 15-year exemption for companies and trusts. Under this section, a company can disregard the capital gain from the disposal of a CGT asset if: (a) the company satisfies the basic conditions in Subdivision 152-A of the ITAA 1997 for the small business CGT concessions (b) the company continuously owned the CGT asset for the 15-year period ending just before the CGT event happened (c) the company 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 time the company owned the CGT asset; and (d) an individual who was a significant individual of the trust just before the CGT event was either: - at least 55 years old at that time and the event happened in connection with their retirement or - permanently incapacitated at that time. Significant individual 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. An entities direct small business participation percentage in a company is the percentage of: · voting power that the entity is entitled to exercise · any dividend payment that the entity is entitled to receive, or · any capital distribution that the entity is entitled to receive. If an entity has different participation percentages in a company, their participation percentage is the smaller or smallest percentage. Application to your circumstances In this case, individuals A and B were equal shareholders in the company. They each held more than 20% of the voting power and rights to more than 20% of any dividend payments or capital distributions. Therefore, both individuals A and B were significant individuals of the company. The shareholdings of the company have never changed; therefore the company has had a significant individual for a period of at least 15 years. The company satisfies the basic conditions for the small business concessions. The company has also continuously owned the land for a period of 15 years. As discussed above, the company has had a significant individual for a period of at least 15 years. Individual A is over 55 years of age, and retired after the sale of the property. In this case, the company is entitled to apply the 15 year exemption to the capital gain made on the sale of the property.