Private ruling: Small business concessions
Date of advice: 6 December 2016
Published: March 2017
Ruling period: Year ended 30 June 20YY
Date scheme commenced: 1 July 20XX

Ruling: Q1: Do you satisfy the basic conditions for the small business concessions under subdivision 152-A of the ITAA 1997 for the portion you acquired when the property was purchased? | A1: Yes. | Q2: Do you satisfy the basic conditions for the small business concessions under subdivision 152-A of the ITAA 1997 for the portion you acquired when your spouse passed away? | A2: No.

Relevant facts and circumstances: You and your spouse acquired a property over 15 years ago. You moved your business, being run by a trust onto the premises. The business operated for a number of years until you sold 50% of the business. You gradually sold the remainder of the business to the other partner. Your spouse passed away. You and your spouse were beneficiaries of the trust. The total net value of CGT assets owned by you, entities connected with you and your affiliates is less than $6 million.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 152-35 | Income Tax Assessment Act 1997 section 152-15 | Income Tax Assessment Act 1997 subsection 152-40(1)

Reasons for decision: Summary: To qualify for the small business CGT concessions, the basic conditions as contained in subdivision 152-A of the ITAA 1997 must be satisfied. The basic conditions are: ● 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. 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 yours 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 yours for a total of at least 7½ years during the test period. 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. Paragraph 152-40(4)(e) of the ITAA 1997 states, however, that an asset whose main use in the course of carrying on the business is to derive rent cannot be an active asset unless the main use for deriving rent was only temporary. However, the use of an asset by a relevant entity is treated as the use by the asset owner, even if the asset owner receives rent from the relevant entity for the use of that asset. Connected entity An entity controls another entity (except a discretionary trust) if it or its affiliate (or all of them together): ● owns, or has the right to acquire ownership of, interest in the other entity that give the right to receive at least 40% (the control percentage) of ● any distribution of income or capital by the other entity, or ● if the other entity is a partnership, the net income of the partnership 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, or both the entity and its affiliates. A beneficiary is taken to control a discretionary 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 beneficiary 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. The control tests for the connected with rules are designed to look through business structures that include interposed entities. If an entity (the first entity) directly controls a second entity, and the second entity controls (whether directly or indirectly) a third entity, the first entity is also taken to control the third entity. | Detailed Reasoning - Application to your circumstances: In this case, you intend to sell the property and realise a capital gain. You purchased your original interest in the property more than 15 years ago and inherited your remaining interest in the property when your spouse passed away. Having considered the information provided, we accept that you controlled the trust. Further, as the trust held at least a 40% interest in the partnership during the relevant period, the trust was connected with the partnership. As you controlled the trust and the trust was connected with the partnership you are taken to have also controlled the partnership during the relevant period. Your original interest in the property has been used in the course of carrying on a business by entities connected with you for more than 7½ years. Therefore, this interest in the property will satisfy the active asset test. As you also satisfy the maximum net asset value test, the basic conditions for the small business CGT concessions have been met for your original interest in the property. However, the portion of the property that you inherited from your spouse does not satisfy the active asset test. This interest in the property has never been used in the course of carrying on a business by an entity connected with you during your ownership period.