Private ruling: Small business concessions
Date of advice: 11 August 2016
Published: September 2016
Ruling period: Year ended 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Are the trust 1 and the trust 2 connected entities for the purposes of accessing the small business concessions? | A1: No | Q2: Is the superannuation fund eligible for the active asset reduction? | A2: No

Relevant facts and circumstances: Trust 1 is a unit trust with two unit holders: Individual A and the Super Fund. Individual A owns more than 40%, but less than 50% of the units in Trust 1, and the super fund, owns, the remaining units, more than 50%. Company 1 is the trustee company for the trust 2. Trust 2's sole director is Individual B. In 20XX trust 1 purchased a warehouse, this was used as the business premises for trust 2. Trust 2 paid rent to trust 1 for use of the premises. In the year ended 30 June 20XX, trust 2 distributed 50% of the distributions to one of the beneficiaries Individual A. In the year ended 30 June 20YY, trust 2 satisfied the maximum net asset value test for the purposes of the small business CGT concessions. In the year ended 30 June 20YY, trust 1 realised a capital gain on the sale of the premises. Trust 1, were not carrying on a business; they collected rent from the leased business premises only.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 152-10, | Income Tax Assessment Act 1997 subsection 152-10(1A), | Income Tax Assessment Act 1997 section 328-125, | Income Tax Assessment Act 1997 subsection 328-125(2), | Income Tax Assessment Act 1997 subsection 328-125(6) and | Income Tax Assessment Act 1997 subsection 328-130(1).

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. One of the basic conditions (paragraph 152-10(1)(c) of the ITAA 1997) requires that at least one of the following applies: • you are a small business entity (SBE) for the income year • you satisfy the maximum net asset value test • you are a partner in a partnership that is a SBE for the income year and the capital gains tax (CGT) asset is an interest in an asset of the partnership; or • the conditions mentioned in subsection 152-10(1A) or (1B) of the ITAA 1997 are satisfied in relation to the CGT asset in the income year that the CGT event occurs In this case, you are not carrying on a business; however you may still qualify for the small business concessions if your CGT asset was used in a business carried on by a small business entity that is your affiliate or an entity connected with you. Passively held assets This passively held asset condition allows you to access the concessions for a CGT asset you own where you are not carrying on a business, but that CGT asset is used in the business of your affiliate or an entity connected with you (subsection 152-10(1A) of the ITAA 1997). The following conditions must be satisfied: • Your affiliate, or entity connected with you, is a small business entity for the income year, that is the income year in which the CGT event happens to your CGT asset • You do not carry on a business in the income year other than in partnership • If you carry on a business in partnership, the CGT asset is not an interest in an asset of the partnership • Your affiliate or entity that is connected with you at a time in the income year is the same small business entity that carries on the business and uses the asset at that time and the asset is the same asset that also meets the active asset test at that time. A connected entity is defined under section 328-125 of the ITAA 1997 as being: 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. For trust 1 to be connected with trust 2, we need to establish that both entities are controlled by the same third entity. In this case, we need to examine whether Individual A was in control of both trusts. In order to be connected with a trust, other than a discretionary trust, you need to establish control via the right to distribution control rule (paragraph 328-125(2)(a) of the ITAA 1997). Paragraph 328-125(2)(a) of the ITAA 1997 provides that you control an entity other than a discretionary trust, if you, your affiliates, or you together with your affiliates beneficially own, or have the right to acquire the beneficial ownership of, interests in the entity that carry between them the right to receive a percentage (the control percentage ) that is at least 40% of any distribution of income or capital by the entity. If your control percentage in a trust is at least 40% but less than 50% the Commissioner may determine under subsection 328-125(6) of the ITAA 1997, that you do not control the other entity if the Commissioner thinks that the entity is controlled by a third entity (other than your affiliate). Subsection 328-130(1) states that an individual or a company is an affiliate of yours if the individual or company 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 business of the individual or company. Consequently, trusts, partnerships and superannuation funds cannot be your affiliates. In this case, Individual A received a 50% distribution from trust 2 in the relevant financial year, therefore we are satisfied that they have a control percentage in trust 2. Individual A also owns more than 40%, but less than 50% of the units in trust 1. However, the Commissioner cannot determine that Individual A is in control of trust 1, as it is controlled by the super fund with their ownership percentage being more than 50% of the units. Therefore, as Individual A does not control both trust 1 and trust 2 and they do not have any other controlling third party, trust 1 and trust 2 are not connected entities for the purposes of accessing the small business concessions. Super fund access to active asset reduction To be able to access the active asset reduction in the small business concessions, the super fund must meet the basic conditions. As they are not in business, they must also use the passively held asset test. As discussed above, to pass the passively held asset test, the following conditions must be met: • Your affiliate, or entity connected with you, is a small business entity for the income year, that is the income year in which the CGT event happens to your CGT asset • You do not carry on a business in the income year other than in partnership • If you carry on a business in partnership, the CGT asset is not an interest in an asset of the partnership • Your affiliate or entity that is connected with you at a time in the income year is the same small business entity that carries on the business and uses the asset at that time and the asset is the same asset that also meets the active asset test at that time. As trust 1 is not a small business entity, the super fund does not meet the passively held asset test. Therefore, the super fund is unable to access the active asset reduction.