Private ruling: Income Tax - Capital Gains Tax - Small Business Concessions
Date of advice: 9 March 2017
Published: August 2017
Ruling period: Year ending 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Are you eligible to apply the small business capital gains tax concessions under Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997) on the proposed transfer of the property? | A1: Yes. | Q2: Will the property qualify as an 'active asset' for the purpose of section 152-35 of the ITAA 1997? | A2: Yes. | Q3: Are you eligible for the Capital Gains Tax (CGT) discount under Division 115 of the ITAA 1997? | A3: Yes. | Q4: Are you eligible for the small business 50% active asset reduction under Subdivision 152-C of the ITAA 1997? | A4: Yes. | Q5: Are you eligible to apply the small business retirement exemption under subdivision 152-D of the ITAA 1997? | A5: Yes.

Relevant facts and circumstances: The property was acquired by the Trustee of the Trust ('you') approximately 20 years ago and was immediately occupied and used as the premises from which a business was operated by an entity connected with you. The property was rented out on commercial lease terms to the connected entity that used it as part its business for more than 10 years. Later, the connected entity sold the business to a third party; the new owners of the business occupied the property for a period of time. The property is currently occupied by a third party unrelated to the previous business and commercial rent is paid. You and your connected/affiliated entities are considering a restructure of ownership of the property for estate and succession planning purposes. You propose to transfer the property to X and Y (the individuals) which will result in a CGT event. Rental income from the property has always been paid into the trust, trust income distributions have always been made every financial year and at least 20% of the income each year has been distributed directly or indirectly to either or both of the individuals. This will also occur for the income year in which the CGT event occurs. You will satisfy the maximum net asset value test at the time of disposal of the property. You will keep a written record of the amount you choose to disregard under the small business retirement exemption, including each CGT concession stakeholder's percentage of the exempt amount. You will make a payment of the exempt amount within the relevant time period required by subdivision 152-D of the ITAA 1997, to the CGT concession stakeholders in accordance with each CGT concession stakeholder's percentage of the exempt amount. The individuals are over the age of 55 and neither of them have utilised any part of their $500,000 lifetime CGT retirement exemption limit.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 152-10 | Income Tax Assessment Act 1997 Section 152-15 | Income Tax Assessment Act 1997 Section 152-35 | Income Tax Assessment Act 1997 Section 152-40 | Income Tax Assessment Act 1997 Section 152-50 | Income Tax Assessment Act 1997 Section 152-205 | Income Tax Assessment Act 1997 Section 152-305 | Income Tax Assessment Act 1997 Section 152-315

Reasons for decision: Summary: To qualify for the small business capital gains tax (CGT) concessions, you must satisfy several conditions that are common to all the concessions. You must first satisfy one of the following: ● you are a small business entity ● you do not carry on business (other than as a partner) 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 (passively-held assets) ● you are a partner in a partnership that is a small business entity, and the CGT asset is o an interest in a partnership asset (partnership assets) or ● an asset you own that is not an interest in a partnership asset (partner's assets) which is used in the business of the partnership ● you satisfy the maximum net asset value test . There is a limit of $6 million on the net value of the CGT assets that you and certain entities can own and still qualify for the small business CGT concessions. This $6 million limit is called the maximum net asset value test. You satisfy the maximum net asset value test if the total net value of CGT assets owned by certain entities does not exceed $6 million just before the CGT event that results in the capital gain for which the concessions are sought. You must include the net value of CGT assets owned by: ● you ● any entities 'connected with' you, ● any of your 'affiliates' and entities connected with your affiliates. You have advised that the total net value of the CGT assets owned by you, entities connected with you, and your affiliates and entities connected with your affiliates, just before the CGT event will be below $6 million. Consequently the maximum net asset value test will be met. The active asset test is satisfied 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 test period, or ● you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of least 7.5 years during the test period. The periods in which the asset is an active asset do not need to be continuous. However, they must add up to the minimum periods specified above, depending on the total period of ownership. The asset does not need to be an active asset just before the CGT event. In this case the test period will be your ownership period. As the property has been held by you for more than 15 years and was used in a business carried on by an entity connected with you for at least 7.5 years during your ownership period the property will qualify as an active asset. Section 115-10 of the ITAA 1997 provides that a discount on a capital gain is available to a trust where the capital gain results from an asset that was acquired by the trust at least 12 months before the event. You have held the property for longer than 12 months. Therefore you are eligible to apply the 50% discount to the capital gain on disposal of the property. A further 50% reduction on the capital gain may be available under subdivision 152-C of the ITAA 1997. To apply the small business 50% active asset reduction, you need to satisfy only the basic conditions. As you have satisfied the basic conditions of the maximum net asset value test and the active asset test, you are eligible to apply the small business 50% active asset reduction. 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 also choose to disregard all or part of a capital gain where you meet all the following conditions: ● you satisfy the basic conditions ● you satisfy the significant individual test ● you keep a written record of the amount you choose to disregard (the exempt amount) and, ● if there is more than one CGT concession stakeholder, each stakeholder's percentage of the exempt amount (one may be nil, but together they must add up to 100%) ● you make a 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 (up to the asset's CGT exempt amount). You must make the payment: ● if you choose the retirement exemption for a J2, J5 or J6 event, seven days after you choose to disregard the capital gain ● in any other case, by the later of seven days after you choose to disregard the capital gain, and seven days after you receive the capital proceeds from the CGT event. 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%. A company or trust satisfies the significant individual test it had at least one significant individual just before the CGT event. An individual is a CGT concession stakeholder of a company or trust if they are a significant individual or the spouse or 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. Based on the facts you have provided, you will satisfy the significant individual test. You will keep a written record and make the payment to the CGT concession stakeholders within the requirements under subdivision 152-D of the ITAA 1997. Consequently, you will be able to eligible to apply the small business retirement exemption with respect to the transfer of the property.