1 Will X be carrying on a primary production business, as defined in section 995-1, pursuant to the sharefarming arrangements it has entered into?
1 No. Question 2 If the answer to question 1 is yes, will X include the proceeds from the sale of the sharefarming crops in its annual turnover in accordance with section 328-120? Answer 2 The receipt by X of payments under the sharefarming arrangements is income from property and would be included in its annual turnover. Question 3 Is any adjustment to be made to the annual turnover of X on the basis that it was unable to plant crops in the first six months of 20XX due to lack of rain in accordance with section 328-120(5)? Answer 3 No. Question 4 Is any adjustment to be made to the annual turnover of X if the trading stock it had on hand (or in the ground) was unsold at 30 June 2024 in accordance with Division 70 and subsection 328-120(1)? Answer 4 No. Question 5 Is the insurance proceeds amount on the plant included in the calculation of the annual turnover of X in accordance with section 328-120(1)? Answer 5 No. Question 6 Will the income from the sale of the crops be derived under section 6-5 when it has been tested and graded? Answer 6 Yes. Question 7
Is the interest income derived by any of the entities included in the aggregated turnover of X in accordance with section 328-115? Answer 7 Yes. Question 8 Are the self-managed superfund and the unit trust excluded from the aggregated turnover test for X? Answer 8 Yes. Question 9 Will there be a CGT event as a consequence of C transferring control of the Y to D by resigning as trustee and appointer and disclaiming C's entitlements under the Trust? Answer 9 No. Question 10 Will the marriage breakdown rollover provision under Subdivision 126-5 apply to C's transfer of C's XX% ownership interest in the J land to D? Answer 10 Yes. Question 11 Is V entitled to use the franking credits it receives on the fully franked dividend paid on the off-market share buy-back in X? Answer 11 Yes. Question 12 Is the Z eligible to apply the 15 year exemption in Subdivision 152-B to the sale of the lands (held greater than 15 years) to disregard any capital gain under section 151-110(1)? Answer 12 No. All legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated.
The Individuals are A, B, C, D. C and D are going through a matrimonial separation and looking to divide up the family assets. A and B are parents of C. A, B, C and D have not utilised any of their $500,000.00 CGT small business retirement concession amounts in the past. Details of the Businesses X Pty Ltd On XX XX XXXX, X was incorporated and has been registered for GST since then. X has historically undertaken a primary production business on J. The directors of X are A, B, C, D. X's ordinary shareholders are: Name of shareholders Number of shares Type of shares Beneficially Held V x Ordinary Shares Yes C and D x Ordinary Shares No V is owned by Z. C and D own their shares as trustees for the Y. Therefore, X is jointly owned by Y and Z. As at 30 June 202X, X had retained earnings of about $X and paid-up capital of $X ($X.00 per share). The aggregated turnover for the period XX to XX was less than $X,000,000.00 for X. Y Family Trust Y was established on XX XX XXXX and is a discretionary trust. The vesting date is in 79 years or such earlier date as the Trustee determines. C and C are the trustees of Y.
The distributions of income from Y for the last four years have been fifty percent each to C and D. Z Family Trust Z was established on XX XX XXXX and is a discretionary trust. Z has been registered for GST since XX XX XXXX. A and B are the trustees of this trust. For the 2024 year, there has been no crop harvested or sold. In the prior years, Z had been carrying on some minor grain and cereal growing business. Z leases land from SF and only farms on BP. A and B are the beneficiaries of the Z along with their children and V. The distributions of income from the Z to A and B were less than twenty percent in six out of fifteen years. Unit Trust Unit trust was established on XX XX XXXX and the trustees are A and B. SF is the sole unit holder. SF SF is a superannuation fund and the trustees are A, B and their child (not part of this ruling). V Pty Ltd V was incorporated on XX XX XXXX. It has 100 ordinary shares on issue and Z is the sole shareholder. V owns shares in both X (50%) and M. A and B are the directors. V does not carry on business or undertake any farming activities, and its income is solely from franked dividends and interest on bank accounts and loans.
At 30 June 20XX V had: retained earnings of approximately $X cash holdings of $X For the 30 June 20XX income year, V derived interest income of $X on its term deposit. There are loans to associated entities of $X (income tax consequences of this loan were not part of this ruling). In terms of an off-market share buy-back for V (of its X shares in X), the return would be as follows: return of capital $X payment of a fully franked dividend of $X. M Pty Ltd The business of M was sold couple years ago. M is still earning interest income as a consequence of its past trading business income deposited into a bank account. The farming land is owned as follows: Property Owners Percentage of ownership J Unit Trust D C 50 25 25 LS Y Z 50 50 LN Y Z 50 50 MA Unit Trust Y 50 50 BN Unit Trust Y 50 50 TG Unit Trust Y 50 50 BP (owned by SF) is partly used for share cropping by the unrelated neighbour's trust and partly farmed by Z. This property is leased to the Z. All the properties (apart from BP) have been used exclusively in the farming business carried on by the X since they were acquired, until March 20XX when some were entered into sharecropping arrangements.
The BN and LS land (100%) is leased to X by Y, Z and Unit Trust to be used for the purpose of sharecropping since March 20XX. X receives 20% of the gross sales income from the crops that have been planted on these lands with the unrelated neighbour's trust in return for the share farming. The payment for this was made in XX. There is no formal share farming agreement. A and the neighbour speak in general regarding when crops are likely to be planted and where, expected time for harvest and sales based on expected prices. There is no direct involvement in the business of farming by X, A's involvement was in general discussions and paying for insurance and rates was passive. LN land is farmed by X. A crop was planted in XX and was harvested in XX. The crop is being delivered and had not yet been invoiced as at XX.
Income Tax Assessment Act 1936 subsection 6-1 Income Tax Assessment Act 1936 section 45A Income Tax Assessment Act 1936 section 45B Income Tax Assessment Act 1936 section 45C Income Tax Assessment Act 1936 paragraph 177EA(5)(b) Income Tax Assessment Act 1997 section 6-5 Income Tax Assessment Act 1997 section 40-285 Income Tax Assessment Act 1997 Division 70 Income Tax Assessment Act 1997 subsection 104-10(1) Income Tax Assessment Act 1997 section 104-55 Income Tax Assessment Act 1997 section 104-60 Income Tax Assessment Act 1997 subsection 108-5(1) Income Tax Assessment Act 1997 section 108-7 Income Tax Assessment Act 1997 section 128-50 Income Tax Assessment Act 1997 Subdivision 152-A Income Tax Assessment Act 1997 Subdivision 152-B Income Tax Assessment Act 1997 Subdivision 152-C Income
Question 1 Will X be carrying on a primary production business, as defined in section 995-1, pursuant to the sharefarming arrangements it has entered into? Summary X will not be carrying on a primary production business in relation the sharefarming arrangements it has entered into. Detailed reasoning Subsection 995-1(1) defines 'primary production business' as carrying on a business of: (a) cultivating or propagating plants, fungi or their products or parts (including seeds, spores, bulbs and similar things), in any physical environment; or .... It is therefore necessary to determine whether the landowner is involved in a business of cultivation or propagation. Taxation Determination TD 95/62 Income tax: will the owner (or lessor) of land who allows the land to be used in a sharefarming arrangement be considered to be engaged in a business of primary production as defined by the Income Tax Assessment Act 1936 ? (TD 95/62) considers whether the owner of land who allows the land to be used in a sharefarming arrangement is considered to be engaged in a business of primary production. TD 95/62 states at paragraph 5 that:
... carrying on a business, the taxpayer must be involved in the activities that make up that business. This would be evidenced by an element of control over, and/or an ongoing participation in the business. The involvement should be direct or immediate, rather than passive. The payment of expenses relating to the ownership of the land would not, without more, be sufficient. If you are in business for tax purposes is set out in Taxation Ruling TR 97/11 Income Tax: Am I carrying on a business of primary production ? (TR 97/11). As per the facts, there is no direct involvement in the business of farming by X. The BN and LS land (100%) was leased to X by Y, Z and Unit Trust for the purpose of sharefarming since XX. X receives twenty percent of the gross sales income from the crops that have been planted on the sharefarming land which will be included in the turnover calculations. In the absence of direct involvement by X, it is not regarded as carrying on a business of primary production in relation to the sharefarming arrangements it has entered into. Rather, it is merely leasing the land. Question 2
If the answer to question 1 is yes, will X include the proceeds from the sharefarming crops in its turnover in accordance with section 328-120? Summary Not applicable. However, the receipt by X of payments under the sharefarming arrangements is income from property and would be included in its turnover. Detailed reasoning X will not be carrying on a primary production business as explained in the response to Question 1. Section 328-115 gives the meaning of 'aggregated turnover.' An entity's aggregated turnover for an income year is the sum of the annual turnovers of itself, its connected entities, and its affiliates, excluding dealings with or between any connected entities or affiliates. 'Annual turnover' is explained in section 328-120, subsection 328-120(1) provides: An entity's annual turnover for an income year is the total ordinary income that the entity derives in the income year in the ordinary course of carrying on a business.
In calculating each company's annual turnover, the exclusions in subsections 328-120(2), 328-120(3) and 328-120(4) apply. Certain items including GST charged on transactions, amounts borrowed for the business, any proceeds from the sale of business capital assets and insurance proceeds for the loss or destruction of a business asset for example, will not be included in the calculation of their annual turnover. Subsection 328-120(5) requires that if an entity does not carry on a business for a whole income year, its annual turnover is worked out using a reasonable estimate of what it would be if it carried on a business for the whole income year. Subject to the exceptions in section 328-115 and 328-120, a receipt will be included in aggregated turnover if it is both: 'ordinary income', and derived in the 'ordinary course' of carrying on a business. Consequently, X's receipt of the payments from the sale of the crops (20%) under the sharefarming arrangements is included in its aggregated turnover. Question 3
Is any adjustment to be made to the aggregated turnover of X on the basis that it was unable to plant crops in the first six months of 2024 due to lack of rain in accordance with section 328-120(5)? Summary There is no adjustment to be made to the aggregated turnover of X for its inability to plant crops. Detailed Reasoning Derived in the ordinary course of carrying on a business. The phrase 'ordinary course of carrying on a business' is not defined, so its meaning must be taken from its ordinary usage and context. The Macquarie Dictionary says the meanings of: 'ordinary' include 'commonly met with, of the usual kind' or 'customary; normal' 'course' include 'customary manner of procedure; regular or natural order of events', 'a mode of conduct; behaviour' or 'a particular manner of proceeding'. 'Business' is defined in section 995-1 as 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'. Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? provides further guidance on whether an activity carried on by a taxpayer amounts to a business.
A receipt will be 'in relation to' carrying on a business when there is a real connection between the payment and the business. The term 'in relation to' includes within its scope payments that have a direct or indirect connection to the business. As stated by Hill J in the First Provincial case (1995) 56 FCR 320 at 333. Your annual turnover is your gross income of proceeds, not your net profit. In calculating your annual turnover there are exclusions in subsections 328-120(2), 328-120(3) and 328-120(4) to consider. Subsection 328-120(5) requires that if an entity does not carry on a business for a whole income year, its annual turnover is worked out using a reasonable estimate of what it would be if it carried on a business for the whole income year. However, a temporary cessation in farming activities for example due to poor weather, etc does not mean that the farming business has ceased. Therefore, as X was still farming land even if there was no crop in the ground. There is no adjustment to be made to the annual turnover for 2024 for the loss of income caused by the inability to plant a crop. Question 4
Is any adjustment to be made to the aggregated turnover of X if the trading stock it had on hand (or in the ground) was unsold at XX in accordance with Division 70 and subsection 328-120(1)? Summary The trading stock provisions are statutory provisions. Therefore, the movement in trading stock for the year is not included in ordinary income. Detailed Reasoning Subsection 328-120(1) defines annual turnover as the total ordinary income that the entity derives in the income year in the ordinary course of carrying on a business, and includes the total ordinary income of any connected entities or affiliates before (or after) they became a connected entity or affiliate in accordance with section 6-5(1). Section 70-35 states you include the value of your trading stock in working out your assessable income and deductions. If you carry on a business, you compare: the value of all your trading stock on hand at the start of the income year, and the value of all your trading stock on hand at the end of the income year. Note: You may not need to do this stocktaking if you are a small business entity in Division 328. Your assessable income includes any excess of the value at the end
of the income year over the value at the start of the income year. Therefore, any trading stock adjustment, being statutory income under section 70-35(2) and not being ordinary income, is excluded from the determination of X's annual turnover. Question 5 Is the insurance proceeds amount on the plant included in the calculation of the aggregated annual turnover in accordance with section 328-120(1)? Summary The insurance proceeds amount on the plant is not included in the calculation of the aggregated annual turnover. Detailed Reasoning Subsection 328-120(1) provides for the meaning of 'annual turnover': An entity's annual turnover for an income year is the total ordinary income that the entity derives in the income year in the ordinary course of carrying on a business.
Consequently, in order to establish whether an entity is a small business entity it is necessary to consider what constitutes the entity's ordinary income such that its aggregated turnover for the relevant income year can be established. The insurance proceeds are not ordinary income of X. Therefore, those proceeds are not included in its aggregated annual turnover for the XX year. However, the disposal would generally be the realisation of depreciable assets subject to a balancing adjustment under section 40-285. Question 6 Will the income from the sale of the crops be derived under section 6-5 when it has been tested and graded? Summary The income from the sale of the crop will be derived after it is tested, graded and weighed at the market value (sale proceeds). Detailed Reasoning Under subsection 6-5(1) an amount is assessable income if it is income according to ordinary concepts. Paragraph 74 of Taxation Ruling TR 97/9 Income tax: sale of wool outlines that the income from the sale of the wool is considered to be derived immediately after the test results are received.
In applying the same principles applied in TR 97/9, the income derived on the crops will not be derived until X or the sharefarmer has been advised by the buyer of the grade and weight of the crops (so as to determine its market value), and only then will the sale of the crop have occurred. The income from the sale of the crops will not be derived merely because the crop is harvested and then delivered to the buyer. The crop income is derived under 6-5 is upon the notification from the buyer of the grading, weight and its market value, which may have occurred before or after XX XX XXXX. Question 7 Is the interest income derived by any of the entities included in the aggregated turnover of X in accordance with section 328-115? Summary The interest income for the entities would only be included in aggregated turnover if these entities were carrying on a business and the interest income is on the income that has been generated from carrying on that business. Detailed reasoning Subsection 328-115(2) provides that the relevant annual turnovers are: (a) your annual turnover for the income year; and (b) the annual turnover for the income year of any entity (a
relevant entity ) that is connected with you at any time during the income year; and (c) the annual turnover for the income year of any entity (a relevant entity ) that is an affiliate of yours at any time during the income year. 'Annual turnover' is defined in subsection 328-120(1) as an entity's annual turnover for an income year is the total ordinary income that the entity derives in the income year in the ordinary course of carrying on a business. The entities in question for the inclusion of interest income are M, V, Y, and Z. M M was not trading in the XX income year, but it has earned interest income in its bank account as a consequence of its trading business income deposits. The ATO's view in Example 1 of TR 2019/1 is that an inactive company with retained profits held in a bank account earning interest is still carrying on a business as it has both a purpose and prospect of profit. The interest income will be the turnover of M for the XX income year and will be aggregated with X. V V is a 50% shareholder in X and it has received dividends from X. These dividends have been deposited in its bank account which is earning interest.
Where a company is established and maintained to make a profit for its shareholders, and invests its assets in gainful activities that have both a purpose and prospect of profit, it will normally be carrying on a business in a general sense per Aickin J at (1981) 147 CLR 441; Westleigh. American Leaf at (1979) AC 676, 684 . This is so even per Brookton per Aickin J; Westleigh; American Leaf [1978] 3 All ER 1185 at 1189; Total Holdings; EA Marr; Korean Syndicate if the company's activities are relatively limited, and its activities consist of passively receiving returns on its investments and distributing them to its shareholders. Therefore, depositing the dividends received from X into a bank account and receiving interest on that investment is sufficient for V to be carrying on business. The interest income of V will be aggregated with X. Z Z carries on minor business in its own right in relation to crop sales. Consequently, its turnover (including interest income) would be aggregated with X. Y Y does not carry on business and therefore its income would be excluded from aggregated turnover under section 328-115(3). Question 8
Are the turnover of SF along with Unit Trust excluded from the aggregated turnover test for X? Summary The turnover of SF along with Unit Trust will be excluded from the aggregated turnover of X as neither are controlled or connected by X. Detailed Reasoning Subsection 328-125(1) provides an entity is connected with another entity if either entity controls the other entity in the way described in section 328-125 or both entities are controlled in that way by the same third entity. The fund is not connected with the members or trustees under paragraph 328-125(1)(a). Accordingly, a complying superannuation fund is not connected with another entity under paragraph 328-125(1)(b) even if the fund's members or trustees control the other entity. Paragraph 328-125(2)(a) provides that an entity controls another entity, that is not a discretionary trust, if it or its affiliates, or all of them together beneficially own, or have the right to acquire the beneficial ownership of, interests in the other entity that carry between them the right to receive at least 40% of any distribution of income or capital by the other entity.
Accordingly, a complying superannuation fund does not control another entity under subsection 328-125(2) (via aggregation of its affiliates' interests) even if the fund's members or trustees control the other entity and therefore the fund is also not connected with the other entity under paragraph 328-125(1)(a). SF and Unit Trust are not controlled by any entity and their turnover is excluded from being aggregated with X. Question 9 Will there be a CGT event as a consequence of C transferring control of Y to D by resigning as trustee and appointer and disclaiming C's entitlements under the Trust? Summary A change in C being a trustee or appointer and disclaiming C's Trust entitlements will not result in a CGT event. Detailed reasoning A change of trustee involves the transfer of legal title of the trust assets. This is because the trustee holds legal title to the trust's assets for the benefit of the trust beneficiaries. Change in Trustee and Appointor In Taxation Determination TD 2012/21
Income tax: does CGT event E1 or E2 in sections 104-55 or 104-60 of the Income Tax Assessment Act 1997 happen if the terms of a trust are changed pursuant to a valid exercise of a power contained within the trust's constituent document, or varied with the approval of a relevant court? It states at paragraph 24... that a change in the terms of the trust pursuant to exercise of an existing power (including an amendment to the deed of a trust), or court approved variation, will not result in a termination of the trust and, therefore, subject to the observation in paragraph 27, will not result in CGT event E1 happening. Where an asset is instead transferred to an existing trust, CGT event E2 will be the relevant event (subsection 104-60(1)). The trust deed allows for the removal, appointment and retirement of trustees and appointers. C will resign as appointor and trustee of the trust in accordance with the Trust Deed. In subsection 104-55(1), a CGT event E1 happens if you create a trust over a CGT asset by declaration or settlement.
The note to subsection 104-55(1) states that a change in the trustee of a trust does not constitute a change in the entity that is the trustee of the trust (subsection 960-100(2). This means that CGT event E1 or E2 will not happen merely because of a change in the trustee as C resigning as Trustee is a valid exercise of power contained within the deed in a continuing trust. Disclaimer of interest in trust In section 104-25(1), a CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset: (a) being redeemed or cancelled; or (b) being released, discharged or satisfied; or (c) expiring; or (d) being abandoned, surrendered or forfeited; or (e) if the asset is an option - being exercised; or (f) if the asset is a convertible interest - being converted. The Trust Deed outlines that the Trustee has absolute discretion in distributing all or part of the net income to or for all the beneficiaries or to one or more of them to the exclusion of the others and in, such shares as the Trustee may decide.
The disclaimer of a trust interest by C will not trigger a 'resettlement' of the trust, or otherwise result in a variation to the trust interests held in the Trust, which would otherwise trigger a CGT event for C or for the Trust. However, an amendment to the trust deed to exclude a beneficiary from the discretionary trust may result in the creation of a new trust with CGT event E1 (section 104-55). Paragraph 2 of TD 2001/26 Income tax: capital gains: what are the capital gains tax consequences for a beneficiary of a discretionary trust who renounces their interest in the trust?
provides that a beneficiary of a discretionary trust renounces their interest in the trust and a beneficiary of a discretionary trust who has no interest in either the assets or the income of the trust before the exercise of any discretion by the trustee as to the allocation of those assets or income can renounce their interest in the trust. In these circumstances, however, any capital gain the beneficiary makes from the renunciation of an interest acquired on or after 20 September 1985 is likely to be nil because its cost base is likely to be nil and the market value of the interest at the time of the renunciation would generally be nil. A discretionary beneficiary may or may not receive any capital proceeds for renouncing their interest in the discretionary trust. Whether or not capital proceeds are received, the beneficiary will need to determine the market value of the interest under section 116-30 at the time of the renunciation of the interest. A capital gain may arise if the market value exceeds the cost base of their trust interest as included in paragraph 3 of TD 2001/26.
Prior to the disclaimer, C was entitled to and received the discretionary rights to income or capital of the trust and we have assumed C will renounce C's rights to receive this income or capital. Therefore, a change in C not being a trustee or appointer and disclaiming C's entitlement to the Trust entitlements will not result in a CGT event. Question 10 Will the marriage breakdown rollover provision under Subdivision 126-5 apply to C's transfer of C's X% ownership interest in the J to D? Summary C will be transferring the portion of ownership interest in compliance with a Court Order made under the Family Law Act 1975 (FLA). As a result, the rollover provision under section 126-5 will apply. However, the rollover relief is only available if C's portion of the ownership interest is transferred to D. This will allow C to disregard any capital gain or capital loss made from the transfer of C's interest to D. Detailed Reasoning You may make a capital gain as a result of a CGT event happening to an asset in which you have an ownership interest. The most common CGT event is CGT event A1.
Section 104-10 explains that this event occurs whenever there is a change of ownership for a CGT asset, for example, when you dispose of an asset to someone else. A CGT event A1 will occur when C transfers J to D. In certain situations, the capital gain or capital loss made as a result of a CGT event can be disregarded or rolled over. Subdivision 126-A provides a roll-over if a CGT event occurs as a result of a marriage or relationship breakdown when the relevant requirements are satisfied. The basic conditions are in sections 126-5 and 126-15. In order for the marriage breakdown rollover to apply, the CGT event must happen because of an order of a court or court order made by consent under the FLA. If the rollover applies, C will be transferring C's interest and disregarding any capital gain or capital loss C's makes on the transfer. C will be able to access the rollover on the basis that the transfer of C's interest in the J will be in accordance with a court order under the FLAand the transfer is to D and not to a company or trust. Accordingly, the marriage breakdown relief provision will apply to C. Question 11
Is V entitled to use the franking credits it receives on the fully franked dividend paid on the off-market share buy-back in X? Summary V is entitled to the franking credits it receives on the fully franked dividend paid on the off-market share buy-back in X. Detailed Reasoning The term 'dividend' is defined in subsection 6(1) of the ITAA 1936. However, paragraph (d) of the definition of 'dividend' excludes distribution from the meaning of 'dividend' if the amount of the distribution is debited against an amount standing to the credit of the company's share capital account. V which holds 50% of the shares in X does not itself carry on a primary production business nor undertake any farming activities, and its income is solely from franked dividends and interest on bank accounts and loans. In terms of the proposed arrangement, the amount of the capital returned to V will be equal to the amount paid up by V originally, and represents 50% of the total paid up capital in X itself. Under the buyback the proceeds to be received by V will be a dividend and a capital component.
The capital component is a distribution to the shareholder that is to be debited in X's share capital account. Therefore, the exclusion in paragraph (d) will be applicable to X. Based on the market value of the plant and equipment and unsold XX crop and XX crop in the ground it is estimated that 50% of the market value for X will be $X Consequently, in terms of an off-market share buy-back for V, the approximate return would be as follows: Return of capital $X Fully franked dividend $X The payment of franked dividends to one shareholder of X would be as per the dividend policy of X. The Commissioner will not make a determination under subsection 45A, 45B that section 45C applies to the whole, or part, of the payment of the return of the capital as unfranked dividend. Further, the Commissioner will not make a determination under paragraph 177EA(5)(b) of ITAA 1936 that no imputation benefit is to arise in respect of the distribution or a specified part of a distribution that is made, or flows indirectly, to V. Question 12
Is Z eligible to apply the small business 15-year exemption in Subdivision 152-B to the sale of the lands (held greater than 15 years) to disregard any capital gain under section 151-110(1)? Summary Z is not eligible to apply the small business 15-year exemption to disregard any gain made from the disposal of the lands as all of the requirements in section 152-110 have not been met. Detailed reasoning The 15-year exemption in Subdivision 152-B allows an entity to disregard a capital gain arising from a CGT asset that it has owned for at least 15 years if certain conditions are met. Subsection 152-110(1) provides that a company or trust can disregard any capital gain arising from a CGT event if all of the following conditions are satisfied: (a) the basic conditions in Subdivision 152-A are satisfied for the gain; (b) the entity continuously owned the CGT asset for the 15-year period ending just before the CGT event; (c) the entity had a significant individual for a total of at least 15 years during which the entity owned the CGT asset; (d) an individual who was a significant individual of the company or trust just before the CGT event either:
(i) was 55 or over at that time and the event happened in connection with the individual' s retirement; or ... The requirements in paragraph 152-110(1)(a) and (b) are satisfied. To determine whether paragraph 152-110(1)(d) has been satisfied, it must be determined whether Z had a significant individual (paragraph 152-110(1)(c), just before the contract to sell the lands is entered into. Significant individual test Section 152-55 provides that an individual will be a significant individual of Z at a time, if at that time the individual has a small business participation percentage (SBPP) in Z of at least 20%. Section 152-65 provides that an entity's SBPP in another entity at a time is the percentage that is the sum of the entity's direct and indirect SBPP in the other entity at that time. The table in subsection 152-70(1) provides that an entity's direct SBPP in: 1. ... 2. a trust at the relevant time is the percentage of any distribution of income or capital distribution the trustee makes. If these amounts are different, the smallest amount is used.
3. a trust at the relevant time is the percentage of the distributions of income or capital distribution the trustee makes. If these amounts are different, the smallest amount is used. An individual's direct SBPP in a trust is worked out under either item 2 and 3 of section 152-70(1) depending on whether beneficiaries have or do not have entitlements to all of the income and capital of the trust. Z is a discretionary trust and the beneficiaries do not have entitlements to all the income and capital of the trust in the same percentage. Therefore, the relevant percentage is worked out under item 3 in section 152-70(1). A and B are the beneficiaries of the Z in addition to others. A and B have been distributed income of less than twenty percent in six out of fifteen years. In accordance with item 3 in section 152-70(1), A and B are not significant individuals under section 152-55 as a result of their direct SBPP in Z in those years their direct distribution was less than twenty percent. This then requires us to consider the indirect SBPP that A and B may have in Z. Section 152-75 provides that to work out an entity's indirect SBPP:
Work out the indirect SBPP that an entity (the holding entity) holds at a particular time in another entity (the test entity) by multiplying: (a) the holding entity's direct SBPP (if any) in another entity (the intermediate entity) at that time; by (b) the sum of: (i) the intermediate entity's direct SBPP (if any) in the test entity at that time; and (ii) the intermediate entity's indirect SBPP (if any) in the test entity at that time (as worked out under one or more other applications of this section). Note: When testing an intermediate entity's indirect SBPP in another entity, the intermediate entity becomes the holding entity. The use of the phrase 'another entity' in subsection 152-75(1) shows that the holding entity cannot also be the test entity, with the effect that an indirect interest cannot trace through an intermediate entity that is also the test entity. As a result, A and B have no indirect SBPP in the Z. Consequently, Z is not eligible to apply the small business 15-year exemption to disregard the gain made from the disposal of lands as all of the requirements in section 152-110 have not been met.