CGT - small business concessions

1 Is the UnitTrust carrying on a business of leasing rental properties?

1 No. Question 2 Is the FinanceTrust carrying on a business of money lending? Answer 2 No. Question 3 Will the Taxpayer satisfy the basic conditions in Subdivision 152-A of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of a capital gain they makes on the disposal of their Original 50% interest in Property 1 or Property 2 and their Second 50% interest in Property 1 or Property 2? Answer 3 Yes. Question 4 Will the Taxpayer be eligible to apply the small business 15-year exemption under Subdivision 152-B of the ITAA 1997 in respect of a capital gain they make on the disposal of their Original 50% interest in Property 1 or Property 2? Answer 4 Yes. Question 5 Will the Taxpayer be eligible to apply the small business 50% reduction under Subdivision 152-C of the ITAA 1997 in respect of a capital gain they make on the disposal of their Second 50% interest in Property 1 or Property 2? Answer 5 Yes. Question 6 Will the Taxpayer be eligible to apply the small business retirement exemption under Subdivision 152-D of the ITAA 1997 in respect of a capital gain they make on the disposal of their Second 50% interest in Property 1 or Property 2? Answer 6 Yes. Question 7

Will the Taxpayer be eligible to apply the small business roll-over under Subdivision 152-E of the ITAA 1997 in respect of a capital gain they make on the disposal of their Second 50% interest in Property 1 or Property 2? Answer 7 Yes. This ruling applies for the following periods: Income year ending 30 June 20XX Income year ending 30 June 20XX

The Taxpayer was born in 19XX. The Taxpayer does not carry on a business in their personal capacity. The Taxpayer has never used the small business capital gains tax (CGT) concessions in the past. The Taxpayer owns 100% of Property 1. The Taxpayer acquired their initial 50% interest in Property 1 in 20XX (Original 50% interest in Property 1) and the remaining 50% in 20XX (Second 50% interest in Property 1). The Taxpayer owns 100% of Property 2. The Taxpayer acquired their initial 50% interest in Property 2 in 200X (Original 50% interest in Property 2) and the remaining 50% in 20XX (Second 50% interest in Property 2). The Group Entities The Taxpayer has provided a list of related entities, as follows: Table 1: Related entities Name of entity Purpose The Company Discussed below. The Finance Trust Discussed below. ABC Co Trustee of the Finance Trust. The Unit Trust Discussed below. DEF Co Trustee of the Unit Trust. D Discretionary Trust Passive investment vehicle. Holds 100% of the units in the Unit Trust. Does not carry on a business. P Co Trustee for the D Discretionary Trust. D Co Passive investment vehicle. Does not carry on a business. M Trust

Passive investment vehicle. Holds 100% of the shares in the Company. Does not carry on a business. All the entities mentioned above, including the Taxpayer and the Taxpayer's spouse, together form the 'Group Entities'. No entity that is not a member of the Group Entities is either connected with the Taxpayer pursuant to section 328-125 of the ITAA 1997 or an affiliate of the Taxpayer pursuant to section 328-130 of the ITAA 1997. Each of the Group Entities are residents of Australia for tax purposes. The Company and the Business The Company was incorporated in 20XX. The Taxpayer is the sole director of the Company. The Taxpayer holds 100% of the shares in the Company in their capacity as trustee for the M Trust. Property 1 and Property 2 have been continuously used in a primary production business (the Business) since their acquisition. The Business was first operated in partnership between the Taxpayer and their sibling. The ownership of the Business has been restructured over time, primarily due to the passing of the Taxpayer's sibling, outlined as follows: Table 2: Ownership structure Start dates Ownership structure of BusinessOnershi 20XX A partnership comprising:

•                     the Taxpayer (50% interest); and •                     the Taxpayer's now deceased sibling (50% interest). 20XX •                     A partnership comprising: •                     the Taxpayer (50% interest); and •                     the Company (50% interest). 20XX The Company (100% interest). The Business pays rent to the Taxpayer for use of Property 1 and Property 2. The rent is determined based on prevailing market conditions. The aggregated turnover of the Business for the 20XX income year was less than $2,000,000. As at 30 June 20XX, the Company did not have any carry forward capital losses or carry forward revenue losses. The Company has a Manager who manages the business activities on a daily basis and a consultant who advises the Manager on business matters. The Taxpayer currently works on the affairs of the Business for approximately X hours a week. During this time they hold meetings with the Manager and consultant and reviews the administration and bookkeeping undertaken by their employees. They also did a small amount of physical work.

The Taxpayer received 50% of the total income and capital distributions of the M Trust in the 20XX and 20XX income years. The Finance Trust The Finance Trust is a discretionary trust established in 20XX. ABC Co was incorporated in 20XX. The Taxpayer is the sole shareholder and director of ABC Co. The trust deed of the Finance Trust does not provide for any specific purpose of settling this trust. The Taxpayer advises that the Finance Trust was established for the sole purpose of acting as the key borrowing and lending entity for the Group Entities, thereby consolidating the treasury function of the Group Entities. This structure is submitted by the Taxpayer to provide the Group Entities with greater ease of administration in dealing with banks, as well as consolidated borrowing power, compared to if the Group Entities sought third party financing as individual entities. As such, the Finance Trust's key activities comprise of borrowing funds at interest from a bank and on-lending those borrowed funds at interest to other Group Entities.

The Finance Trust's only source of income is interest received from other Group Entities. This interest income is described by the Taxpayer as a nominal mark-up to cover administrative services provided by the Finance Trust to the other Group Entities. The margin charged by the Finance Trust is determined by the Trustee and designed to cover its operating costs such as accountancy fees, Australian Securities and Investments Commission fees, bank charges, borrowing costs, and interest paid. Any net profit derived from the margin charged by the Finance Trust is distributed to the Taxpayer and their spouse. The Finance Trust's 20XX and 20XX balance sheets show a loan from bank of approximately $XX million, and loans to Group Entities totalling a similar amount. For the 20XX and 20XX income years, the Finance Trust's income statements show an interest income of $XXX and $XXX respectively. The Finance Trust has not ever provided money lending services to non-Group Entities and has no intention of doing so in the future.

As the sole director of the trustee of the Finance Trust, the Taxpayer manages the Finance Trust's borrowing and lending activities. There are no staff members employed to manage the activities of the Finance Trust. There is no office used for the activities of the Finance Trust, as the scale of its activities is very small and does not justify having an office space. The Taxpayer carries out their activities in relation to the Finance Trust at their home. The Finance Trust is connected with the Taxpayer pursuant to section 328-125 of the ITAA 1997. The Taxpayer currently spends approximately X hour per week on the affairs of the Finance Trust. The Unit Trust The Unit Trust is a unit trust established in 20XX. DEF Co was incorporated in 19XX. The Taxpayer is the sole shareholder and director of DEF Co. In its capacity as trustee for the D Discretionary Trust, P Co holds 100% of the units in the Unit Trust. The Taxpayer is the sole shareholder and director of P Co. The trust deed of the Unit Trust does not provide for any specific purpose of settling the trust. The Taxpayer advises that the Unit Trust was established for the sole purpose of owning the Rental Properties.

The Unit Trust has owned the Rental Properties since 20XX. The Unit Trust does not own any other property, and does not undertake any other activity apart from leasing the Rental Properties. The Unit Trust's primary source of income is rent from the commercial and residential tenancies. There is no debt owed by the Unit Trust in respect of the Rental Properties. According to its income statements, the Unit Trust had a profit of around $XXX in the 20XX income year and $XXX in the 20XX income year. The D Discretionary Trust borrowed monies to acquire units in the Unit Trust, and this acts as security for borrowings by the Group Entities. The Unit Trust is connected with the Taxpayer pursuant to section 328-125 of the ITAA 1997. The Taxpayer currently spends approximately X hour per week on the affairs of the Unit Trust. The Rental Properties The Rental Properties have been continually held by the Taxpayer's family since the 19XXs. The Taxpayer's intention has always been to hold the Rental Properties as a long-term investment for the family. That is, the Rental Properties are regarded as an intergenerational asset, and the Taxpayer acts as a steward of these assets.

The Rental Properties are XX block of premises consisting of XX residential properties and X commercial properties. No improvements or renovations have been made to the Rental Properties since 20XX, when the Unit Trust first started holding the Rental Properties. All tenants of the Rental Properties are third parties. None of the premises are used by the Taxpayer or any of their related parties. The X commercial properties are all rented to third party tenants who operate retail businesses. The size of the properties range from XX to XXX square metres. The standard length of the commercial property tenancies are XX months. The Unit Trust has engaged an external property agent who manages most of the rental activity relating to the commercial properties, including finding commercial tenants. The Taxpayer's involvement in relation to the commercial properties is minimal and limited to issuing rental invoices to tenants. The commercial tenants pay the rent directly to the Taxpayer and the Taxpayer spends approximately X hour per week issuing invoices to the tenants. The standard length of the residential property tenancies are at least XX months.

The residential properties are entirely managed by a property agent and the Taxpayer has no direct involvement in managing these properties. All ongoing maintenance, cleaning and repairs of both the residential and commercial properties are managed and arranged by a property agent. A property agent is also responsible for corresponding with the tenants. Any payment in arrears for either the commercial and residential properties is pursued by a property agent, and any dispute with a tenant (commercial or residential) is also handled by a property agent. None of the properties are rented out as furnished or used as holiday rentals or short-term rentals. No common facilities such as gym, pool or shared common spaces are provided in the Rental Properties. Proposed sale The Taxpayer intends to wind down the Business over time. A significant step in that process is to sell either Property 1 or Property 2 in the 20XX or 20XX income year. The Company will make a capital gain from this disposal and will continue operating the Business on the remaining property.

The sale of either Property 1 or Property 2 will immediately reduce the scope of the operations and the time investment required by the Taxpayer in the affairs of the Business will reduce. That reduction will materialise as a consequence of a reduction in meetings with their employees, a reduction in review activities they routinely undertake in their capacity as controller of the Business, and the cessation of all physical duties. Following the sale of either Property 1 or Property 2, the Taxpayer anticipates that their involvement in the affairs of the Company will reduce from X hours per week to X hours per week. They also expects to reduce the time they spend on the affairs of other Group Entities. The Taxpayer previously managed the affairs of the Group Entities from an office which was also used to store paper records of the Group Entities. Having reduced the extent of office space required, the Taxpayer managed the affairs of the Group Entities from their family home since the 20XX income year.

The Taxpayer intends to use the funds from the sale of the property for passive investment purposes and to repay debt. They has no intention of growing the Business or starting any new business ventures. At the time of this ruling, the Taxpayer has not set a date by which they will sell the remaining property, terminate the Business and retire. According to the Taxpayer, their retirement is expected to happen in the foreseeable future. It is expected that the Taxpayer's involvement in the affairs of the Company will further reduce to 0.5 hours a week after the disposal of the second property. Assumptions The aggregated turnover of the Business for each of the 20XX and 20XX income years will be less than $2,000,000. The Taxpayer will not begin to carry on a business in their personal capacity during the 20XX or 20XX income year.

Income Tax Assessment Act 1997 section 104-10 Income Tax Assessment Act 1997 section 104-185 Income Tax Assessment Act 1997 section 104-197 Income Tax Assessment Act 1997 section 104-198 Income Tax Assessment Act 1997 Division 152 Income Tax Assessment Act 1997 Subdivision 152-A Income Tax Assessment Act 1997 subsection 152-10(1) Income Tax Assessment Act 1997 paragraph 152-10(1)(a) Income Tax Assessment Act 1997 paragraph 152-10(1)(b) Income Tax Assessment Act 1997 paragraph 152-10(1)(c) Income Tax Assessment Act 1997 subparagraph 152-10(1)(c)(i) Income Tax Assessment Act 1997 subparagraph 152-10(1)(c)(ii) Income Tax Assessment Act 1997 subparagraph 152-10(1)(c)(iii) Income Tax Assessment Act 1997 subparagraph 152-10(1)(c)(iv) Income Tax Assessment Act 1997 paragraph 152-10(1)(d) Income T

All subsequent legislative references are to the ITAA 1997. Question 1 Summary The Unit Trust is not carrying on a business of leasing rental properties. Detailed reasoning Business is defined under section 995-1 to include any profession, trade, employment, vocation or calling, but does not include occupation as an employee. Whether the activity of letting property amounts to the carrying on of a business will depend on the circumstances of each case. A person who simply owns an investment property or several investment properties, either alone or with other co-owners, is usually regarded as an investor who is not carrying on a rental property business. This is because of the limited scale of the rental property portfolio and the nature and extent of the involvement of the owner in the provision of services to the tenants of these properties. Taxation Ruling IT 2423 Withholding tax: whether rental income constitutes proceeds of business - permanent establishment - deduction for interest states at paragraph 5:

A conclusion that an individual is carrying on a business of letting property would depend largely upon the scale of operations. An individual who derives income from the rent of one or two residential properties would not normally be thought of as carrying on a business. On the other hand if rent was derived from a number of properties or from a block of apartments, that may indicate the existence of a business. In Commissioner of Taxation v McDonald, B. D. [1987] FCA 318 (McDonald ) Beaumont J made a distinction between property investing and carrying on a business, noting that in the carrying on of a business involving property letting services of the nature of those offered by a boarding house would be expected. This was a significant factor in finding that the taxpayer and their spouse were co-investors in their 2 properties rather than in a business of letting rental properties. This being the case the tribunal affirmed that any assignment of profits or losses was a private arrangement between the parties and did not alter their respective obligations or entitlements for income tax purposes. In Cripps v. FC of T

[1999] AATA 937 the taxpayer and their spouse purchased, as joint tenants, 14 townhouses which they rented out. They also purchased a property which was used initially as a holiday home but was later periodically rented out. A further property was purchased for residential purposes. After a failed attempt to sell it, it was also rented out. The Administrative Appeals Tribunal found that the taxpayer and their spouse were passive investors and were not in the business of deriving income from rental properties. The number of the properties involved and the nature and extent of the services offered were key factors in this decision. In Administrative Appeals Tribunal case YPFD and FCT [2014] AATA 9 ( YPFD ), the following statement about the tests that are relevant when the issue involves residential rental properties was made: 16.          The Tribunal suggested in Shields v Deputy Federal Commissioner of Taxation (1999) 41 ATR 1042 and, more recently, in Smith and Commissioner of Taxation (2010) 79 ATR 934, that relevant matters might include: (a)           the nature of the activities and whether they have the purpose of profit-making;

(b)           the complexity and magnitude of the undertaking; (c)           an intention to engage in trade regularly, routinely or systematically; (d)           operating in a business-like manner and the degree of sophistication involved; (e)           whether any profit/loss is regarded as arising from a discernible pattern of trading; (f)            the volume of the taxpayer's operations and the amount of capital employed by him; (by 'her' in the present case). In this case the applicant owned 9 rental properties managed through real estate agents but also spent time on a regular basis performing additional management activities and arranging maintenance. The tribunal noted that reliance on real estate agents did not preclude consideration of their being in business and, taking the volume of their operations into account decided in their favour. In Allen v Federal Commissioner of Taxation [2021] AATA 2768 ( Allen

) it was held the applicant was carrying on the business of letting rental accommodation involving 9 properties. The applicant had the purpose of maximising net rent, the capital invested was considerable, and they spent a significant amount of time managing their income-producing real estate assets, especially once they ceased employment. The activities undertaken were significant in nature and included the personal involvement of the taxpayer in the planting and maintenance of gardens, cleaning, property repairs and maintenance, lease preparation for and attendance to legal disputes, and extensive development of their existing holdings to accommodate more tenants. It was estimated that the development of their existing holdings would increase their annual rental income by $120,000. The tribunal decision considered the extent and nature of their activity as well as their prospects for profit, and found their activities were more than that of a passive investor. The factors outlined in these court decisions are taken into consideration in the indicators set out in the Commissioner's view on whether a taxpayer is carrying on a business as set out in Taxation Ruling TR 97/11

Income tax: am I carrying on a business of primary production? While written for primary producers, these indicators are the consolidation of many years of case law and have broad application over many industries. TR 97/11 identifies the following indicators for consideration in determining whether a taxpayer is carrying on a business for taxation purposes. •                     whether the activity has a significant commercial purpose or character; •                     whether the taxpayer has more than just an intention to engage in business; •                     whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity; •                     whether there is repetition and regularity of the activity; •                     whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business; •                     whether the activity is planned, organised, and carried on in a businesslike manner such that it is directed at making a profit; •                     the size, scale, and permanency of the activity; and

•                     whether the activity is better described as a hobby, a form of recreation or a sporting activity. In determining whether a taxpayer is carrying on a business, no one indicator will be decisive. The indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the large or general impressions gained from looking at all the indicators and whether these indicators provide the operations with a commercial flavour. Whether the activity has a significant commercial purpose or character An activity can be considered to have significant commercial purpose or character if it has a business plan, a profit-making purpose, and can be shown to be carried on in a commercially viable manner. The business planning process itself includes knowledge of or research into marketing the product or service provided, capital requirements and how these might be met, costs, legal requirements, and the size and scale needed for commercial viability.

The Rental Properties held by the Unit Trust consist of X residential properties and X commercial properties. The Unit Trust did not diversify its properties and owned them all in a single block. Over the years, the Unit Trust has not increased its property holdings at any stage nor has it undertaken any major capital improvements to the Rental Properties. External property agents are largely relied upon for the management of the properties; neither the Taxpayer or anyone else associated with the Unit Trust takes a hands-on approach to the management and maintenance of the Rental Properties. Overall, the activities of the Unit Trust have not grown to be that of a commercial nature. Whether there is a purpose of profit as well as a prospect of profit from the activity A business must have a purpose as well as a prospect of profit. This includes planning and activity that is directed towards making a profit and being able to demonstrate how that profit is to be made.

The Taxpayer's family has held the Rental Properties since 19XXs and the Unit Trust specifically since 20XX. The Rental Properties were acquired with the intention of being a long-term investment for the Taxpayer's family, to be passed down as an intergenerational asset. That intention has not changed and the Unit Trust has not looked to expand its rental property portfolio. The Rental Properties are profitable. There is a purpose of profit and a prospect of profit, although it is also expected that a property investor would intend to make a profit. Whether there is repetition and regularity of the activity Activity must be undertaken on a continuous and repetitive basis, as appropriate to the industry, for it to be considered a business. In Allen the applicant was occupied for the larger part of their working week with their extended involvement in the management, maintenance, and further development of 9 properties.

The rental activities of the Unit Trust, such as ongoing maintenance and repairs of the Rental Properties, finding tenants, corresponding with tenants and managing disputes, are entirely managed by a property agent. The Taxpayer's involvement in managing the Rental Properties is minimal, averaging X hour per week and limited to issuing rental invoices to the commercial tenants. The Taxpayer's commitment to this activity on behalf of the Unit Trust can be considered continuous and regular but to a much lesser extent as that described in the Allen case. The activity undertaken by the Taxpayer (for the Unit Trust) is more in line with other property investors. Whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business An activity can more readily be recognised as commercial if it is of the same kind and carried on in a similar manner to other businesses in the same industry.

The Unit Trust outsourced almost all of the management, maintenance and correspondence activities relating to the residential and commercial properties to a property agent. The Taxpayer's involvement on behalf of the Unit Trust is limited to issuing invoices for rental payments received from commercial tenants only. The Unit Trust did not offer any in-house services such as those referred to in the McDonald case (and considered one of the characteristics of a rental letting business in that case). The activities of the Unit Trust do not go beyond that of an investor. Whether the activity is planned, organised, and carried on in a businesslike manner such that it is directed at making a profit An activity can more readily be characterised as a business when it is carried on in a planned, organised, and businesslike manner such that it is directed at making a profit. The Unit Trust manages its records systematically so it can meet its legal obligations. The activities of the Unit Trust are organised and directed at making a profit, albeit almost all of that activity is carried on through an agency. The size, scale, and permanency of the activity

An activity would be expected to be of a size, scale, and permanency suitable to the industry it is operating in to be recognised as a business. The Rental Properties constitute an asset, consisting of X residential properties and X commercial properties, and is of a size and scale capable of being recognised as a business. The permanent nature of the activity is supported by the duration of holding. The Unit Trust is operating on an ample scale not dissimilar to those in YPFD and Allen , both of whom were considered to be in business with 9 properties apiece, or to McDonald who had 14 properties but was considered an investor. Whilst scale is a factor, it is not determinative of a business of letting rental properties. Conclusion The property letting activities of the Unit Trust have a purpose of profit and are on a larger scale than most investors. However, the Unit Trust's level of involvement in that activity is more consistent with that of an investor than one carrying on a business of letting rental properties. Just about all activities undertaken in managing and maintaining the Rental Properties are undertaken by an agent on behalf of the Unit Trust.

The Taxpayer's family has maintained the same rental property block for approximately XX years and the Unit Trust itself has held it for almost XX years during which there was no development of the asset, growth or diversification of the activity. As well as producing profits, the Rental Properties are (and always have been) held for long-term family succession purposes. The significance of these factors in determining if a business is being carried on is underlined by the decisions in the above cited cases. An overall consideration of the Unit Trust's case against these indicators gives the impression that the Unit Trust is not in the business of letting rental properties, but is a property investor. Question 2 Summary The Finance Trust is not carrying on a business of money lending. Detailed reasoning As discussed above, whether an entity is carrying on a business is a question of fact, depending on the circumstances of the particular case and based on the overall impression gained after weighing all the relevant indicators set out in TR 97/11. The following passage of Bowen CJ in F.C. of T. v. Marshall and Brougham Pty Ltd

17 FCR 541, 87 ATC 4522, 18 ATR 859 at ATC p. 4528, ATR p. 866 is set out in paragraph 43 of Taxation Ruling TR 92/18: Income tax: bad debts and provides some useful general guidelines on determining whether a taxpayer is a money lender: It is generally accepted that in order to be regarded as carrying on a business one must demonstrate continuity and system in one's dealings. In the case of money lending it has been said that a person must hold himself out as willing to lend money generally to all and sundry (subject to credit-worthiness): see Litchfield v. Dreyfus [1906] 1 KB 584. It is not decisive whether the lender is a registered money-lender or not, although this will be a factor to take into account. It should be mentioned that it need not be the only business or the principal business of the taxpayer. It will be insufficient, however, if it is merely ancillary or incidental to the primary business. In the end, it will be a question of fact for the court to decide by looking at all the circumstances involved: see Newton v. Pyke (1908) 25 TLR 127. TR 92/18 proceeds to note (at paragraph 46), contrary to the statement of Farwell J in Litchfield v. Dreyfus

(referenced in paragraph 43 of TR 92/18) in light of more recent Australian cases, that for tax purposes a money lender need not necessarily be ready and willing to lend moneys to the public at large or to a wide class of borrowers. It would be sufficient if a taxpayer lends moneys to certain classes of borrowers provided the taxpayer does so in a businesslike manner with a view to yielding a profit from it. The value of the loans made by the Finance Trust and represented as assets of the trust as at 30 June 20XX (i.e. approximately $XX million) is of a size and scale capable of being recognised as a money lending business. The Finance Trust is capable of making a profit (as confirmed in its recent financials), and there is a degree of system, continuity and repetition associated with its lending activities (albeit the Taxpayer, on behalf of the Finance Trust, only dedicates about X hour per week on the activity).

Nevertheless, the overall impression gained after weighing up all the relevant indicators set out in TR 97/11, as well as those mentioned in TR 92/18 in specific reference to money-lending businesses, is that the Finance Trust does not carry on a business of money lending for reasons which include: •                     the Finance Trust was established for the sole purpose of acting as the key borrowing and lending entity for the Group Entities, consolidating the treasury function for the Group Entities as well as the borrowing power of Group Entities (a common commercial practice for privately held groups); •                     the Finance Trust is not registered as a money lender; •                     the interest the Finance Trust charges is designed to cover its operating costs (rather than make profits); and •                     the Finance Trust's only source of income is interest received from other Group Entities; it does not lend and has no intention of lending to entities outside of the group and therefore cannot be said to lend to certain classes of borrowers (let alone a wide class of borrowers or the public at large). Question 3 Summary

The Taxpayer will satisfy the basic conditions in Subdivision 152-A in respect of a capital gain they make on the disposal of their Original 50% interest and Second 50% interest in Property 1 or Property 2 . Detailed reasoning To qualify for any of the CGT small business concessions in Division 152, a capital gain made by an entity must satisfy several conditions that are common to all the concessions, known as the basic conditions. The basic conditions for relief in relation to a capital gain made from a CGT event happening to real property are contained in subsection 152-10(1): (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 CGT small business entity for the income year; (ii)           (ii) you satisfy the maximum net asset value test (see section 152-15); (iii)          you are a partner in a partnership that is a CGT 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) are satisfied in relation to the CGT asset in the income year; (d)           the CGT asset satisfies the active asset test (see section 152-35). The Taxpayer acquired their Original 50% interest in Property 1 and Property 2 in 20XX and 20XX respectively, and their Second 50% interest in Property 1 and Property 2 in 20XX. Taxation Determination TD 2000/31 states that if a taxpayer owns an interest in a CGT asset and they acquire another interest in the asset, the interests remain separate CGT assets. Therefore the 2 half interests in each of Property 1 and Property 2 that the Taxpayer acquired remain separate CGT assets throughout the period of ownership. Paragraphs 152-10(1)(a) and (b) For the purposes of paragraph 152-10(1)(a), CGT event A1 under section 104-10 will happen in relation to the Taxpayer's respective interests in Property 1 or Property 2 upon their disposal as planned during the 20XX or 20XX income year. For the purposes of paragraph 152-10(1)(b), those events will (apart from Division 152) result in a capital gain for the Taxpayer. Paragraph 152-10(1)(c)

None of subparagraphs 152-10(1)(c)(i), (ii) or (iii) or subsection 152-10(1B) apply to the Taxpayer. For the purposes of subparagraph 152-10(1)(c)(iv), the conditions in subsection 152-10(1A) are satisfied in relation to the CGT asset in the income year if: (a)           your affiliate, or an entity that is connected with you, is a CGT 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 CGT 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)) in relation to the CGT asset. A 'CGT small business entity' for an income year (as referred to in paragraph 152-10(1A)(a)) is defined in subsection 152-10(1AA) to mean an entity which: •                     is a small business entity for the income year; and

•                     would be a small business entity for the income year if each reference in section 328-110 to $10 million were a reference to $2 million. Broadly, section 328-110 defines a 'small business entity' for an income year as an entity that carries on a business in that year and: •                     both carried on a business in the previous income year and had an aggregated turnover for that year of less than $10 million ((subparagraph 328-110(1)(b)(i)); or •                     its aggregated turnover for the current year is likely to be less than $10 million and, where it carried on a business in each of the 2 previous income years, the aggregated turnover for each of those income years was less than $10 million (subparagraph 328-110(1)(b)(ii) and subsection 328-110(3)); or •                     its aggregated turnover for the current year, worked out as at the end of the year, is less than $10 million (subsection 328-110(4)). Therefore, for the purposes of paragraph 152-10(1A)(a): •                     the Company is a CGT small business entity for the 20XX income year pursuant to •                     subsection 152-10(1AA) on the basis that:

-              it carries on a business in the 20XX income year; and -              it carried on a business in the 20XX income year and its aggregated turnover for the 20XX income year was less than $X million; and •                     the Company will be a CGT small business entity for the 20XX income year pursuant to •                     subsection 152-10(1AA) on the basis that: -              it will carry on a business in the 20XX income year; and -              as assumed for the purposes of this ruling, its aggregated turnover for the 20XX income year will be less than $X million. Section 328-115 explains that your aggregated turnover for an income year is your annual turnover plus the annual turnovers of any business entities that are your affiliates or that are connected with you. As the Unit Trust and the Finance Trust do not carry on a business (confirmed at questions 1 and 2 of this ruling), their annual turnover is not factored into the aggregated turnover of the Company. Under subsection 328-125(1), an entity is connected with another entity if: •                     either entity controls the other entity in a way described in section 328-125; or

•                     both entities are controlled in a way described in section 328-125 by the same third entity. Pursuant to paragraph 328-125(2)(b), an entity (the first entity) controls a company if the first entity, its affiliates, or the first entity together with its affiliates own, or have the right to acquire the ownership of, equity interests in the company that carry between them the right to exercise, or control the exercise of, at least XX% of the voting power in the company. Pursuant to subsection 328-125(4), an entity (the first entity) controls a discretionary trust for an income year if, for any of the 4 previous income years: (a)           the trustee of the trust paid to, or applied for the benefit of: (i)            the first entity; or (ii)           any of the first entity's affiliates; or (iii)          the first entity and any of its affiliates; any of the income or capital of the trust; and (b)           the percentage (the control percentage ) of the income or capital paid or applied is at least 40% of the total amount of income or capital paid or applied by the trustee for that year.

Subsection 328-125(7) provides that section 325-125 applies to an entity (the first entity) that directly controls another entity (the second entity) as if the first entity also controlled any other entity that is controlled by the second entity (by application of section 328-125). The M Trust is the sole shareholder in the Company and directly controls the Company pursuant to paragraph 328-125(2)(b) on the basis that it owns 100% (and therefore at least XX%) of the voting power in the Company. The Taxpayer received 50% of the total income and capital distributions of the M Trust (a discretionary trust) in the 20XX and 20XX income years. The Taxpayer therefore directly controls the M Trust for both the 20XX and 20XX income years pursuant to subsection 328-125(4) on the basis that the trustee of the M Trust paid at least XX% of the total amount of income or capital it paid in any of the previous X years.

As the Taxpayer directly controls the M Trust in the 20XX and 20XX income years and the M Trust directly controls the Company, section 328-125 applies to the Taxpayer as if they control the Company pursuant to subsection 328-125(7). As such, the Company is an entity that is 'connected with' the Taxpayer. As the company is both connected with the Taxpayer and a CGT small business entity for the 20XX and 20XX income years, paragraph 152-10(1A)(a) is satisfied. Paragraph 152-10(1A)(b) is also satisfied and paragraph 152-10(1A)(c) is not applicable on the basis that the Taxpayer does not carry on a business, either alone or in partnership, during the 20XX income year and will not carry on a business during the 20XX income year (as assumed for the purposes of this ruling). For the purposes of paragraph 152-10(1A)(d), the Company (being the relevant CGT small business entity) is the entity that, at a time in the 20XX or 20XX income year (as applicable), carries on the business (as referred to in subparagraph 152-40(1)(a)(iii), discussed below) in relation to the Taxpayer's interests in Property 1 or Property 2.

As each of the conditions in subsection 152-10(1A) are satisfied in relation to the Taxpayer's interests in Property 1 or Property 2 in the 20XX and 20XX income years, the basic condition in subparagraph 152-10(1)(c)(iv) is satisfied. Paragraph 152-10(1)(d) For the purposes of paragraph 152-10(1)(d), a CGT asset satisfies the active asset test in section 152-35 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 detailed below; or •                     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 7.5 years during the test period. •                     The test period for these purposes: •                     begins when you acquired the asset; and •                     where the relevant business hasn't ceased earlier, ends at the happening of the CGT event •                     (subsection 152-35(2)). Subject to the application of any exception under subsection 152-40(4), a CGT asset that is real property is an 'active asset' at a time pursuant to paragraph 152-40(1)(a) if, at that time:

you own the asset ... and it is used, or held ready for use, in the course of carrying on a business that is carried on (whether alone or in partnership) by: (i)            you; or (ii)           your affiliate; or (iii)          another entity that's connected with you Relevantly, the exception in paragraph 152-40(4)(e) provides that an asset whose main use by you is to derive rent cannot be an active asset. However, paragraph 152-40(4A)(b) provides that to determine the main use of an asset for the purposes of paragraph 152-40(4)(e), any use by your affiliate or an entity connected with you is to be treated as your use. Each of the Taxpayer's interests in Property 1 and Property 2 is an active asset as they own them and they have been used since their acquisition in the course of the Business carried on initially by a partnership between the Taxpayer and their sibling, followed by a partnership between the Taxpayer and the Company, and then (since 20XX) the Company (an entity connected with the Taxpayer).

The exception in paragraph 152-40(4)(e) does not apply to prevent the Taxpayer's interests in Property 1 and Property 2 from being active assets for the period during which they have been leased (for rent) by the Taxpayer to the Company for use in the Business as, pursuant to paragraph 152-40(4A)(b), that use by the Company (an entity connected with the Taxpayer) is treated as the Taxpayer's use. As confirmed in ATO ID 2002/862, the active asset test must be applied separately to each of the Taxpayer's interests in Property 1 and Property 2. Those interests satisfy the active asset test under section 152-35 on the basis that they have been an active asset of the Taxpayer for the duration of their ownership period (and therefore for a period exceeding 7.5 years in the case of the Original 50% interest in Property 1 and Property 2 which have been owned for more than 15 years, and a period exceeding half the ownership period in the case of the Second 50% interest in Property 1 and Property 2 which have been owned for less than 15 years).

The basic condition in paragraph 152-10(1)(d), like each of the other relevant basic conditions, is therefore satisfied in respect of the capital gain the Taxpayer makes on the disposal of their interests in Property 1 or Property 2. Question 4 Summary The Taxpayer will be eligible to apply the small business 15-year exemption under Subdivision 152-B in respect of a capital gain they make on the disposal of their original 50% interest in Property1 or Property 2. Detailed reasoning The small business 15-year exemption under Subdivision 152-B permits a CGT small business entity to disregard a capital gain on an asset subject to meeting certain conditions. Section 152-105 provides that an individual can disregard the capital gain from the disposal of a CGT asset under the small business 15-year exemption if: (a)           the basic conditions in Subdivision 152-A are satisfied for the gain; (b)           you continuously owned the CGT asset for the 15-year period ending just before the CGT event;

(c)           if the CGT asset is a share in a company or an interest in a trust - the company or trust 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 you owned the CGT asset; (d)           either: (i)            you are 55 or over at the time of the CGT event and the event happens in connection with your retirement; or (ii)           you are permanently incapacitated at the time of the CGT event. As confirmed in response to question 3 of this ruling, the basic conditions in Subdivision 152-A will be satisfied for the capital gain made by the Taxpayer on the disposal of their Original 50% interest in Property 1 or Property 2, thereby satisfying paragraph 152-105(a). Having acquired their Original 50% interest in Property 1 and Property 2 in 20XX and 20XX respectively, the Taxpayer will have continuously owned those interests for the 15-year period ending just before the CGT event (in the 20XX or 20XX income year), thereby satisfying paragraph 152-105(b).

The condition in paragraph 152-105(c) relates to shares in a company or interests in a trust and do not apply to the Taxpayer. In connection with retirement: subparagraph 152-105(d)(i) The legislation does not define what is meant by the phrase 'in connection with' your retirement for the purposes of the provision. It does not give any indication of what constitutes retirement, or whether partial retirement is contemplated, or whether there is any implied temporal relationship between the CGT event in question and the individual's retirement such that retirement must occur contemporaneously with the disposal of the asset(s). The Explanatory Memorandum to the New Business Tax System (Capital Gains Tax) Bill 1999 makes the following comments about the requirement to be permanently incapacitated or retiring as one of the conditions for the concession: 1.68 One of the requirements of this concession for an individual small business taxpayer is that they must be either permanently incapacitated at the time of the CGT event, or at least 55 years old and using the capital proceeds for their retirement.

This wording would suggest that the funds arising from the disposal of the asset must predominantly be intended to fund the retirement of the individual (whether or not supplemented by other monies). It would similarly follow that where the funds are intended to be employed in a manner other than funding the individual's retirement (for example, the acquisition of a new business that the individual will have an active role in or the gifting of the monies) then the test will not be satisfied. The phrase 'in connection with' has been judicially considered in numerous cases. In Collector of Customs v Pozzolanic Enterprises Pty Ltd (1993) 43 FCR 280 ( Pozzolanic ), it was stated by the Full Court of the Federal Court that: The words 'connected with' are capable of describing a spectrum of relationships ranging from the direct and immediate to the tenuous and remote. As Sheppard and Burchett JJ observed in Australian National Railways Commission v Collector of Customs (SA

) [(1985) 69 ALR 367 at 377-378; 8 FCR 264, at 265] the meaning of the word 'connection' is wide and imprecise, one of its common meanings being 'relation between things one of which is bound up with, or involved in, another': Shorter Oxford English Dictionary . (at 288) Given the potential width of the words 'in connection with', the question remains in a particular case what kind of relationship will suffice to establish the connection contemplated by the statute. This in turn will require a value judgement about the range of the statute: see for example Pozzolanic at 289 and Taciak v Commissioner of Australian Federal Police (1995) 59 FCR 285 at 295. Wilcox J of the Federal Court considered the meaning of the phrase 'in connection with the retirement' in Claremont Petroleum NL v Cummings (1992) 110 ALR 239 ( Claremont ). The case concerned the application of provisions within the Queensland Companies Code and in particular, whether payments made were in connection with the retirement of certain individuals. Wilcox J made the following observations on the phrase 'in connection with':

The phrase 'in connection with' is one of wide import, as I had occasion to observe in a different context in Our Town FM Pty Ltd v Australian Broadcasting Tribunal (1987) 16 FCR 465 at p479-80; 77 ALR 577 at pages 591-2: The words 'in connexion with'...do not necessarily require a causal relationship between the two things: see Commissioner for Superannuation v Miller (1985)8 FCR 153 at 154, 160, 163; 63 ALR 237at 238, 244, 247. They may be used to describe a relationship with a contemplated future event: see Koppen v Commissioner for Community Relations (1986) 11 FCR 360 at 364, Johnson v Johnson [1952] P 47 at 50-1. In the latter case the United Kingdom Court of Appeal applied a decision of the British Columbia Court of Appeal, Re Nanaimo Community Hotel Ltd

[1945] 3 DLR 225, in which the question was whether a particular court, which was given 'jurisdiction to hear and determine all questions that may arise in connection with any assessment made under this Act', had jurisdiction to deal with a matter which preceded the issue of an assessment. The trial judge held that it did, that the phrase 'in connection with' covered matters leading up to, or which might lead up to an assessment. He said...: 'One of the very generally accepted meanings of 'connection' is 'relation between things one of which is bound up with or involved in another'; or, again 'having to do with'. The words include matters occurring prior to as well as subsequent to or consequent upon so long as they are related to the principal thing. The phrase 'having to do with' perhaps gives as good a suggestion of the meaning as could be had.' Having regard to the context of subparagraph 152-105(d)(i), the Commissioner considers that it would be reasonable to adopt the meaning given to the phrase 'in connection with' in Claremont such that it is not necessary for there to be a permanent and everlasting retirement from the workforce.

However, there would need to be at least a significant reduction in the number of hours worked or a significant change in the nature of the activities to be regarded as a retirement for the purposes of subparagraph 152-105(d)(i). Whether a CGT event, happens in connection with an individual's retirement depends on the particular circumstances of each case. Similarly, the words 'in connection with' can apply where the CGT event occurs sometime before or after retirement. Again, this would depend on the particular facts, and would need to be considered on a case-by-case basis. For the purposes of subparagraph 152-105(d)(i), CGT event A1 will happen in respect of the Taxpayer's Original 50% interests in Property 1 or Property 2 in connection with their retirement for reasons which include: •                     upon the disposal, the scale of the Business will immediately reduce and the Taxpayer will immediately reduce the time they spend on the affairs of the Business (to an anticipated X hours per week); •                     the time the Taxpayer expects to spend on the affairs of the Business and those of the other Group Entities is less than half the time they currently spend;

•                     the proceeds from the disposal will be passively invested (as well as to repay debt); they will not be reinvested in the Business or invested in any other business venture carried on by him or any Group Entity; and •                     the Taxpayer plans to dispose of the remaining property, terminate the Business and retire in the foreseeable future. As the Taxpayer is also over 55 years old, paragraph 152-105(d) is satisfied and the Taxpayer can disregard the capital gain they make on the disposal of the Original 50% interest held in Property 1 or Property 2 pursuant to section 152-105. Questions 5, 6 and 7 Summary The Taxpayer will be eligible to apply the small business 50% reduction under Subdivision 152-C, the small business retirement exemption under Subdivision 152-D and the small business roll-over under Subdivision 152-E in respect of a capital gain they make on the disposal of their Second 50% interest in Property 1 or Property 2. Detailed reasoning

Having acquired their Second 50% interest in Property 1 and Property 2 in 20XX, the Taxpayer will not have continuously owned those interests for the 15-year period ending just before their disposal in the 20XX or 20XX income year. As such, the condition in paragraph 152-105(b) will not be satisfied and the Taxpayer may not disregard any capital gain arising from the disposal of these interests under Subdivision 152-B. The Taxpayer will nevertheless be eligible to apply the concessions under Subdivision 152-C, Subdivision 152-D and Subdivision 152-E in respect of a capital gain they make on the disposal of their Second 50% interest in Property1 or Property 2. The small business 50% reduction may be applied pursuant to section 152-205 where the basic conditions in Subdivision 152-A are satisfied for the capital gain.

Pursuant to subsection 152-305(1), an individual already over the age of 55 may apply the small business retirement exemption where the basic conditions in Subdivision 152-A are satisfied for the capital gain. The amount of the capital gain chosen to be disregarded under Subdivision 152-D is subject to the individual's 'CGT retirement exemption limit', as defined in subsection 152-320(1). The small business roll-over may be applied pursuant to section 152-410 to defer the making of a capital gain from a CGT event in relation to an asset of a business where the basic conditions in Subdivision 152-A are satisfied for the capital gain. A replacement asset need not be acquired before choosing the roll-over, although CGT events J2, J5 or J6 may happen in certain circumstances: •                     CGT event J5 under section 104-197 happens if, by the end of the replacement asset period, the taxpayer does not acquire the asset; •                     CGT event J6 under section 104-198 happens if the cost of the replacement asset is less than the amount of the capital gain the taxpayer disregarded; and

•                     CGT event J2 under section 104-185 may happen if the taxpayer has acquired a replacement asset but there is a change in relation to the replacement asset after the end of the replacement asset period.