Did you satisfy the basic conditions in section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the capital gain you made on the transfer of your interest in Property 1, Property 2 and Property 3?
No. This ruling applies for the following period : Year ended 30 June 20YY The scheme commenced on: 1 July 20YY
Person A and their spouse (Person B) own Property 1, Property 2 and Property 3. Person A and Person B are partners in a partnership. Each individual has a 50% interest in the Partnership. Person A and Person B were trustees of the Trust since the time it was settled. Some time later Person A and Person B's adult child became co-trustee of the Trust. Person A and Person B retired as trustees of the Trust. The Trust carries on a primary production business. The Trust's annual turnover for the 20YY financial year was $X. The Partnerships turnover for the 20YY financial year was $Y. All three properties are used completely by the Trust and the Partnership in their primary production activities. When they were trustees, Person A and Person B made all the financial and farming decisions related to the Trust and the Partnership. Business decisions were made based on both entities being fully integrated. The Trust and the Partnership have an unwritten agreement that a percentage of grain income belongs to the Partnership each financial year. Decisions pertaining to the farming operations of the Trust are undertaken collaboratively with a Company.
The adult child of Person A and Person B is one of the directors of the Company. Certain operational activities of the Trust and the Company are influenced by the availability and utilisation of plant and equipment owned by each respective entity. Resources are utilised collectively to maximise operational efficiency of the Trust and the Company. Expenditure relating to agricultural inputs, including seed, fertiliser and chemicals is determined with consideration for economies of scale. Accordingly, bulk purchasing arrangements may be entered into jointly by the Trust and the Company to achieve cost efficiencies. No formal arrangements exist between the Trust and the Company. Payments for plant hire have been transacted between the Trust and Company on a monthly basis; however, no written agreements have been executed in respect of these arrangements. The Company's annual turnover for the 20YY financial year was more than $2 million. You transferred your interest in Property 1, 2 and 3 to your adult child. You made a capital gain from the transfer of each of the properties.
The net value of the capital gains tax (CGT) assets of yours, any entities connected with you, your affiliates or entities connected with your affiliates exceeded $6 million just before the properties were transferred.
Income Tax Assessment Act 1997 section 152-10 Income Tax Assessment Act 1997 subsection 152-10(1A) Income Tax Assessment Act 1997 section 152-35 Income Tax Assessment Act 1997 section 152-40 Income Tax Assessment Act 1997 subsection 328-115(2) Income Tax Assessment Act 1997 subsection 328-125(3) Income Tax Assessment Act 1997 subsection 328-130(1)
Basic conditions The basic conditions in section 152-10 of the ITAA 1997 must be satisfied first for an entity to be able to reduce or disregard its capital gains using the small business concessions. To meet the basic conditions the following must be satisfied: (a) a CGT event happens in relation to a CGT asset of yours in an income year. (b) the event would have resulted in a gain. (c) at least one of the following applies: (i) you are a CGT small business entity for the income year. (ii) you satisfy the maximum net asset value test. (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) you do not carry on a business, but your CGT asset is passively held and is used in a business carried on by a CGT small business entity that is your affiliate, or an entity connected with you. (d) the CGT asset satisfies the active asset test. Connected entities
An entity controls a discretionary trust if a trustee of the trust acts, or could reasonably be expected to act, in accordance with the directions or wishes of the first entity, its affiliates, or the first entity together with its affiliates (subsection 328-125(3) of the ITAA 1997). Passively held assets - affiliates and entities connected with you Subsection 152-10(1A) of the ITAA 1997 provides that the conditions in this subsection 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 CGT small business entity
An entity is a small business for an income year if it carries on a business during that year and its aggregated turnover is less than $2 million. This can be established by either: having carried on a business in the previous year with an aggregated turnover below the threshold, or projecting that the aggregated turnover for the current year will remain under $2 million (subsection 152-10(1AA) of the ITAA 1997). Aggregated turnover Your aggregated turnover for an income year is the sum of your annual turnover and the annual turnovers of any entity that is connected with you or any affiliate of yours in the income year (subsection 328-115(2) of the ITAA 1997). Affiliate A company is an affiliate of yours if the company acts, or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you, in relation to the affairs of the business. (subsection 328-130(1) of the ITAA 1997). Paragraph 2.36 of the Explanatory Memorandum to the Tax Laws Amendment (Small Business) Bill 2007
provides relevant factors that support a finding that a company acts, or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you include: • the existence of a close family relationship between the parties • the lack of any formal agreement or formal relationship between the parties dictating how the parties are to act in relation to each other • the likelihood that the way the parties act, or could reasonably be expected to act, in relation to each other would be based on the relationship between the parties rather than on formal agreements or legal or fiduciary obligations, • the actions of the parties. Active asset The CGT asset must satisfy the active asset test in order to satisfy the basic conditions (section 152-35 of the ITAA 1997). The active asset test will be met if: • you have owned the CGT asset for 15 years or less and the asset was an active asset of yours for a total of at least half of the period from when you acquired it to the time of the CGT event or the cessation of the business; or
• you have owned the CGT asset for more than 15 years and the asset was an active asset of yours for a total of at least 7 ½ years during the period specified in section 152-35(2). A CGT asset is an active asset at a time if, at that time the asset is used, or held ready for use, in the course of carrying on a business that is carried on whether by your or your affiliate or another entity that is connected with you (subsection 152-40(1) of the ITAA 1997). Application to your circumstances A CGT event happened when you transferred your interest in the Properties to your adult child and you made a capital gain on the transfer. Therefore paragraphs 152-10(1)(a) and (b) of the ITAA 1997 were satisfied. You are not a CGT small business entity as you do not carry on a business in your individual capacity and you do not satisfy the maximum net asset value test as the net value of the CGT assets of yours, any entities connected with you, your affiliates or entities connected with your affiliates exceeded $6 million just before the properties were transferred. You are also not a partner in a partnership that is a CGT small business entity.
Therefore, as you do not satisfy subparagraphs 152-10(1)(c)(i), (ii) or (iii) of the ITAA 1997, subparagraph 152-10(c)(iv) of the ITAA 1997 must be satisfied. Relevantly in your case, this means that subsection 152-10(1A) of the ITAA 1997 must be satisfied. For the conditions in subsection 152-10(1A) of the ITAA 1997 to be satisfied the Properties must have been used by your affiliate, or an entity that is connected with you, that is a CGT small business entity. You were a trustee of the Trust and together with your spouse made all the decisions of the Trust in relation to the Trust's business up until you retired as trustee. As a result, the Trust could reasonably be expected to act in accordance with your wishes. Therefore, the Trust is your connected entity under subsection 328-125(3) of the ITAA 1997. To determine if the Trust is a CGT small business entity, we must consider its aggregated turnover which includes the annual turnovers of entities that are its affiliates.
The Commissioner considers the Company to be an affiliate of the Trust, as the Company acts, or could reasonably be expected to act, in concert with the Trust in relation to their business affairs. This conclusion is based on the collaborative nature of their operations, including joint decision-making and shared use of resources to enhance the operational efficiency of both entities. The Trustees of the Trust and the director of the company have a close family relationship. The arrangements between the entities are informal and are not governed by any written agreement. In particular, bulk purchasing arrangements demonstrate that the entities consult with each other on business matters. Furthermore, the Trust and the Company also engage in monthly plant hire transactions with no written agreement. Therefore, the annual turnover of the Company is included in the aggregated turnover of the Trust when determining if the Trust is a CGT small business entity.
As the annual turnover of the Company is $X million the Trust does not satisfy subsection 152-10(1A) of the ITAA 1997 as it has an aggregated turnover of over $2 million and therefore is not a CGT small business entity under subsection 152-10(1AA) of the ITAA 1997. As the Trust is not a CGT small business entity you do not satisfy paragraph 152-10(1)(c) of the ITAA 1997. Therefore, you did not satisfy the basic conditions in section 152-10 of the ITAA 1997 and are not entitled to apply the small business CGT concessions to the capital gain you made on the transfer of your interest in the properties to your adult child.