1 Does the Trust satisfy the basic eligibility conditions for the small business capital gains tax (CGT) concession under section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the sale of Business A?
Yes. Question 2 Will the small business 15-year exemption in section 152-110 of the ITAA 1997 apply to allow the Trust to disregard any capital gain from the sale of Business A where the CGT event happens in connection with the retirement of the significant individual? Answer No. Question 3 Does Individual A satisfy the basic eligibility conditions for the small business CGT concession under section 152-10 of the ITAA 1997 in relation to the sale of the Building? Answer Yes. Question 4 Will the small business 15-year exemption in section 152-105 of the ITAA 1997 apply to allow Individual A to disregard any capital gain from the sale of the Building where the CGT event happens in connection with their retirement? Answer Yes. Question 5 Does Individual B satisfy the basic eligibility conditions for the small business CGT concession under section 152-10 of the ITAA 1997 in relation to the sale of the Building? Answer Yes. Question 6 Will the small business 15-year exemption in section 152-105 of the ITAA 1997 apply to allow Individual B to disregard any capital gain from the sale of the Building where the CGT event happens in connection with their retirement? Answer Yes.
This ruling applies for the following periods : 1 July 20YY to 30 June 20YY 1 July 20YY to 30 June 20YY 1 July 20YY to 30 June 20YY The scheme commenced on: 1 July 20YY
1. The Trust is a family discretionary trust. 2. Individual A and Individual B are spouses and trustee of the Trust. 3. Individual A and Individual B along with their adult children are the beneficiaries of the Trust. 4. Individual A and Individual B purchased the Building in MM YYYY. 5. The Building is registered under Individual A and Individual B's names. 6. At the time of the purchase, the Building was leased to a business. 7. Individual A and Individual B never leased the Building to the Trust. 8. On DD MM YYYY, the Trust purchased the business (Business B) that was operated in the Building and continued the same business as the previous owner. 9. Individual A and Individual B operated Business B on behalf of the Trust since its acquisition. The business had employees who worked with Individual A and Individual B. All business decisions were made by Individual A and Individual B. 10. In MM YYYY, Individual A and Individual B got an approval to run Business A.
11. Both Business B and Business A were operated simultaneously by Individual A and Individual B from MM YYYY to YYYY. 12. After Business B closed in YYYY, the Trust only operates Business A. 13. The Building and Business A are currently on the market for sale. Business A will be sold as a going concern. Everything required to run Business A will go to the new owner. 14. The employees working in Business A will continue to work for the new owner after the sale of Business A. 15. It is anticipated that the Building and Business A will be sold soon after securing a buyer. The sales will lead to a capital gain. 16. Individual A and Individual B: • receive most of the distribution from the Trust, which is close to X% each; • are over 55 years of age; • will retire completely after the sale of the Building and Business A. 17. The aggregate turnover of the Trust was less than $2 million in the previous year and is expected to be less than $2 million in the current year when the CGT event happens.
18. The Trust has had the same significant individual for over 15 years. 19. The Trust is expecting to sell the Building and Business A for less than $6 million.
Income Tax Assessment Act 1997 section 104-10 Income Tax Assessment Act 1997 section 152-10 Income Tax Assessment Act 1997 section 152-105 Income Tax Assessment Act 1997 section 152-110
Question 1 Summary The Trust satisfies the basic eligibility conditions for the small business capital gains tax concession under section 152-10 in relation to the sale of Business A. Detailed reasoning CGT event A1 as per section 104-10 will happen when the Trust disposes of Business A, resulting in a capital gain. Division 152 provides CGT relief for small business entities if the specified conditions for relief are satisfied. The CGT small business 15-year exemption allows small business entities to disregard a capital gain from a CGT event happening to a CGT asset owned for at least 15 years. Under subsection 152-10(1), a capital gain (except a capital gain from CGT event K7) you make may be reduced or disregarded under this Division if the following basic conditions are satisfied for the gain: 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) 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) 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). Application to your circumstances Paragraphs 152-10(1)(a) and (b) will be satisfied as CGT event A1 will happen upon the disposal of Business A, and a capital gain will be made. Paragraph 152-10(1)(c) is satisfied as the Trust is considered a CGT small business entity for the relevant income year (subparagraph 152-10(1)(c)(i)). The Trust is carrying on a business with an aggregated turnover of less than $2 million.
Business A satisfies the active asset test under paragraph 152-10(1)(d) as it has been held and ran by the Trust since MM YYYY. Section 152-35 requires an asset that is held for less than 15 years to be an active asset for at least half of the period specified in subsection (2). The period begins from when the asset was acquired and ends at the earlier of the CGT event or if the relevant business ceased to carry on in the 12 months or less after the CGT event. As the Trust actively carried on Business A for at least half of the specified period, the active asset test is satisfied. Therefore, all the basic conditions set out in section 152-10 have been met. Question 2 Summary The Trust has not satisfied the conditions set out in section 152-110 to disregard any capital gain arising from the sale of Business A. Detailed reasoning As per subsection 152-110(1), an entity that is 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 (even if the 15 years was not continuous and it was not always the same significant individual) 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 i) was 55 or over at that time and the event happened in connection with the individual's retirement; or ii) was permanently incapacitated at that time. Taxation Ruling TR 1999/16 Income tax: capital gains: goodwill of a business (TR 1999/16) discusses the general issues of a taxpayer who conducts a business with goodwill, and if a business can change to such an extent that it is no longer the same business so that the goodwill of the old business ceases and goodwill of a new business is acquired?
Paragraph 18 of TR 1999/16 states that a business or the sources of its goodwill may change so much it can no longer be said to be the same business as that previously conducted. In other words, the old business ceases and a new business commences. If this happens the goodwill of the original business ceases to exist and a new CGT asset - being the goodwill of the new business - is acquired. TR 1999/16 further explains that where a business changes/evolves through organic growth, the same goodwill may continue. However, where the original business ceases and a different business begins, the goodwill of the earlier business ends and new goodwill arises. Paragraph 24 of TR 1999/16 explains that if a similar kind of business is carried on, it must be a business of the same essential nature or character that is carried on. The same business is not carried on if: • through a planned or systematic process of change within a reasonable period of time, a business changes its essential nature or character; or • there is a sudden and dramatic change in the business brought about by either the acquisition or the shedding of activities on a considerable scale.
Application to your circumstances The Trust has met all basic conditions to be eligible for a small business capital gains tax concession. However, paragraph 152-110(1)(b) is not satisfied as the CGT asset that will be sold is Business A, which has been held for less than 15 years from the date of acquisition in MM YYYY to the date of this ruling. Business A will be sold as a going concern. Everything required to run Business A will go to the new owner. The primary CGT asset that is to be sold will be goodwill of Business A. Taking into consideration the view in TR 1999/16 and the facts provided, there are indicators that Business A activities constitute a separate business rather than a continuation of Business B. In particular: • The nature of the business activities changed significantly. • Separate regulatory approval was required to begin the Business A. • The Business A has different operational hours and business model unlike Business B. • Business B business closed in YYYY, shortly after Business A commenced.
• As both Business A and Business B operated concurrently from MM YYYY to YYYY, and there was no business activity during the hours Business B was operating in before it closed. This overlap and lack of business activity during the hours Business B suggests that two separate businesses operated rather than a single continuation of Business B. These factors suggest that Business A commenced in MM YYYY and, as at the date of this ruling, has not been continuously owned by the Trust for a 15-year period. Hence, paragraph 152-110(1)(b) is not satisfied. Therefore, the Trust has not satisfied all the conditions to utilise the small business 15-year exemption under section 152-110 if Business A is sold in the next 12 months or before MM YYYY. Question 3 and 5 Summary Individual A and Individual B satisfy the basic eligibility conditions for the small business CGT concession under section 152-10 in relation to the sale of the Building. Detailed reasoning Under subsection 152-10(1), a capital gain (except a capital gain from CGT event K7) you make may be reduced or disregarded under this Division if the following basic conditions are satisfied for the gain:
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) 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) 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). Subsection 152-10(1A) relates to passively held assets that are held by affiliates and entities connected with you. Subsection 152-10(1A) states 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. Application to your circumstances Paragraphs 152-10(1)(a) and (b) will be satisfied as CGT event A1 will happen upon the disposal of the Building, and a capital gain will be made. Paragraph 152-10(1)(c) is satisfied as subsection 152-10(1A) is satisfied in relation to the Building.
The Building satisfies the active asset test under paragraph 152-10(1)(d) as it has been held by Individual A and Individual B for X years. Paragraph 152-35(1)(b) requires an asset that is held for over 15 years to be an active asset for at least 7.5 years during the period specified in subsection (2). The period begins from when the asset was acquired and ends at the earlier of the CGT event or if the relevant business ceased to carry on in the 12 months or less after the CGT event. The Building is an active asset as it has been used by the Trust, an entity connected with Individual A and Individual B, in carrying on a business for at least 7.5 years. Therefore, all the basic conditions set out in subsection 152-10(1) have been met. Question 4 and 6 Summary Individual A and Individual B are eligible to receive the 15-year small business CGT exemption as all the relevant conditions have been satisfied. Detailed reasoning Section 152-105 provides the conditions individuals will need to meet to disregard capital gains arising from a CGT event. The conditions are as follows: 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 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. Application to your circumstances Paragraph 152-105(a) and (b) are satisfied as Individual A and Individual B have met all the basic conditions, and the Building has been continuously owned for more than 15 years just before the CGT event. Paragraph 152-105(c) is not relevant to your circumstances as the CGT asset is not a share in a company or an interest in a trust. Subparagraph 152-105(d)(i) is satisfied as Individual A and Individual B are both over the age of 55 and are planning to fully retire after the sale of the Building.
Therefore, Individual A and Individual B will be able to utilise the small business 15-year exemption as all the conditions set out in section 152-105 are satisfied.