(Subsection (2) details that the period begins when you acquire the asset and ends at the earlier of; (i) the CGT event, and (ii) if the relevant business ceased to be carried on in the 12 months before that time or any longer period that the Commissioner allows — the cessation of the business).
While the ownership period can be satisfied in our example, section 152-40 of ITAA97 has to be looked at to answer the question as to whether the 50% ownership of the commercial property by the individual is an active asset.
Section 152-40(1)(a) indicates a CGT asset is an active asset at a time if, at that time; you own the asset (whether the asset is tangible or intangible) 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 is connected with you.
(The definition also goes on to include the requirements for intangible assets, not applicable to this example.) In our example, the business is being conducted by a unit trust (the unit holders being two family trusts, of which, while one used to be a family trust related to the individual, the units in that trust’s ownership of the unit trust were disposed of to a non related trust a number of years ago). As the business is not being carried on by the individual or an affiliate of the individual, the question becomes; is the unit trust “connected” to the individual? This question led to reviewing section 328-125(1) ITAA97, which indicates that an entity is connected with another entity if:
a. either entity controls the other entity in a way described in this section, or
b. both entities are controlled in a way described in this section by the same third entity.
Section 328.125(2) goes on to say that “an entity (the first entity) controls another entity if the first entity, its affiliates, or the first entity together with its affiliates … except if the other entity is a discretionary trust — own, or have the right to acquire the ownership of, interests in the other entity that carry between them the right to receive a percentage (the control percentage) that is at least 40% of:
i. any distribution of income by the other entity, or
ii. if the other entity is a partnership—the net income of the partnership, or
iii. any distribution of capital by the other entity.
In this example, because the individual is no longer the beneficiary of the family trust that owns units in the unit trust that conducts the business, the individual could not be considered to be a connected entity of the unit trust that conducts the business. As a result the active asset definition would not be satisfied.
Therefore, while the 50% discount under subdivision 115-A would apply to a capital gain made by the individual on his disposal of his 50% share in the commercial property, eligibility for separate access to the four available small business CGT concessions
(being the 15 year exemption, the 50% active asset reduction, the retirement concession and the roll-over concession) would not be available. (Note that this example relates to the individual’s 50% ownership of the commercial property. A different CGT result would likely apply to the remaining 50% ownership of the property by the remaining 50% share owned by the remaining couple.)