NO. 076

CGT Small Business Rollover Relief and Retirement Exemption for Land and Buildings Held in A Non-Operating Entity

As announced in A New Tax System, the Government has decided to extend the

capital gains tax (CGT) small business rollover relief and retirement exemption

initiatives to include situations where land and buildings integral to the business are

owned by an entity (for example, a trust, company or individual) other than the entity

operating the business. Land and buildings include fixtures.

The new provisions will apply where the persons owning and controlling the land and

buildings are substantially identical to those controlling the operating entity.

The Government has decided to introduce this new measure because it accepts that, for

genuine commercial reasons, small businesses may operate through a structure that includes

a non-operating entity which holds some of the business assets. In such cases, even though

in substance assets are used actively in a business, they may be held by an entity which

is not conducting the business. This means that capital gains arising from their sale

might not be eligible for either the rollover relief or the retirement exemption benefits – because the assets are passive assets of the non-operating entity.

The new measures are to operate for all disposals of land and buildings after today.

All of the other conditions for the CGT rollover relief and retirement exemption

provisions will continue to apply.

The broad design details as to how these new measures are to operate are set out below.

CGT rollover relief is available for an entity operating a small business that sells an

active asset and then re-invests the proceeds in other active assets.

• Active

assets are those owned by an entity and used directly by the entity to

produce business income.

• Capital gains made upon the disposal by the entity of land and buildings used directly

  by it in the business generally qualifies for rollover relief.

A controlling individual of a company or unit trust may also qualify for small business

rollover relief in certain circumstances where they dispose of their shares or units.

Where land and buildings are held by an entity that is separate from the operating

entity, CGT rollover relief will now be available if:

• the land and buildings would have qualified as active assets if they had been owned by

  the operating entity rather than through the non-operating entity; and

• the non-operating and the operating entity are connected associates. Entities are

  connected associates if they and any associate (as defined in section 160ZZPM of

  the Income Tax Assessment Act 1936) have a common controller or interlocking

  control exists (applying the control tests contained in section 160ZZPN of the Income

  Tax Assessment Act 1936).

Beefsteak Pty Ltd (Beefsteak) owns the land and associated buildings used by the

Feedlot Trading Company Pty Ltd (Feedlot) in carrying on a feedlot business. Feedlot

leases the land and buildings from Beefsteak. Mr Baron beneficially owns all of the shares

in Feedlot, and he and his wife and two children are equal shareholders of Beefsteak. Mr

Baron wishes to sell the assets of the business and to invest the proceeds into another

type of business.

Under the existing law, the capital gain from the disposal of the land and buildings

held in Beefsteak and used by Feedlot is not eligible for rollover relief as the land and

buildings are not active assets of Beefsteak.

Under the proposed amendments, and viewing the business as a whole, the land and

buildings will be treated as active assets, and Beefsteak and Feedlot will be connected

associates, because they are both controlled by Mr Baron. The capital gain from the

disposal of the land and buildings will therefore qualify for rollover relief.

A capital gain arising from the disposal of an active asset of a business qualifies for

a CGT exemption where the proceeds are used for retirement.

Specifically, small business people who satisfy the existing eligibility requirements

will also be able to claim a CGT retirement exemption on the sale of land and buildings

owned by an entity other than the operating entity of the business if:

• the land and buildings would have qualified as active assets if they had been held

  directly by the operating entity rather than by the non-operating entity; and

• the exemption is claimed by or on behalf of a person who, under the existing definition,

  is a controlling individual of both the operating entity of the business and the entity

  which owns the land and buildings. The controlling individual need only be an employee of

  the operating entity to be eligible for the exemption.

The Breakfast Family Trust (Breakfast) owns the land and associated buildings used by

the Cornflake Canning Company Pty Ltd (Cornflake) in carrying on a cornflake canning

business. Cornflake leases the land and buildings from Breakfast. Ms Cornfast owns all of

the shares in Cornflake, and she is the controller of Breakfast (based on a pattern of

distributions test which indicates that her interest in the trust exceeds 50%). Cornflake

employs all of the family members. Ms Cornfast wishes to sell all of the assets of the

business and retire.

Under the existing law, the capital gain from the disposal of the land and buildings

held in the trust and used by Cornflake is not eligible for retirement exemption as the

land and buildings are not active assets of the trust.

Under the proposed amendments, and viewing the business as a whole, the land and

buildings will be treated as active assets, as Breakfast and Cornflake are both controlled

by Ms Cornfast. The capital gain from the disposal of the land and buildings will qualify

for the retirement exemption.

CANBERRA

13 August 1998

John Burge

Australian Taxation Office

( (02) 6216 1324