Business Succession and Draft Taxation Ruling TR 2012/D1
You and your wife are the sole beneficiaries of the Acme Discretionary Trust whose sole asset is farming land purchased in 1990 for $800K.. It’s now worth $2.5m. The farming business is owned by you and your wife and your only child, John. You and your wife want to retire and transfer the farming assets to John.
The intergenerational stamp duty exemption on the transfer of the farm will apply. But will the 15 year small business CGT exemption apply to make the land transfer CGT free? Based on the above draft taxation ruling, the answer is “No.” It would have been better to simply transfer control of the trust to John. This is because you and your wife are not dealing at arms length with John and the market value substitution rules therefore apply. According to the draft ruling, the trust will make a deemed capital gain of $1.7m which is classified as “notional income.” The ruling states that “notional income” is to be taxed in the trustee’s hands under s99A ITAA 1936, and ss115-222 ITAA 1997 denies either the general CGT discount or the Division 152 active asset discount.
Business succession can be very tricky when business assets are owned by a trust.