Edited version of private ruling

Authorisation Number: 1011564870663

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Ruling

Subject: Active Assets

Is the Option granted by you over your property an active asset under section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?

No.

This ruling applies for the following periods

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commences on:

1 July 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You own the property.

You granted an Option over your property.

The partnership carries on a farming business at the property.

The Option fees will form part of the purchase price for the property should the grantee of the Option exercise the Option.

You wish to categorise the Option agreement as an active asset for taxation purposes.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-40.

Income Tax Assessment Act 1997 Section 108-5.

Income Tax Assessment Act 1997 Subsection 112-25(3).

Income Tax Assessment Act 1997 Section 152-10.

Income Tax Assessment Act 1997 Section 152-35.

Income Tax Assessment Act 1997 Section 152-40.

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA of the ITAA 1936, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

The active asset test

According to section 152-35 of the ITAA 1997 the active asset test is satisfied if:

· you have owned the asset for 15 years or less and the asset was an active asset of yours for a total of at least half of the test period outlined below, or

· you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of at least seven years during the test period.

The test period:

· begins when you acquired the asset, and

· ends at the earlier of:

o the capital gains tax (CGT) event, and

o if the business in question ceased in the 12 months before the CGT event (or such longer time as the Commissioner allows) when the business ceased.

Meaning of active asset

Section 152-40 provides that a CGT asset is an active asset if it is owned by you and is:

· used or held ready for use by you, your affiliate, your spouse or child under 18 years, or an entity connected with you, in the course of carrying on a business, or

· an intangible asset that is inherently connected with a business you, your affiliate, your spouse of child under 18 years, or another entity that is connected with you carries on e.g. goodwill or the benefit of a restrictive covenant. 

Subsection 152-40(4)(d) of the ITAA 1997 advises that:

Financial instruments (such as loans, debentures, bonds promissory notes, futures contracts, forward contracts, currency swap contracts and a right or option in respect of a share, security loan or contract) cannot be active assets.

Rulee's Opinion

Your contentions include:

· Because it is not known when (or even if) Grantee will exercise the Option it is not possible for the business to make plans regarding its relocation.

· The business would cease to operate from the time the Option is exercised as the business is a family business on the property and without the property the business would cease.

· It has been accepted that goodwill or a poker machine licence of a hotelier would be an active asset, so too would registered trademarks, trade debtors, (see ATO Interpretative Decisions 200/785 and 2002/1003) and a restrictive covenant (as per Note 3 of section 152-40(1) of the ITAA 1997).

· Because of the nature of the Option and its inherent connection to the ability of the business to exist, the Option is inherently connected to the carrying on of the business from the property.

· The Option is therefore an inseparable element or attribute attached to the business conducted by the business entity and as a result of this an intangible asset that is inherently connected with a business being carried on, and therefore an active asset, which satisfies the meaning within section 152-40 of the ITAA 1997.

Application to your circumstances

The Option

Subsection 152-40(4)(d) of the ITAA 1997 advises that:

Financial instruments (such as loans, debentures, bonds promissory notes, futures contracts, forward contracts, currency swap contracts and a right or option in respect of a share, security loan or contract) cannot be active assets.

You wish to categorise the Option on the land as an active asset as you believe it is inherently connected to the carrying on of the business from the property.

To be inherently connected to the carrying on of the business the Option would need to be a permanent and inseparable element, quality or attribute of the business. Therefore, the business would need the Option in order to operate.

The Option was not a requirement for the business to operate prior to it being granted, it does not appear that the business needs the Option to operate currently and if the Option is not exercised, the business will be able to continue to operate without it.

The Option is related to the disposal of the business rather that the carrying on of the business.

Therefore, the Option does not appear to be inherently connected with the business.

A more accurate description of the Option might be a contingent equitable interest in the land for which it was granted.

Therefore, the Option over the land does not qualify as an active asset.

Note:

You advise that goodwill or a poker machine licence of a hotelier have been accepted as active assets, referring to ATO Interpretative Decisions ATO ID 2002/785(w) and ATO ID 2002/1003(w).

Using your reference it can been seen that in order for a hotelier to operate poker machine's in the hotel establishment a poker machine licence would be a requirement as without the licence the hotelier would not be able to legally operate a poker machine in the establishment for which the poker machine licence has been acquired. Therefore, the poker machine licence is inherently connected with the business being carried on and an active asset which satisfies the meaning within section 152-40 of the ITAA 1997.

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