Edited version of private ruling

Authorisation Number: 1011611934392

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Ruling

Subject: Active Asset

Will your property satisfy the active asset test under section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997) if it is sold within the next two years?

Answer

Yes.

This ruling applies for the following period

Year ending 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

The scheme commenced on

1 July 2010

Relevant facts

Mr and Mrs X are the beneficiaries of a trust. The trust (the rulee) has owned a factory and adjoining yard for in excess of 15 years.

Two businesses are presently on the site:-

One run by the trust. Beneficiaries of the trust have been Mr and Mrs X and their children in the past. Mr and Mrs X are directors of the trustee company.

The other business is run by a company. The directors and shareholders are Mr and Mrs X equally. The main business on the site by turnover and floor space would be this business. This business would be a 50% occupier by turnover and floor space.

You are going to sell your business and continue to rent out the space to the other business that is run by Mr and Mrs X's company. You will also receive rent from the purchaser of the trust's business. You plan to sell the property within the next two years.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 152-40

Income Tax Assessment Act 1997 Section 152-10

Income Tax Assessment Act 1997 Section 152-35

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 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 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 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, go to our website 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

All subsequent legislative references are to the ITAA 1997 unless otherwise stated.

For the small business capital gains tax (CGT) concessions in Division 152 to apply to reduce or disregard a capital gain, the relevant CGT asset must satisfy all the basic conditions for relief as outlined in section 152-10.

One of these conditions is the active asset test under section 152-35. This test requires that if you have owned the asset for more than 15 years, that the asset was an active asset of yours for a total of at least 7½ years.

You have advised that the property has been used by your business for in excess of 15 years. The property has also been used by an associated company for running their business for the same period of time.

Now it is necessary to ensure that the property satisfies the meaning of an active asset under section 152-40 of the ITAA 1997.

Section 152-40 discusses the meaning of the active asset, and at subsection 152-40(1) states, in part, that a CGT asset is an active asset at a time if, at that time, you own the asset and it is used, or held ready for use, in the course of carrying on a business that is carried on by you or your affiliate, or another entity that is connected with you.

Paragraph 152-40(4)(e) excludes, among other things, assets whose main use is to derive rent.

The company's business is a 50% occupier by turnover and floor space of the property. We need to establish if the company that runs the business is connected to the trust.

Paragraph 328-125(1)(b) states an entity is connected with another entity if both entities are controlled in a way described in that section by the same third entity.

Direct control of a discretionary trust may be established via either of two paths, subsection 328-125(3) or subsection 328-125(4).

Subsection 328-125(3) provides that an individual controls a discretionary trust if the trustee of that trust acts, or could reasonably be expected to act, in accordance with the directions or wishes of the individual, his/her affiliates, or the individual together with his/her affiliates.

Subsection 328-125(4) provides, in part, that an individual directly controls a discretionary trust for an income year if, for any of the preceding four income years, the discretionary trust distributed at least 40% of any income or capital paid for that year to either the individual, the individual's affiliates, or to the individual together with any of his/her affiliates.

Mr and Mrs X are the directors of the company that is the trustee for the trust. In this case it would be reasonable to expect that the trustee of the trust to act in accordance with the directions or wishes of Mr and Mrs X. Therefore, the trust is controlled by Mr and Mrs X.

Subsection 328-125(2)(b) provides that an entity will control a company if they beneficially own, or have the right to acquire the beneficial ownership of equity interests in the company that carry between them the right to exercise, or control the exercise of a percentage that is at least 40% of the voting power in the company.

Mr and Mrs X are the only directors and shareholders (50% each) of the company that runs the business from the property. They control the company as they meet the requirements of subsection 328-125(2)(b).

The trust and company are controlled by the same third party being Mr and Mrs X. The property will meet the requirements of section 152-40 and the meaning of an active asset.

Therefore as the property is owned by the trust and used by a connected entity's business for more than 7½ years, the active asset test will be satisfied.

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