Disclaimer
This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of private ruling

Authorisation Number: 1011620103509

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: CGT Active asset

Question

Is the property located at XXXX an active asset of yours pursuant to section 152-40 of the Income Tax Assessment Act 1997(ITAA 1997)?

Advice/Answers

Yes.

This ruling applies for the following period

1 July 2010 to 30 June 2011.

Relevant facts and circumstances

You purchased a commercial property and intend to sell it after a period of ownership.

For more than half of the ownership period, this property has been used by a related entity to carry on a business.

The business has been carried on by a 50/50 partnership of two discretionary trusts.

Trust A and Trust B.

Trust A is controlled by a former employee who is not related to the rulee.

Trust B has a company as trustee. You, your brother and father own one share each in this company.

Trust B has a number of beneficiaries including all members of your family and any company in which family members hold shares.

Company is a beneficiary of Trust B.You are a director and shareholder with your brother of this company. Details of the shareholding in this company are in the table below:

The ordinary shares have voting rights, E and F class shares do not have voting rights or a right to any distribution on the wind up of the company, they do have a right to attend the AGM. G class shares do not have voting rights or a right to attend the AGM.

Shareholder

Ordinary

E Class

F Class

G Class

A

X

X

X

X

B

X

  

X

  

C

      

X

D

X

  

X

  

E

      

X

The business traded at a loss for a number of years (4) and then became profitable over 5 years and 100% of the net income of Trust B was distributed to Beneficiary PCQ Company.

You, together with all your connected entities and all of your affiliates can satisfy the basic conditions for small business CGT relief pursuant to Division 152 of the ITAA 1997. In particular, you and all of your connected entities and all of your affiliates can satisfy the maximum net asset value test under section 152-15.

Reasons for decision

In order to apply the small business CGT concessions, amongst other conditions, the active asset test must be satisfied.

According to the facts that you have submitted, you satisfy the basic conditions.

Section 152-40 defines an active asset as follows:

A CGT asset is an active asset at a time if, at that time:

Subsection 152-35 provides an asset owned for less than 15 years will satisfy the active asset test if it has been an active asset for at least half the period of ownership.

In this case you are not using your CGT asset in a business that you are carrying on yourself and the CGT asset will be an active asset if it is used in a business carried on by your affiliate or another entity connected with you (provided the basic conditions are met). The partnership carrying on the business or a trust cannot be your affiliate, therefore it is necessary to examine whether other entities or affiliates of yours exercise control over the partnership carrying on the business which is using your CGT asset.

'Connected with'

Under subsection 328-125(1), an entity is 'connected with' another entity if either entity controls the other entity in the way described in section 328-125 or both entities are controlled in that way by the same third party.

Subsection (3) of section 328-125 states;

An entity (the first entity) controls a discretionary trust if a trustee acts, or could reasonably be expected to act, in accordance with the directions or wishes of the first entity; its affiliates, or the first entity together with its affiliates.

The word affiliate has the meaning given by section 328-130.

An individual or a company is an affiliate of yours if the individual or company acts, or could reasonably be expected to act, in accordance with your directions, or in concert with you, in relation to the affairs of the business of the individual or company.

Relevant factors that may support a finding that a person acts, or could reasonably be expected to act, in accordance with the taxpayer's directions or wishes, or in concert with the taxpayer, include:

The existence of a close family relationship between the parties

The lack of any formal agreement or formal relationship between the parties dictating how the parties are to act in relation to each other

The likelihood that the way the parties act, or could reasonably be expected to act, in relation to each other would be based on the relationship between the parties rather than on formal agreements or legal or fiduciary obligations, and

In this case you are the owner of a property which is leased to a partnership of two discretionary trusts. All of the income of Trust B for years XXXX was distributed to one beneficiary being PCQ.

The control of this company depends on either:

Under the right to distribution control rule as it applies to a company, an entity (X) will control a company if (X) and/or X`s affiliates beneficially own, or have the right to acquire the beneficial ownership of, interests in the company that carry between them the right to receive a percentage (the control percentage) that is at least 40% of:

Under the voting power rule an entity (Y) will control a company if Y and/or Y`s affiliates 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 (the control percentage) that is at least 40% of the voting power in the company.

According to the facts submitted, you, your brother and father hold all shares between you that carry voting rights. If your brother and father are your affiliates, together you would have the necessary 40% of the control percentage to control this company.

Your tax agent has advised the following in respect of describing the working relationship between yourself, your brother, and your father.

The working and decision making relationship is strictly informal. There are no set, documented or contractual roles.

The relationship is based on family trust

The two brothers have the active management role (as the father is preparing to retire) and see each other on a daily basis where decisions are made.

There is no formal dispute process; differences are sorted out over the dinner table.

On these facts your brother and father are your affiliates as they could reasonably be expected to act in accordance with your directions or wishes or in concert with you in relation to the affairs of the business.

The control of Trust B depends on the pattern of distributions control rule.

According to this rule, an entity (M) will control a discretionary trust for an income year if, for any of the four years before that income year;

In this case the beneficiary company received all (100%) of the net income of the trust for the relevant period and would meet the trust control test as detailed above. And as you and your affiliates control this beneficiary company (see above) you and your affiliates control Trust B.

Control of the partnership

The Advanced Guide to Capital Gains Tax Concessions for Small Business states, that where entities carry on a business in equal partnership, each partner has a 50% interest in the partnership and therefore controls the partnership. Accordingly, the partnership is connected with each partner and the two partners are connected with the partnership.

In summary

You own and lease a CGT asset to affiliates & a connected entity that are carrying on a business with you.

The CGT asset has been an active asset for more than half of the period that you have owned it.

You satisfy the basic conditions for small business CGT concessions pursuant to 152-10.

Your property is an active asset for the purposes of the small business CGT concessions under Division 152 of the ITAA 1997.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).