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Edited version of private ruling
Authorisation Number: 1011712662633
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Ruling
Subject: Capital gains tax-active asset
Question 1
Are the shares in private company active assets under section 152-35 of the Income Tax Assessment Act 1997(ITAA 1997)?
Answer:
No.
Question 2
Is the taxpayer eligible for the retirement exemption pursuant to sub-section 152-305 of the ITAA 1997 under a trust structure?
Answer:
No.
Question 3
Which active asset exemptions (concessions) apply?
Answer:
No active asset exemption concessions apply.
Relevant facts
The rulee is a family trust. The Trustee for the family trust is a private company which is 100% owned by one shareholder.
Company B was created on XXXX to facilitate the sale of its shares (within a month) to another company (not related to the rulee entity).
Company B did not carry on a business.
Reasons for decision
A number of basic conditions must be met if a capital gain that is made from the happening of a CGT event is to qualify for the CGT small business reliefs. When the basic conditions are met, any specific requirements for a particular relief to apply must be satisfied. The basic conditions are stated at Section 152-10 of the ITAA 1997.
One of the basic conditions is that the CGT asset satisfies the active asset test under section 152-35 of the ITAA 1997. Further, section 152-40 explains that a CGT asset is an active asset if;
(a) You own the asset and:
(i) You use it, or hold it ready for use, in the course of carrying on a business; or
(ii) it is used, or held ready for use, in the course of carrying on a business by your affiliate, or by another entity that is connected with you
(b) if the asset is an intangible asset-you own it and it is inherently connected with a business that you, your affiliate, or another entity that is connected with you, carries on.
If a capital gain is made from the happening of a CGT event in relation to a share in a company (or interest in a trust), then, in addition to the basic conditions, one or other of two further basic conditions must be met for the CGT small business relief to be available in relation to the capital gain.
Under subsection 152-40(3) of the ITAA 1997 a share in a company is an active asset at a given time if it is a share in an Australian resident company and the total of the market value of the active assets and certain capital proceeds of the company is 80% or more of the market value of all the assets of the company.
To satisfy the active asset test, the shares must also be active assets for at least half of a certain period (paragraph 152-35(b) of the ITAA 1997). In this case, the shares must be active assets for at least half of the period from when they were acquired to when the business ceased. This means that the total of the market value of the active assets and certain capital proceeds of the company must be 80% or more of the market value of all the assets of the company for this same period.
In this case the shares in Company B were acquired on XXX. This company was then sold shortly afterwards to another private company.
Company B was in existence for nearly a month until its sale. No business transactions occurred during this time, therefore it did not carry on a business for the purposes of the active asset test.
As the CGT asset being shares held by the family trust did not satisfy the basic conditions under 152-10 of the ITAA 1997, the proceeds from the sale of the shares do not qualify for small business relief under Division 152.
Retirement Exemption
If the basic conditions for CGT small business relief are met in relation to a capital gain and the 15-year small business exemption does not apply, so much of the capital gain as is not disregarded by the CGT small business 50% reduction is potentially eligible for the CGT small business retirement exemption (or CGT small business roll-over relief).
In this case the basic conditions for CGT small business relief have not been satisfied, therefore the retirement concession is not available and none of the other CGT small business concessions are available for the same reason.
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