Edited version of private ruling

Authorisation Number: 1011907661673

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Ruling

Subject: Active asset

Question

Will your commercial property (the 'Property') satisfy the requirements of section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997), which defines the meaning of an active asset?

Answer

Yes.

This ruling applies for the following period

Year ending 30 June 2009

The scheme commenced on

12 December 2008

Relevant facts

You and Person X own a commercial property ('property') as tenants in common in equal shares. The property was purchased after September 1985.

A unit trust (trust) conducts a business in which you and Person X are the principals. You and Person X are the directors and shareholders of the trustee company for the unit trust.

The unitholders in the trust are a family discretionary trust for the benefit of you and your family as to 50% and a family discretionary trust for the benefit of Person X and his family.

From the time the property was purchased by you and Person X until it was sold, the trust has occupied the property under a lease. Namely, the trust uses the property as its business premises.

In the year of income the property was sold, your family discretionary trust only made a distribution of income and not capital. The distribution of net income for tax purposes for that year was made solely to your spouse and children (being under the age of 18 years).

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 328-125

Income Tax Assessment Act 1997 Section 152-40

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 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

Unless otherwise stated, all legislative references in the following Reasons for Decision are to the Income Tax Assessment Act 1997.

Summary

The asset would meet the definition of an active asset in Subsection 152-40(1). Furthermore, the effect of Subsection 152-40(4A) means that the exclusion provision in Subsection 152-40(4) is not applicable. Consequently, the property does qualify as an active asset for the purposes of the small business concessions.

Detailed reasoning

Active Asset

Section 152-40 discusses the meaning of the term '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.

In order for the property to be an active asset it must be used in the business of an entity connected to you.

Connected with an entity

An entity is connected with another entity if:

either entity controls the other entity in a way described in this section; or

both entities are controlled in a way described in this section by the same third entity.

Direct control of an entity other than a discretionary trust

Subsection 328-125(2) states an entity (the first entity) controls another entity if the first entity, its affiliates, or the first entity together with its affiliates:

except if the other entity is a discretionary trust - beneficially own, or have the right to acquire the beneficial ownership of, interests in the other entity that carry between them the right to receive a percentage (the control percentage) that is at least 40% of any distribution of income by the other entity; or if the other entity is a partnership - the net income of the partnership; or any distribution of capital by the other entity; or

if the other entity is a company - 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.

In your case, your family discretionary trust is a 50% unit holder of the trust, and accordingly, controls the unit trust.

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.

Section 152-47(2) provides that in determining whether the business entity is an affiliate of, or is connected with, the asset owner, that a spouse and children under the age of 18 years will be affiliates of an individual.

Your family discretionary trust distribution of net income for tax purposes for the relevant financial year was made solely to your spouse and children who were under the age of 18 years, who are your affiliates in accordance with section 152-47(2). Therefore, you control the trust in accordance with Subsection 328-125(4).

As a result the property will meet the requirements of section 152-40 and the meaning of an active asset.

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