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Ruling
Subject: CGT - small business concessions - active asset test
Question
Does property B satisfy the active asset test under section 152-35 of the Income Tax Assessment Act 1997?
Answer
Yes
This ruling applies for the following period
Year ending 30 June 2012
The scheme commenced on
1 July 2011
Relevant facts and circumstances
A Pty Ltd (the company) was incorporated for the purpose of purchasing and developing property A.
X, Y and Z were appointed directors of the company.
X, Y and Z commenced another business through B Pty Ltd.
B Pty Ltd conducted business from property A.
The company purchased and developed property B after 1985, building a commercial premises and subsequently sold property A.
B Pty Ltd moved its operations to property B subsequent to the sale of property A.
X, Y and Z were common directors of both the company and B Pty Ltd for the period of less than 10 years.
During the entire period of less than 10 years, X, Y and Z, collectively held over a 50% ownership interest (either directly or indirectly) in both the company and B Pty Ltd.
The company and B Pty Ltd shared numerous resources and had further mutual dependencies with each other as outlined below:
B Pty Ltd has always paid commercial rent to the company
The same staff have been used to manage the day to day accounting and administration functions of B Pty Ltd and the company
Both entities share the services of the same accountant and income tax returns were prepared at the same time and in conjunction with each other
While the two entities maintained separate bank accounts, the signatories of the accounts for B Pty Ltd and the company were the same
B Pty Ltd operated from property B for less than 10 years when the business was sold.
Other unrelated parties also leased areas within property B. However B Pty Ltd held the majority of the rentable floor area.
The purchasers of B Pty Ltd's business, who are unrelated parties, continued to lease a portion property B from the company after 1 July 2009.
The company sold property B after 1 July 2009.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 152-35
Income Tax Assessment Act 1997 Paragraph 152-40(4)(e)
Reasons for decision
The active asset test is contained in section 152-35 of the Income Tax Assessment Act 1997 (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 detailed 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 least 7.5 years during the test period.
The test period:
· begins when you acquired the asset, and
· ends at the earlier of
· the CGT event, and
· when the business ceased, if the business in question ceased in the 12 months before the CGT event (or such longer time as the Commissioner allows).
A CGT asset is an active asset if it is owned by you and is used or held ready for use in a business carried on (whether alone or in partnership) by you, your affiliate, your spouse or child, or an entity connected with you.
Paragraph 152-40(4)(e) of the ITAA 1997 states, however, that an asset whose main use in the course of carrying on the business is to derive rent can not be an active asset unless the main use for deriving rent was only temporary. This exclusion generally does not apply to a CGT asset leased to an affiliate or connected entity.
An affiliate is an individual or a company that, in relation to their business affairs, acts or could be reasonably expected to act in accordance with your directions or in concert with you. The Advanced guide to capital gains tax concessions for small business 2010-11 (NAT 3359), provides a number of relevant factors that may support a finding that a person is an affiliate of a taxpayer.
After consideration of the facts and circumstances in this case, including the common directors and shareholders and the common resources and staff used by the company and B Pty Ltd, we consider that B Pty Ltd is an affiliate of the company.
Although rent was also received from unrelated parties, the majority of the rentable area and the rental income received was attributable to B Pty Ltd, therefore the exclusion in paragraph 152-40(4)(e) of the ITAA 1997 will not apply in this case.
The asset has been an active asset for more than 7.5 years and will pass the active asset test under section 152-35 of the ITAA 1997.
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