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Edited version of your private ruling
Authorisation Number: 1012347974027
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Ruling
Subject: Small business capital gains tax concessions
Question
Will the shares you hold in a company satisfy the active asset test?
Answer
Yes.
This ruling applies for the following period:
Year ended 30 June 2013
The scheme commences on:
1 July 2012
Relevant facts and circumstances
The Family Trust was set up to hold shares in the company.
The director of the trustee of the Family Trust is also a director of the company.
The Family Trust owns one third of the total shares in the company.
The company developed and sold assets.
Prior to all assets being sold, the majority of assets left were sold to company B.
As part of the sale transaction, the company also received shares in company B, as well as a right to receive revenue for each asset sold by company B.
A small amount of assets were also retained by the company for sale.
There are currently negotiations taking place with an external party to purchase the shares in the company and company B, in order to complete the development.
The proposed sale of the company is likely to realise a capital gain for the Family Trust.
The assets currently held by the company are cash, stock and shares in several companies.
The above amounts are market values as determined by the directors. They are all either based on the value of assets in an active market, or on actual offers to purchase having been received and considered.
The shares in company B will be considered active, as the directors have determined the market value of that company to be made up on a single active asset.
The market value of the active assets, financial instruments and cash of the company were more than 80% of the market value of the assets of the trust for over half the period of ownership.
Relevant legislative provisions
Income Tax Assessment Act 1997 Division 152,
Income Tax Assessment Act 1997 section 152-35,
Income Tax Assessment Act 1997 section 152-40,
Income Tax Assessment Act 1997 subsection 152-40(1),
Income Tax Assessment Act 1997 subsection 152-40(3), and
Income Tax Assessment Act 1997 subparagraph 152-40(3)(b)(iii).
Reasons for decision
Summary
The total market value of the company's active assets is more than 80% of the total market value of all the company's assets. You have advised that the market value of the active assets, financial instruments and cash of the company were more than 80% of the market value of the assets of the trust for over half the period of ownership. Therefore, the shares held in the company satisfy the active asset test.
Detailed reasoning
A capital gain you make may be reduced or disregarded under Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997) if certain conditions are satisfied. One of these conditions requires the capital gains tax (CGT) asset satisfies the active asset test contained in section 152-35 of the ITAA 1997.
A CGT asset will satisfy the active asset test if:
(a) you have owned the asset for 15 years or less and the asset was an active asset of your for a total of at least half of the test period, or
(b) you have owned the asset for more than 15 years and the asset was an active asset of your for a total of at least 7½ years during the test period.
The test period beings when you acquired the asset and ends at the earlier of the CGT event and if the relevant business ceased to be carried on in the 12 months before that time - the cessation of the business.
Subsection 152-40(1) details that a CGT asset is an active asset at a time if 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.
Subsection 152-40(3) determines that a share in a company that is an Australian resident can also be an active asset. This is provided that the total of:
· the market values of the active assets of the company or trust; and
· the market value of any financial instruments of the company or trust that are inherently connected with a business that the company or trust carries on; and
· any cash of the company or trust that is inherently connected with such a business;
· is 80% or more of the market value of all of the assets of the company or trust.
Subsection 152-40(3B) provides that the 80% test will be taken to have been met where breaches of the threshold are only temporary in nature and in circumstances where it is reasonable to conclude that the 80% threshold has been passed.
A bank account used by a taxpayer in the operation of their business is usually 'inherently connected' with the taxpayer's business and would satisfy subparagraph 152-40(3)(b)(iii) of the ITAA 1997.
Application to your circumstances
In this case the assets are interests in a company. Those interests will be active assets if they meet the 80% market value test. The assets include cash, stock and shares in several companies. The cash is inherently connected with the company's business and will therefore be considered an active asset. The land held as trading stock will also be considered an active asset. The only asset of company B is active. Therefore, the shares in company B are an active asset.
The total market value of the company's active assets is more than 80% of the total market value of all the company's assets. You have advised that the market value of the active assets, financial instruments and cash of the company were more than 80% of the market value of the assets of the trust for over half the period of ownership. Therefore, the shares held in the company satisfy the active asset test.
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