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Edited version of your private ruling
Authorisation Number: 1012363170021
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Ruling
Subject: Capital gains tax small business concessions
Question
Will the shares you hold the company satisfy the active asset test?
Answer: Yes
This ruling applies for the following period
Year ended 30 June 2013
The scheme commenced on
1 July 2012
Relevant facts and circumstances
The trust was set up to hold shares in Company X.
The director of the trustee of the trust is also a director of Company X.
The trust owns one third of the total shares in Company X.
The shares in Company X were purchased around 2000.
Company X carries on a business activity. Prior to all assets being sold, the majority of assets left were sold to Company Y.
As part of the sale transaction, Company X also received shares in Company Y, as well as a right to receive revenue for each asset sold by Company Y.
A small asset was also retained by Company X for sale.
There are currently negotiations taking place with an external party to purchase 100% of the shares in Company X and the shares in Company Y.
The proposed sale of the shares in Company X is likely to realise a capital gain for the trust.
The assets currently held by Company X are as follows:
Cash $xxx
Stock $xxx
Shares in Company Y $xxx
Shares in Company Z $xxx
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 Y 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 are more than 80% of the market value of all the assets of the company and were more than 80% of the market value of all the assets of the company for over half the period of your share ownership.
Relevant legislative provisions
Income Tax Assessment Act 1997 Division 152
Income Tax Assessment Act 1997 Section 152-35
Income Tax Assessment Act 1997 Subsection 152-40(1)
Income Tax Assessment Act 1997 Subsection 152-40(3)
Income Tax Assessment Act 1997 Subsection 152-40(3B)
Income Tax Assessment Act 1997 Subsection 152-40(3A)
Reasons for decision
Summary
The market value of Company X's active assets is more than 80% of the market value of all the company's assets. In addition, the market value of the active assets, financial instruments and cash of the company were more than 80% of the market value of the all the assets of the company for over half the period of your share ownership. Accordingly, the shares held in the company satisfy the active asset test.
Detailed reasoning
A capital gain you make on the disposal of a capital gains tax (CGT) asset 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 that the 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 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.
The test period begins 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) of the ITAA 1997 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) of the ITAA 1997 provides 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; and
· the market value of any financial instruments of the company that are inherently connected with a business that the company carries on; and
· any cash of the company that is inherently connected with such a business;
is 80% or more of the market value of all of the assets of the company.
As the active asset test requires a CGT asset to have been an active asset for at least half of a particular period, as outlined earlier, in order for a share in an Australian resident company to meet this requirement, the company must satisfy the 80% test for that same period.
The 80% test will be taken to have been met:
· where breaches of the threshold are only temporary in nature (subsection 152-40(3B) of the ITAA 1997), and
· in circumstances where it is reasonable to conclude that the 80% threshold has been passed (subsection 152-40(3A) of the ITAA 1997), such as when there have been no significant changes to the assets or liabilities of the company.
Importantly, an interest in an entity that itself holds interests in another entity that operates a business may be an active asset, depending on the successive application of the 80% test at each level.
Application to your circumstances
The CGT assets to be disposed of are the shares in Company X. The shares will be active assets if they meet the 80% market value test.
The assets of Company X include cash, stock, shares in Company Y and shares in Company Z. The cash is inherently connected with the company's business and is therefore considered an active asset. The land held as trading stock is also considered an active asset. You state that the shares in Company Z are not active assets and therefore can not be included in the market value test. The shares in Company Y will only be active assets if Company Y also passes the 80% market value test. As you state that the market value of Company Y is made up of a single asset, Company Y also meets the 80% market value test and therefore the Company Y shares will be active assets.
Based on the information provided, the total market value of Company X's active assets, cash and financial instruments (that are inherently connected with the business) is more than 80% of the market value of all the assets of the company. In addition, 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 company for over half the period of your share ownership.
Accordingly, the shares held in Company X satisfy the active asset test under section 152-35 of the ITAA 1997.
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