Edited version of your written advice

Authorisation Number: 1012754198333

Ruling

Subject: Capital gains tax

Question

Do you satisfy the basic conditions for the small business capital gains tax (CGT) concessions in relation to the sale of the asset?

Answer

Yes.

This ruling applies for the following period

Year ending 30 June 2015

The scheme commences on

1 July 2014

Relevant facts and circumstances

You and your spouse own various assets.

These assets have been used by contractors engaged by the partnership.

You and your spouse intend to sell one of the assets

As an operator, you undertake the following duties:

• arrange contractors

• ensure the contractors meet the relevant regulations

• arrange weekly payments to the contractors

• arrange for maintenance of assets

• arrange for and take the assets for mandatory quarterly inspection and registration

• purchase new assets

• arrange for the sale of old assets

• arrange for a replacement assets when required

• take trouble shooting phone calls from contractors

• complete record keeping for BAS and income tax matters

Profits have been made for the previous 5 years before depreciation is accounted for.

The turnover of the partnership is less than $2 million.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 152-A

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 paragraph 152-40(1)(c)

Income Tax Assessment Act 1997 subsection 152-40(4)

Income Tax Assessment Act 1997 section 328-110

Reasons for decision

The basic conditions for the small business capital gains tax concessions in Subdivision 152-A of the ITAA 1997 (as relevant to this case) are:

• the small business entity test and

• the active asset test.

Small business entity

You are a small business entity if you carry on a business and your business turnover (aggregated turnover) is less than $2 million (section 328-110 of the ITAA 1997). Your turnover includes all income earned in the ordinary course of business for the income year.

Active asset test

A requirement of the active asset test contained in section 152-35 of the ITAA 1997 is that the CGT asset must be an active asset for at least half of the period from when you acquired it until the earlier of the CGT event or when you ceased business, if the relevant business had ceased to be carried on in the 12 months before the CGT event.

The meaning of an active asset is set out in section 152-40 of the ITAA 1997. It must firstly satisfy one of the 'positive tests' in subsection 152-40(1) of the ITAA 1997 and then also not be excluded by one of the exceptions in subsection 152-40(4) of the ITAA 1997.

Under subsection 152-40(1) of the ITAA 1997 a CGT asset is an active asset (subject to the exclusions) if it is owned and used, or held ready for use, in the course of carrying on a business by you or your small business CGT affiliate or another entity that is connected with you under paragraph 152-40(1)(c) of the ITAA 1997.

The combined effect of sections 152-35 and 152-40 of the ITAA 1997 is that the asset will meet the active asset test if the asset was used, or held ready for use, in the course of carrying on a business for at least half of the time period it was owned, subject to the exclusions in subsection 152-40(4) of the ITAA 1997.

The following assets cannot be active assets (subsection 152-40(4) of the ITAA 1997):

• interests in a connected entity (other than those satisfying the 80% test)

• shares in companies and interests in trusts (other than those satisfying the 80% test)

• shares in widely held companies unless they are held by a CGT concession stakeholder of the company

• shares in trusts that are similar to widely held companies unless they are held by a CGT concession stakeholder of the trust or other exceptions for trusts with 20 members or less apply

• financial instruments, including loans, debentures, bonds, promissory notes, futures contracts, forward contracts, currency swap contracts, rights and options

• an asset whose main use in the course of carrying on the business is to derive interest, an annuity, rent, royalties or foreign exchange gains. However, such an asset can still be an active asset if it is an intangible asset that has been substantially developed, altered or improved by the taxpayer so that its market value has been substantially enhanced or its main use for deriving rent was only temporary.

Carrying on a business

Section 995-1 of the ITAA 1997 defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'.

Taxation Ruling TR 97/11 provides the Commissioner's view of the factors used to determine if you are in business for tax purposes.

In the Commissioner's view, the factors that are considered important in determining the question of business activity are:

• whether the activity has a significant commercial purpose or character

• whether the taxpayer has more than just an intention to engage in business

• whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

• whether there is regularity and repetition of the activity

• whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business

• whether the activity is planned, organised and carried on in a business-like manner such that it is described as making a profit

• the size, scale and permanency of the activity, and

• whether the activity is better described as a hobby, a form of recreation or sporting activity.

No one indicator is decisive. The indicators must be considered in combination and as a whole. Whether a 'business' is carried on depends on the large or general impression gained.

Application to your circumstances

Having considered your circumstances and the factors outlined above, we accept that the partnership is carrying on a business. The partnership is a small business entity with a turnover of less than $2 million.

The asset has been used in the course of carrying on a business for the entire ownership period. Therefore, you and your spouse will satisfy the basic conditions for the small business CGT concessions.

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