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Edited version of your written advice
Authorisation Number: 1012839505607
Date of advice: 13 July 2015
Ruling
Subject: capital gains tax
Question 1
Do you satisfy the basic conditions for the small business concessions in the 20XX-YY financial year?
Answer
Yes.
Question 2
Are you entitled to apply the 50% active asset reduction to the capital gain made in the 20XX-YY financial year?
Answer
Yes.
This ruling applies for the following period
Year ended 30 June 20YY
The scheme commences on
1 July 20XX
Relevant facts and circumstances
The Family Trust operates a business. As part of its business, the Family Trust leased commercial premises as a shop front and warehouse.
You and your spouse are the joint directors and joint shareholders of the trustee and have maintained this position since incorporation.
You and your spouse are also the beneficiaries and appointers of the Trust.
You and your spouse purchased commercial premises as a shop front and warehouse in a particular year.
The business was sold in the 20WW-XX financial year to a third party in an arm's length transaction.
The commercial premises were leased back to the new owners of the business until such time as you and your spouse were able to sell the property.
In the 20XX-YY financial year the commercial premises was sold.
You and your spouse satisfy the maximum net asset value test.
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 subsection 152-40(4)
Reasons for decision
The basic conditions are contained in Subdivision 152-A of the Income Tax Assessment Act 1997 (ITAA 1997). To qualify for the small business CGT concessions, you must satisfy several conditions that are common to all the concessions. The following are the basic conditions:
(a) a CGT event happens in relation to a CGT asset of yours in an income year;
(b) the event would have resulted in the gain;
(c) at least one of the following applies:
(i) you are a small business entity for the income year;
(ii) you satisfy the maximum net asset value test;
(iii) you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an interest in an asset of the partnership;
(iv) the conditions mentioned in subsection (1A) or (1B) are satisfied in relation to the CGT asset in the income year;
(d) the CGT asset satisfies the active asset test (see section 152-35).
Note that the small business 50% active asset reduction will apply if the basic conditions are satisfied.
In this case, you and your spouse sold a CGT asset and the event resulted in a capital gain. You and your spouse satisfy the maximum net asset value test. The property was used in the course of carrying on a business by the Family Trust. Therefore, we need to consider whether this company is a connected with you and your spouse.
Connected with - control of a discretionary trust
An entity is connected with another entity if:
• either entity controls the other entity, or
• both entities are controlled by the same third entity.
An entity controls a discretionary trust if the trustee either acts, or might reasonable by expected to act, in accordance with the directions or wishes of the entity or the entity's affiliates, or both the entity and it's affiliates.
In this case, you and your spouse are the shareholders of the trustee company. You and your spouse are also appointers of the trust. Therefore, we accept that the Family Trust is connected with you and your spouse.
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.
Note that the asset does not need to be an active asset just before the CGT event.
Application to your circumstances
In this case, the property owned by you and your spouse was used in the course of carrying on a business by the Family Trust for more than 7 and a half years. As discussed, the Family Trust is connected with you and your spouse. Therefore, the property will satisfy the active asset test.
As the basic conditions for the small business concessions have been satisfied, the trust is entitled to apply the 50% active asset reduction.
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