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Edited version of your written advice
Authorisation Number: 1012854638081
Date of advice: 7 August 2015
Ruling
Subject: Small business concessions
Question 1
Is the cash in the account of the company inherently connected with the business for the purposes of section 152-40(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
Yes.
Question 2
Are the shares in the company excluded from being an active asset by section 152-40(4) of the ITAA 1997?
Answer
No.
This ruling applies for the following periods:
Year ended 30 June 2016
The scheme commences on:
1 July 2015
Relevant facts and circumstances
The shares in the company have been owned for more than 15 years.
The company is an Australian resident company.
The company operates a business.
The company does not undertake any other activities or hold non-business related assets.
In addition to the goodwill reflected in the balance sheet, the goodwill has increased significantly since the date you acquired the shares.
The cash elements of the accounts in the company have been used exclusively for the running of the business.
The funds are made solely up of retained profits. The bank account is used to fund the day to day expenses of the business.
The business has a full equitable interest in the cash and it has been used for, at times, acquisition of plant and equipment, fluctuations in working capital requirements and funding of new contracts.
The funds are not being held in trust for anyone else and or used for any other purpose.
For a short period of time the company invested some of these funds in a managed investment portfolio. This investment has since been liquidated and the funds returned to assist in the running of the business.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 152-35
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(3)
Income Tax Assessment Act 1997 subsection 152-40(4)
Reasons for decision
Summary
The cash is inherently connected with the business and will count towards the satisfaction of the 80% test.
You have held shares in the company for more than 15 years. For more than 7.5 years, at least 80% of the assets held by the company were active assets. Therefore, the shares will not be excluded from being an active asset by subsection 152-40(4) of the ITAA 1997.
Detailed reasoning
Active asset test
The active asset test is contained in section 152-35 of the 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 at least 7.5 years during the test period.
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. An active asset may be a tangible asset or an intangible asset.
The following assets cannot be active assets (subsection 152-40(4) of the ITAA 1997):
a) interests in a connected entity (other than those satisfying the 80% test)
b) shares in companies and interests in trusts (other than those satisfying the 80% test)
c) shares in widely held companies unless they are held by a CGT concession stakeholder of the company
d) 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
e) financial instruments, including loans, debentures, bonds, promissory notes, futures contracts, forward contracts, currency swap contracts, rights and options
f) 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.
Shares
Shares are not active assets unless they satisfy the 80% test in subsection 152-40(3) of the ITAA 1997.
Under subsection 152-40(3) of the ITAA 1997 a 'share' is an active asset if:
a) the company is an Australian resident at that time; and
b) the total of:
(i) the market values of the active assets of the company and
(ii) the market value of any financial instruments of the company that are inherently connected with a business that the company carries on and
(iii) any cash of the company that is inherently connected with such a business
is 80% or more of the market value of all assets of the company.
The Advanced guide to capital gains tax concessions for small business 2013-14 (NAT 3359) states that cash and financial instruments are not active assets, but they count towards the satisfaction of the 80% test provided they are inherently connected with the business.
Inherent connection
Inherent connection necessarily requires something more than just some form of connection between the financial instrument and the business. A thing might be regarded as inherently connected to a business when it is a permanent or characteristic attribute of the business - for example goodwill, or trade debtors.
Where a business is holding excess funds arising from a temporary spike in trading activity or the sale of a business asset, the excess funds might also reasonably be regarded as inherently connected with the business. A financial instrument must be inherently connected with a business that the owner of the financial instrument carries on, rather than any business a related entity carries on.
Application to your circumstances
In this case, we accept that the bank account is inherently connected with the business carried on by the company. Therefore even though cash is not an active asset, it will count towards the satisfaction of the 80% test.
You have held shares in the company for more than 15 years. For more than 7.5 years, at least 80% of the assets held by the company were active assets. Therefore, the shares will not be excluded from being an active asset by section 152-40(4) of the ITAA 1997.
Additional information
This ruling has not fully considered your eligibility for the small business concessions. You should ensure that you satisfy the basic conditions and any other relevant conditions. More information is available in the publication Advanced guide to capital gains tax concessions for small business 2013-14 (NAT 3359), which is available on our website www.ato.gov.au.
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