1013045972257 | Legal database

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Edited version of your written advice

Authorisation Number: 1013045972257

Date of advice: 5 July 2016

Ruling

Subject: CGT Small Business Relief - Active Asset

Questions and Answers

Do the business premises meet the active asset test in section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Yes

This ruling applies for the following periods

1 July 20AA to 30 June 20BB

The scheme commences on

1 July 20AA

Relevant facts and circumstances

1. The Deed for the Trust was formed in 20XX.

2. The Trust purchased the Property, with settlement in 20XX.

3. The total lettable area of the property is approximately 850 sqm.

4. The property was partly used by the company for part of the period of ownership. The company used approximately 500 sqm of the property in its business from 20XX to 20YY.

5. The company was a small business entity. The trust and all related entities pass both the $2 million turnover and the $6 million net asset value tests at all time during the ownership period.

6. During the period of use by the company, it generated turnover typically in the range of $X00,000 per annum. The remainder of the property generated of the property generated approximately $Y0,000 in rent from unrelated parties.

7. There was no part of the property that was unused/vacant land, or had a non-commercial application.

8. The property was sold, with the contract signed and settled in 20BB.

The Trust

9. This is a discretionary trust. The trustee of the Trust is Company B.

10. Person A is the sole director and shareholder of Company B.

The Company

11. Person A owns % of the ordinary issued shares of the company.

How the property was used by the Company

12. Person A operates their business through the Company. The property in question was used by the Company in multiple ways in regards to this business. It was used as a workshop, to house equipment and materials used, and as retail space where the general public were able to view and purchase the products.

Assumptions

None

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152-40

Income Tax Assessment Act 1997 section 328-125

Income Tax Assessment Act 1997 section 328-130

Further issues for you to consider

None

Reasons for decision

Summary

1. The business premises which the Trust sold in 20BB meets the active asset test in section 152-35 of the Income Tax Assessment Act 1997.

Detailed reasoning

2. Section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997) contains the basic conditions you must satisfy to be eligible for the small business capital gains tax (CGT) concessions. These conditions are:

a. a CGT event happens in relation to a CGT asset 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 (MNAV) in section 152-15 of the ITAA 1997,

(iii) you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an asset of the partnership, or

(iv) the conditions in subsection 152-10(1A) or (1B) of the ITAA 1997 are satisfied in relation to the CGT asset in the income year.

d. the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997.

Active asset test

3. Section 152-35 of the ITAA 1997 states that a CGT asset satisfies 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 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 ½ years during the test period.

4. The test period:

• begins when you acquired the asset, and

• ends at the earlier of

• the CGT event, and

• when the business ceased, if the business in question ceased in the 12 months before the CGT event (or such longer time as the Commissioner allows).

5. As the Trust has owned the property between no earlier than 20XX and 20BB, the property must be an active asset for a total of approximately 3,000 days.

6. The Trust rented the property, approximately 500 sqm was rented to a related company. The Company used the property from 20XX through to 20YY. Therefore, the property was used by the Company for approximately 4,000 days.

Active Asset

7. Section 152-40 of the ITAA 1997 provides the meaning of 'active asset'. A CGT asset will be an active asset at a time if, at that time, you own the asset and the asset was used or held ready for use by you, an affiliate of yours, or by another entity that is 'connected with' you, in the course of carrying on a business.

8. Paragraph 152-40(4)(e) provides that an asset cannot be an active asset if its main use by its owner is to derive rental income. However, in determining the main use of the asset any use by an affiliate, or an entity that is connected with the owner, is treated as the owners use (Subsection 152-40(4A)).

9. Therefore, while the Trust's main use of the asset was to derive passive rental income its use by any affiliate, or entity that is connected must be considered.

Affiliates

10. An affiliate is defined by section 328-130 of the ITAA 1997 as being an individual or company who acts or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you, in relation to the affairs of the business of the individual or company.

11. Trusts, partnerships and superannuation funds cannot be your affiliates. However a trust, partnership or superannuation fund may have an affiliate who is an individual or company.

12. Whether a person acts or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you, is a question of fact. Relevant factors that may support a finding that a person acts in such a manner include:

• the existence of a close family relationship between the parties;

• the lack of any formal agreement or formal relationship between the parties dictating how the parties are to act in relation to each other;

• the likelihood that the way the parties act, or could reasonably be expected to act, in relation to each other would be based on the relationship between the parties rather than on formal agreements or legal or fiduciary obligations; and

• the actions of the parties.

13. Another business will not be acting in concert with you if they:

• Have different employees;

• Have different business premises;

• Have separate bank accounts;

• Do not consult you on business matters;

• Conduct their business affairs independently in all regards.

14. Section 328-130(2) of ITAA 1997 provides that an individual or a company is not an affiliate merely because of the nature of the business relationship shared by the entity and the individual or company.

Connected with

15. The meaning of a connected entity is defined under subsection 328-125(1) of the ITAA 1997 which states:

An entity is connected with another entity if:

a. either entity controls the other entity in the way described in this section; or

b. both entities are controlled in a way described in this section by the same third entity.

16. Paragraph 328-125(2)(a) of the ITAA 1997 provides that an entity controls a another entity if the entity, its affiliates, or the entity together with its affiliates beneficially own or has the right to acquire the beneficial ownership of, interests in the other entity that carry between them the right to receive a percentage (control percentage) that is at least 40% of:

a. Any distribution of income by the other entity; or

b. Any distribution of capital by the other entity.

17. Paragraph 328-125(2)(b) of the ITAA 1997 provides that an entity controls company if the entity, its affiliates, or the entity together with its affiliates owns or has the right to acquire the ownership of, equity interests in the company that carry between them the right to exercise, or control the exercise of, a percentage that is at least 40% of the voting power in the company:

18. Subsection 328-125(3) if the ITAA 1997 provides that an entity controls a discretionary trust if a trustee of the trust acts, or could reasonably be expected to act, in accordance with the directions or wishes of the first entity, its affiliates, or the first entity together with its affiliates.

19. You have stated that the trust and the Company are controlled by Person A:

a. She is the sole director and shareholder of the trustee company of the Trust, as such controls the Trust; and

b. She owns 90% of the ordinary shares in the Company, as such has over 40% of the voting rights, and has a right to receive more than 40% of any distribution of income or capital from the Company.

20. As both the Company and the Trust are controlled by Person A, they are connected entities.

21. The Property was used by the Company in multiple ways in regards to the business. It was used as a workshop, to house equipment and materials used, and as retail space where the general public were able to view and purchase the products.

22. Accordingly, as the majority of the Property was used in the course of carrying on the business of an affiliate of the Trust, the Property was an active asset of the Trust.

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