Edited version of your written advice

Authorisation Number: 1051202907852

Date of advice: 22 March 2017

Ruling

Subject: Capital gains tax - small business concessions

Question 1

Are you eligible for the small business concessions in relation to the sale of your property used by the family business?

Answer

No.

This ruling applies for the following periods:

The year ending 30 June 20ZZ.

The scheme commences on:

19XX

Relevant facts and circumstances

You and your spouse have run a business for many years.

The business is run through a Family Trust (the Trust).

A trustee company is the sole trustee of the Trust.

You are beneficiaries to the Trust.

You are shareholders and directors of the trustee company.

The Trust carries on a business.

During that time, you owned a block of land (the property). The property is adjacent to your family home.

Both the property and your family home were acquired more than 15 years before you later sold the property.

The business has been running for longer than your ownership period in the property.

The property has two sheds, as well as a Xm high block wall and gate to secure the property.

The usage of the property involved:

● The two sheds were used for storage of work tools, equipment and materials.

● The open space on the property was used to store materials that did not need to be stored under cover.

● Work vehicles and trailers were parked on the property.

● Tools and items were collected on a daily basis.

● In some cases the property would be visited a number of times a day in between jobs depending on what each job required.

The property was mainly for storage as work would be done on work sites.

On occasion, some preparatory work was done at the property in a limited capacity.

There was no business signage on the property.

In 20YY, the property was sold.

The property was the only business premises used by the business.

The business has an aggregated turnover of less than $2 million a year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3

Income Tax Assessment Act 1997 Part 3-45

Income Tax Assessment Act 1997 Section 328-125

Reasons for decision

Capital gains tax (CGT) is the tax you pay on certain gains you make. You make a capital gain or capital loss as a result of a CGT event happening to a CGT asset. The most common event, CGT event A1, happens if you dispose of a CGT asset to someone else e.g. the disposal of a dwelling.

In this case, the disposal of the property constitutes CGT event A1.

Small business concessions

To qualify for the small business concessions, you must satisfy several conditions that are common to all the concessions. These are called the basic conditions.

The basic conditions in Subdivision 152-A of the ITAA 1997 which are relevant to you are:

● the passively held assets - affiliates and entities connected with you; and

● the active asset test.

Passively held assets - affiliates and entities connected with you

The conditions in subsection 152-10(1A) of the ITAA 1997 are satisfied in relation to the CGT asset in the income year if:

(a) your affiliate, or an entity that is connected with you, is a small business entity for the income year; and

(b) you do not carry on a business in the income year (other than in partnership); and

(c) if you carry on a business in partnership - the CGT asset is not an interest in an asset of the partnership; and

(d) in any case - the small business entity referred to in paragraph (a) is the entity that, at a time in the income year, carries on the business (as referred to in subparagraph 152-40(1)(a)(ii) or (iii) or paragraph 152-40 (1)(b) in relation to the CGT asset.

A connected entity is defined under section 328-125 of the ITAA 1997 as being:

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.

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 (subsection 328-125(3) of the ITAA 1997).

You are directors and shareholders of the trustee company of the Trust. It could reasonably be expected that the trustee company acts in accordance with your directions and wishes. Therefore a connection has been established and you and the Trust are connected entities.

Active asset test

For the sale of the property to qualify for any of the small business CGT concessions, the CGT asset must also satisfy the active asset test in section 152-35 of the ITAA 1997.

In this case, the active asset test is satisfied if:

● You have owned the property for more than 15 years and the asset was an active asset of yours for at least 7.5 years during the test period.

The test period:

● begins when you acquired the asset;

● 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).

The meaning of an active asset is given in subsection 152-40 (1) of the ITAA 1997. Paragraph 152-40(1) (a) states that a CGT asset is an active asset at a given time if at that time, you own it and:

● use it in the course of carrying on a business, or

● hold it ready for use in the course of carrying on a business by:

● you; or

● your affiliate; or

● another entity that is connected with you

Accordingly, for the property in this case to be considered an active asset it must satisfy one of the above conditions.

Application to your situation

The central issue to be determined in this case is whether the property was being used, or held ready for use, in the course of carrying on the business by the Trust. While the property was used as a venue for storing materials, it does not necessarily satisfy the active asset test by this use.

Was the property being used?

The term 'use' is not explained in either the legislation or the Explanatory Memorandum to the New Tax System (Capital Gains Tax) Bill 1999 which introduced Division 152 into the ITAA 1997. The Shorter Oxford English Dictionary uses an expression 'make use of a thing', especially for a particular end or purpose to express the ordinary meaning of the word use. The ordinary English meaning of the term would cover the storage of materials on the property. This was a physical use of the property that was connected with the conduct of the building, bricklaying, and paving business. However, this does not mean that the use to which the property was being put was contemplated by subsection 152-40(1) of the ITAA 1997 because the use may not have had the required connection with the building, bricklaying, and paving business.

Furthermore, ATO Interpretative Decision ATO ID 2002/354 Capital Gains Tax - Small Business Rollover Relief - Active Assets - Asset 'held ready for use', provides that land is not ready for use unless it enables the taxpayer to operate the business on it.

The relevant connection

Paragraph 152-40(1) (a) of the ITAA 1997 requires an asset to be used in the course of carrying on a business. This requirement does not require exclusive use of the asset for business purposes but a use that is sufficient to establish the required connection between the asset and the operations of the business. The degree of connection required is expressed by the words in the course of, which connotes the idea that the use of the asset is an integral part of the process by which the business is carried on.

In the present case, you acquired the property more than 15 years before you later sold it. During your ownership period, relevant tools, materials and vehicles were stored at the property for the business carried on by the Trust. The question now is whether storing materials on the property in sheds or open spaces was integral to the process by which the business was conducted. If it was, the use of the property in such circumstances constituted a use as contemplated by paragraph 152-40(1)(a) of the ITAA 1997 and the property would qualify as an active asset.

Conclusion

You property is not considered to have been an active asset. The reasons are:

● The property was used in a manner that was incidental to the conduct of the business. However, the property was not used in the course of carrying on the business as required by paragraph 152-40(1) (a) of the ITAA 1997.

● The degree of connection required by paragraph 152-40(1) (a) ITAA 1997 is expressed by the words 'in the course of' which mean 'integral to the process by which the business was carried on'.

● The relevant question, in this case, is whether storing materials on the property, either in sheds or open spaces, was integral to the process by which the business was conducted? The answer is that the activity was not integral to the process by which the business was conducted, but was instead merely incidental.

● The property was merely a convenient place to store miscellaneous materials on a small scale and as a matter of convenience, adjoining your family home. No other business activities were conducted on the property, other than some preparatory work from time to time. All the essential activities were conducted elsewhere off site as relevant. The business did not operate on the property and the property cannot be considered 'ready for use'.

● The requisite degree of connection has not been established. An incidental connection between the business and the asset is insufficient to establish that it was used or held ready for use in the course of carrying on the business.

As the property does not meet the active asset test, you are not eligible for the small business concessions.

Further issues for you to consider

This ruling has not fully considered your eligibility for the small business CGT concessions. You should ensure that you satisfy the relevant conditions for the concessions. More information is available in the publication Capital gains tax concessions for small business, which is available on our website www.ato.gov.au.

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