Edited version of private ruling

Authorisation Number: 1011693317284

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Ruling

Subject: Capital gains tax small business concessions

Question 1

Does your property satisfy the active asset test under section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Can you access the small business 50% reduction and the small business retirement exemption provided in Subdivisions 152-C and 152-D of the ITAA 1997 respectively?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

Scheme

In 1996 you purchased your property.

You sold your property in 2010 and made a capital gain.

You are a registered civil celebrant employed by X Company.

You are the sole director and manager of X Company and hold 100% of the ownership interests in X Company.

You are over 55 years of age.

Your original intention was for X Company to operate a business that could utilise your skills as a celebrant.

X Company has been providing Marriage, Name-giving, Affirmation, Funeral ceremonies and other related services to the general public from these premises at market prices, throughout your ownership of the property.

No profit was made in the start-up phase of the activity, however, profits were returned by the third year of operation.

X Company paid all outgoings of the business including gas, electricity, water, rates, telephone, insurance, staff, and maintenance costs.

You obtained the relevant licences required for you to provide celebrant services.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 102-5(1)

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 subsection 152-10(1)

Income Tax Assessment Act 1997 subsection 152-10(1A)

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 Subdivision 152-C

Income Tax Assessment Act 1997 Subdivision 152-D

Income Tax Assessment Act 1997 Subdivision 328-C

Income Tax Assessment Act 1997 subsection 328-110(1)

Income Tax Assessment Act 1997 section 328-130

Reasons for decision

Question 1

Summary

As your property has been used in the course of carrying on a business that is carried on by your affiliate for more that half your ownership period, the property is an active asset, and satisfies the active asset test.

Detailed reasoning

An asset must meet certain conditions to qualify as an active asset.

Your asset must have been used or held ready for use in, or inherently connected with:

§ your business; or

§ the business of your affiliate; or

§ the business of an entity that is connected with you.

In addition, where you have owned your CGT asset for less than 15 years, it must have been actively used by the business for half of the total period you owned it.

Your property was purchased by you in 1996, and sold in 2010. As you have owned the property for 14 years, it must have been an 'active asset' of yours for a total of at least 7 years.

Approximately two months after you purchased your property, it was put to use in the activities undertaken by X Company as a venue for the various ceremonies and service products sold and providing an office for management of operations. The property continued to be utilised for these activities until sold.

Meaning of 'affiliate'

Section 328-130 of the ITAA 1997 explains that a company is your affiliate if the company 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 company's business.

You are the sole director and manager of X Company, and hold 100% of the ownership interests. The company acts in accordance with your directions, and as such it is your affiliate.

Carrying on a business

Taxation Ruling TR 97/11 is the primary source of the Commissioner's view on whether activities undertaken amount to the 'carrying on of a business' and at paragraph 13 provides a number of relevant indicators as follows:

§ whether the activity has a significant commercial purpose or character; this indicator comprises many aspects of the other indicators;

§ 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 repetition and regularity of the activity;

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

§ whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at 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 a sporting activity.

All the facts and circumstances in each case must be examined. No one indicator is decisive and the indicators often overlap significantly. The indicators must be considered in combination and as a whole. Whether activities amount to the carrying on of a business will depend on the 'large or general impression gained' and whether the operations overall have a 'commercial flavour' (TR 97/11 paragraphs 15 and 16).

In the Commissioners view the following facts indicate that a business was being carried on:

§ you obtained the relevant licences required to provide the celebrant services.

§ your original intention was for X Company to operate a business that could utilise your skills as a celebrant.

§ X Company did in fact undertake activity providing Marriage, Name-giving, Affirmation, Funeral ceremonies and other related services to the general public at market prices.

§ although no profit was made in the start-up phase of the activity, profits were returned by the third year of operation.

§ the activity was carried on regularly and repetitiously over the entire ownership period.

§ although X Company did not pay rent, it paid all outgoings of the business including gas, electricity, water, rates, telephone, insurance, staff, and maintenance costs.

§ the activity was planned, organised and carried on in a businesslike manner.

§ the activity was established and committed to on a long-term basis.

§ the activity cannot be described as a hobby or investment activity.

As your property has been used in the course of carrying on a business that is carried on by your affiliate for at least 7 years during your ownership period, the property is an active asset, and satisfies the active asset test.

Question 2

Summary

As you have satisfied the basic conditions in Subdivision 152-A of the ITAA 1997, and you are over 55 you satisfy all the conditions required to access the small business 50% reduction and the small business retirement exemption in Subdivisions 152-C and 152-D respectively.

Detailed reasoning

To have access to the small business relief provided in Division 152 of the ITAA 1997 you must meet both the basic conditions under Subdivision 152-A. Further specific conditions in respect of each concession may apply. There are four basic conditions to be met:

(a) A CGT event must happen

You confirmed you sold your property in 2010. The sale of the property caused CGT event A1 (section 104-10 of the ITAA 1997) to happen and as such this condition is satisfied.

(b) The event results in a capital gain

You advised the sale of the property resulted in a capital gain. As such, this condition is satisfied.

(c) At least one of following 4 sub-conditions 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; or

IV. the conditions mentioned in subsections 152-10(1A) or (1B) [relating to passively held assets like your property] are satisfied in relation to the CGT asset in the income year.

Subsection 152-10(1A) of the ITAA 1997 is satisfied if:

§ your affiliate, or an entity connected with you, is a small business entity for the income year

§ you do not carry on a business in the income year, and

§ in relation to the CGT asset, the small business entity carries on the business, that results in the asset being an active asset.

Meaning of 'affiliate'

A company is your affiliate if the company 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 company's business (section 328-130 of the ITAA 1997).

You are the sole director and manager of X Company, and hold 100% of the ownership interests. The company acts in accordance with your directions, and as such it is your affiliate.

Meaning of 'small business entity'

Subsection 328-110(1) of the ITAA 1997 states that a business entity is a 'small business entity' for an income year (the current year) if:

a) The entity carries on a business in the current year; and

b) One or both of the following applies:

I. The entity carried on a business in the income year (the previous year) before the current year and had an aggregated turnover for the previous year of less than $2 million;

II. The entities aggregated turnover for the current year is likely to be less than $2 million.

The aggregated turnover, for the Company for the 2009 and 2010 financial years, was less than $2 million for each year.

As both the aggregated turnover for the previous year and the aggregated turnover for the current year are less than $2 million, X Company is a small business entity.

The Commissioner has determined that your property satisfies the 'active asset test' in question 1 above.

X Company is your affiliate, a small business entity in the current year, and operates the business which used your property as an active asset. As such, basic condition (c) is satisfied.

(d) The CGT asset must satisfy the active asset test

In question 1 above, the Commissioner determined your property satisfies the 'active asset test'.

On satisfaction of the basic conditions, it is necessary to consider each exemption or reduction concession to determine if any specific conditions apply. You can use as many concessions as you want to until your capital gain is reduced to nil. However, you must meet the conditions of each concession before you can use it.

Small Business 50% Active Asset Reduction

To access the small business 50% reduction provided in Subdivision 152-C of the ITAA 1997 no additional specific conditions must be met.

Once the basic conditions are satisfied, the amount of your capital gain (after subtracting any current year capital losses and prior year capital losses under step 3 of the method statement in subsection 102-5(1)) is reduced by 50%.

Small Business Retirement exemption

The retirement exemption has one special condition for taxpayers under 55 years of age.

Where you have satisfied the basic conditions and you are over 55, any capital gain you make from disposing of a business asset when you retire is exempt from CGT up to a lifetime limit of $500,000.

As you have satisfied the basic conditions in Subdivision 152-A of the ITAA 1997, and you are over 55 you satisfy all the conditions required to access the small business 50% reduction and the small business retirement exemption in Subdivisions 152-C and 152-D respectively.