Edited version of private ruling

Authorisation Number: 1011697469185

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Small business CGT concessions - active asset

Question:

Can you use the small business 50% reduction in section 152-205 of the Income Tax Assessment Act 1997 (ITAA 1997) and the small business retirement exemption in section 152-305 of the ITAA 1997 in relation to the capital gain from the sale of your share of the property?

Answer: Yes.

This ruling applies for the following periods:

1 July 2009 to 30 June 2010.

The scheme commences on:

1 July 2009.

Relevant facts and circumstances

You and your spouse purchased a property jointly a number of years ago. The property was rented to a non-related third party for a few years.

The property was then used by a discretionary trust to conduct the family business for a number of years.

The discretionary trust made distributions to your spouse of 100% in one of the prior four years.

The discretionary trust ceased the family business and the property was used by your spouse to run their sole trader business.

You sold your half share of the property to your spouse and you made a capital gain.

You are more than 60 years old.

You and your spouse satisfy the maximum net asset value test and have combined assets of less than $6 million in value.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 Subdivision 152-D

Income Tax Assessment Act 1997 section 152-205

Income Tax Assessment Act 1997 section 152-305

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

Income Tax Assessment Act 1997 section 152-15

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 subsection 152-35(1)

Income Tax Assessment Act 1997 subsection 152-35(2)

Income Tax Assessment Act 1997 section 152-40

Income Tax Assessment Act 1997 section 328-130

Income Tax Assessment Act 1997 section 152-47

Income Tax Assessment Act 1997 subsection 152-47(1)

Income Tax Assessment Act 1997 subsection 152-47(2)

Income Tax Assessment Act 1997 subsection 328-125(4)

Income Tax Assessment Act 1997 subsection 328-125(3)

Income Tax Assessment Act 1997 section 152-10

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

Subsection 152-10(1) of the ITAA 1997 contains the basic conditions for small business relief in relation to capital gains. The basic conditions to be satisfied for the gain are:

(a) a CGT event happens in relation to a CGT asset of yours in an income year.

(b) the event would (apart from Division 152 of the ITAA 1997) 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 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.

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

Basic conditions (a), (b) and (c)

On the basis of the information supplied in your application, these basic conditions are satisfied.

Basic condition (d)

Active asset test

Subsection 152-35(1) of the ITAA 1997 provides that 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 the test period, 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 7½ years during the test period.

The test period:

· begins when you acquired the asset, and

· ends at the earlier of

o the CGT event, and

o if the business ceased in the 12 months before the CGT event when the business ceased (subsection 152-35(2) of the ITAA 1997).

The asset does not need to be an active asset just before the CGT event.

Meaning of active asset

Section 152-40 of the ITAA 1997 states that a CGT asset is an active asset if it is owned by you and is:

· used or held ready for use by you, your affiliate or an entity connected with you, in the course of carrying on a business, or

· an intangible asset that is inherently connected with a business you, your affiliate or another entity that is connected with you carries on, for example, goodwill.

Affiliates

Section 328-130 of the ITAA 1997 provides that an affiliate is an individual or company that, in relation to their business affairs, acts or could reasonably be expected to act:

· in accordance with your directions or wishes, or

· in concert with you.

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.

Trusts are not affiliates of their trustees merely because of the positions held.

Neither a spouse nor a child under the age of 18 years is automatically your affiliate.

Section 152-47 of the ITAA 1997

Subsection 152-47(1) of the ITAA 1997 applies if:

· one entity (the asset owner) owns a CGT asset (whether the asset is tangible or intangible); and

· either:

o the asset is used, or held ready for use, in the course of carrying on a business in an income year by another entity (the business entity), or

o the asset is inherently connected with a business that is carried on in an income year by another entity (the business entity),and

o the business entity is not (apart from this section) an affiliate of, or connected with, the asset owner.

Subsection 152-47(2) of the ITAA 1997 states for the purposes of this Subdivision, in determining whether the business entity is an affiliate of, or is connected with, the asset owner, take the following to be affiliates of an individual:

· a spouse of the individual:

· a child of the individual, being a child who is under 18 years.

Control of a discretionary trust

An entity controls a discretionary trust if either:

· for any of the four years before the current income year at least 40% of the total amount of income or capital paid or applied by the trustee for that previous income year was paid to or for the benefit of the entity and/or its affiliates (subsection 328-125(4) of the ITAA 1997), or

· a trustee of the trust acts, or could reasonably be expected to act, in accordance with the directions or wishes of the entity and/or its affiliates (subsection 328-125(3) of the ITAA 1997).

Small business 50% reduction

To apply the small business 50% reduction, you only need to satisfy the basic conditions in section 152-10 of the ITAA 1997. There are no other requirements.

Small business retirement exemption

Subdivision 152-D of the ITAA 1997 provides the small business retirement exemption as part of the CGT small business relief provisions. Under the small business retirement exemption a capital gain can be disregarded if certain conditions are satisfied. If an amount is chosen to be disregarded under this exemption, the capital proceeds from the CGT event, to the extent of the exempt amount, is taken to be an eligible termination payment (ETP) paid to you at the later of when you made the choice and when you received the capital proceeds.

You can choose to use the retirement exemption if you satisfy the basic conditions for the gain set out in section 152-10 of the ITAA 1997.

If you satisfy the basic conditions and choose the retirement exemption, you must also satisfy the following requirements:

· if you are under 55 just before you make the choice to use the retirement exemption you must contribute an amount equal to the assets CGT exempt amount to a complying superannuation or RSA, and

· the contribution must be made at the later of when you make the choice and when you receive the proceeds.

The individual CGT retirement exemption limit of $500,000 must not be exceeded. This is the total of all amounts that can be disregarded under the small business retirement exemption in an individual's lifetime.

You must specify the amount in writing that you wish to disregard; the way in which the tax return is prepared is not sufficient evidence of the choice.

Application to your circumstances

You have a 50% ownership of the property. You have owned the property for less than 15 years therefore the asset, the property, needs to be an active asset for more than half the ownership period. The property was leased to an unrelated third party for a few years and then was leased to the discretionary trust for a number of years. The property was then leased to your spouse to run their sole trader business for a period.

To be an active asset the property needs to be used or held ready for use by you, your affiliate or an entity connected with you, in the course of carrying on a business.

At no time was the property used by you to carry on a business. It will only be able to satisfy the active asset test if it was used by an affiliate or connected entity in carrying on a business. At face value this appears not to be the case.

However, under section 152-47 of the ITAA 1997 spouses or children are taken to be affiliates for certain passively held CGT assets.

The section applies if one entity (you) owns a CGT asset and the asset is used or held ready for use in the course of carrying on a business in an income year by another entity and the business entity is not (apart from this section) an affiliate of or connected with the asset owner.

Therefore your spouse will be an affiliate where an asset is owned by you and that asset is used in a business carried on by an entity that your spouse owns or has an interest in.

The facts in your case show that you have an interest in a property which is leased to your spouse or an entity that your spouse has an interest in. The spouse or the entity they have an interest in has carried on a business from this property for more than half of your ownership period.

The trust was controlled by your spouse by virtue of the fact that he received 100% of distributions in at least one of the prior four years. As the trust was controlled by your spouse (who is an affiliate), it is also a connected entity of yours.

It is therefore concluded that the property would be considered to be an active asset and that it would pass the active asset test as it was owned by you for a number of years and was used or held ready for use for least half of the total ownership period in carrying on a business by an affiliate or connected entity.

You will be entitled to the small business 50% active asset reduction and the small business retirement exemption if all the requirements for the retirement exemption are met.