Edited version of private ruling

Authorisation Number: 1011714479125

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Ruling

Subject: Active Asset

Question

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

Answers

Yes.

This ruling applies for the following period

Year ending 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

You are a family trust (trust 1) and you purchased a commercial property after September 1985.

The shareholders and directors of your trustee company are X and Y.

X is the director of another trustee company and the trust (trust 2) carries on a business at trust 1's property. X and Y are the shareholders of the trustee company of trust 2.

Trust 2 solely used trust 1's property for their business for a number of years and has, in recent years, only used a portion of the property. Trust 1 rents the remainder of the property to a third party.

Trust 2 produces 80% of the income from the property compared to 20% rental income received from the third party.

You intend to sell the property.

You have stated that X controls both trust 1 and trust 2 as the trustee companies of each of the trusts acts, or could reasonably be expected to act in accordance with the directions or wishes of X. In particular, X is the sole director of the trustee Company of trust 2 and with his spouse, the only directors of the trustee company of trust 1.

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

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 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

The active asset test in section 152-35 of the ITAA 1997 is satisfied if:

(a) 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 period detailed below or

(b) 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 period detailed below:

The period:

(a) begins when you acquired the asset and

(b) ends at the earlier of:

(i) the CGT event and

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

Active Asset

Now it is necessary to ensure that the property satisfies the meaning of an active asset under section 152-40 of the ITAA 1997.

Section 152-40 discusses the meaning of the active asset, and at subsection 152-40(1) states, in part, that a CGT asset is an active asset at a time if, at that time, you own the asset and it is used, or held ready for use, in the course of carrying on a business that is carried on by you or your affiliate, or another entity that is connected with you.

Paragraph 152-40(4)(e) excludes, among other things, assets whose main use is to derive rent. Such assets are excluded even if they are used in the course of carrying on a business. Whether an asset's main use is to derive rent will depend on the particular circumstances of each case.

Taxation Determination TD 2006/78 considers the case where there is part business and part rental use. It states that an asset owned by the taxpayer and used partly for business purposes and partly to derive rent can be an active asset under section 152-40 of the ITAA 1997 where it is considered the main use of the premises is not to derive rent. In deciding if the property was mainly used to earn rent, the Commissioner will consider a range of factors such as:

· · the comparative areas of use of the premises (between rent and business)

· · the comparative times of use of the premises (between rent and business), and

· · the comparative levels of income derived from the different uses of the asset.

Trust 2, in the first period, used all of the property and in the second period occupied approximately 42% of the area on the property. Approximately 80% of the gross income that is generated by the entire use of the property is from business purposes and only 20% from rental activities.

In this case, for the first period the portion of the premises which contains your connected entity's business constituted 100% of the space and for the second period just under half of the space and generated the majority of the income. Consequently, it is clear that, on balance, the main use of the asset was to generate your connected entity's business income.

Trust 2, used all of the property for a period of time and now continues to use part of the property in running their business. Approximately 80% of the gross income that is generated by the entire use of the property is from business purposes and only 20% from rental activities. We need to establish if the trust that runs the business is connected to the trust that owns the property.

Direct control of a discretionary trust may be established via either of two paths. Subsection 328-125(3) or subsection 328-125(4).

Subsection 328-125(3) provides that an individual controls a discretionary trust if the trustee of that trust acts, or could reasonably be expected to act, in accordance with the directions or wishes of the individual, his/her affiliates, or the individual together with his/her affiliates.

Subsection 328-125(4) provides, in part, that an individual directly controls a discretionary trust for an income year if, for any of the preceding four income years, the discretionary trust distributed at least 40% of any income or capital paid for that year to either the individual, the individual's affiliates, or to the individual together with any of his/her affiliates.

For the purposes of section 328-125(3), X controls trust 1 and trust 2 as the trustee companies of each of the trusts acts, or could reasonably be expected to act in accordance with the directions or wishes of X. In particular, X is the sole director of the trustee company of trust 2 and, with Y, the only directors of the trustee company of trust 1.

As trust 1 and trust 2 are controlled by the same entity, they are connected to one another. Therefore, the property will meet the requirements of section 152-40 and the meaning of an active asset. The rulee needs to satisfy the requirements of section 152-10 to be eligible to claim the active asset discount and the other small business concessions.