Edited version of private ruling

Authorisation Number: 1011731640693

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Ruling

Subject: Active Asset

Question 1

Is the trust that ran a business from your property, connected to you under Section 328-125 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer: No.

Question 2

Will the property you bought after September 1985 satisfy the requirements of section 152-40, which defines the meaning of an active asset?

Answer: No.

This ruling applies for the following period

Year ending 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

You and your sibling bought a property after September 1985. The property was used by a business operated by a trust where you received a 25% distribution yearly. There never was a formal lease in place between you and the trust.

The trustee for the trust is X Pty Ltd and you are not the director for the trustee company.

The business was sold to another trust controlled by your sibling. No distributions to yourself were made by the second trust.

The property has now been sold.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 328-130

Income Tax Assessment Act 1997 Section 328-125

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

The legislative references referred to herein are from the ITAA 1997, unless otherwise stated.

The active asset test in section 152-35 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.

In your case, you owned the commercial property for approximately 20 years. The first 16 years the property was used by a trust's business. The business was sold to another trust that was controlled by your sibling, and that trust used the property until you sold.

Active Asset

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

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.

We need to establish if the first discretionary trust that used the property for business purposes for 16 years is connected to you.

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.

You advised that you received a 25% yearly distribution from the first discretionary trust and no distribution from the second trust that used the property during your period of ownership. You do not meet Subsection 328-125(4) as your distribution was less than 40%.

For the purposes of section 328-125(3), the directors of the trustee company control the first discretionary trust as they are directors of X Pty Ltd who is the trustee company of the first trust. It is reasonable to expect that the trustee would act in accordance with the directions and wishes of the directors.

It clearly follows from the definition of affiliate that only a company or an individual can be an affiliate of another entity. A company in its capacity as such, would not extend to a company acting in the capacity of a trustee. A trust or trustee cannot be an affiliate. As you are one of four beneficiaries who received a 25% distribution, it is unlikely you had more control over the trust than the other beneficiaries or trustee.

Therefore, the property will not meet the requirements of section 152-40 and the meaning of an active asset.