Edited version of private ruling

Authorisation Number: 1011744698874

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: Active asset

Question

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

Answer

Yes.

This ruling applies for the following period

Year ending 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts

You acquired a property in partnership after September 1985 and more than 15 years ago.

The property was then leased to a discretionary trust controlled by you and/or your former partner from the date of settlement. You and your partner were directors of the trustee company for more than 7½ years and then your partner was the director of the trustee company for a period of 3 to 4 years.

The property has always been used as a business premises both by you as a sole trader under a service agreement with the discretionary trust and for direct activities by the trust.

The property was held as joint tenants by yourself and former partner until the partner transferred their interest to you under a court financial settlement order. The marriage breakdown rollover was applied at this time.

You are now the sole director of the trustee company controlling the discretionary trust and you are expected to be acting in that role when the proposed disposal is effected.

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 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:

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

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:

· begins when you acquired the asset and

· ends at the earlier of:

· the CGT event and

· 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 property for more than 15 years. The property has been used by a discretionary trust and by yourself for business purposes for the period of your ownership. Providing the trust is connected with you, the active asset test will be satisfied.

Active Asset

Section 152-40 discusses the meaning of the term '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 discretionary trust that used the property for business purposes is connected to you.

Connected with an entity

An entity is connected with another entity if:

either entity controls the other entity in a way described in this section; or

both entities are controlled in a way described in this section by the same third entity.

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), you control the discretionary trust as you and your partner have always been the director of the trustee company, except for a short period of time of three or four years when your partner was the director. It is reasonable to expect that the trustee would act in accordance with your directions and wishes.

As such, you were connected to the trust during the period in which you were a director of the trustee company. As you were a director of the trustee company for more than 7½ years the active test is satisfied.

In addition, you also used the property in your sole trader business. This combined with the fact that you were connected to the trust indicates that you satisfy the active asset test.

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 (which have not been examined in this ruling) to be eligible to claim the active asset discount and the other small business concessions.