Edited version of private ruling

Authorisation Number: 1011753754636

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Ruling

Subject: Capital gains tax - small business concessions - small business rollover

Question 1

Do you satisfy the rollover conditions in Subdivision 152-E of the Income Tax Assessment Act 1997 (ITAA 1997) if one or more replacement assets are acquired by an entity related to you with funds advanced by you?

Answer

No.

Question 2

Do you satisfy the rollover conditions in Subdivision 152-E of the ITAA 1997 if the replacement assets you have acquired are depreciable assets?

Answer

Yes.

This ruling applies for the following periods:

Income year ended 30 June 2010

Income year ended 30 June 2011

The scheme commences on:

28 October 2009

Relevant facts and circumstances

You applied the small business 50% active asset reduction to a capital gain you made from selling an active business. The amount remaining after the application of the 50% active asset reduction is subject to income tax.

You are the trustee of a trust. The trust is a discretionary trust. Your two equal shareholders are the only named beneficiaries of the trust.

You have loaned a sum of money to the trust. There is no formal loan agreement but at some point in time the funds are to be repaid.

The trust has invested the money you loaned to them in a unit trust. The Trust owns 50% of the units in the unit trust. The units are active assets.

The unit trust is seeking to expand by purchasing further active businesses and will require additional funds. It is proposed that the additional funds will be met by the issue of additional units in the unit trust. A 50% holding will be maintained.

You currently operate a business and have spent a sum of money on office furniture, office equipment and office fit out for the business. You propose to spend more on depreciable assets within the relevant timeframe.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 152-E

Income Tax Assessment 1997 Section 152-410

Income Tax Assessment 1997 Section 104-185

Income Tax Assessment 1997 Section 104-197

Income Tax Assessment 1997 Section 104-198

Income Tax Assessment 1997 Section 152-410

Income Tax Assessment 1997 Subsection 110-25(5)

Income Tax Assessment 1997 Section152-40

Reasons for decision

Question 1

Summary

Section 104-197 of the ITAA 1997 requires that you, the taxpayer choosing to apply the roll-over, acquire replacement assets by the end of the replacement asset period. As the trust, and not you, has acquired the replacement assets you will not satisfy the roll-over conditions in Subdivision 152-E of the ITAA 1997.

Detailed reasoning

The small business roll-over contained in Subdivision 152-E of the ITAA 1997 allows you to defer all or part of a capital gain made from a capital gains tax (CGT) event happening to an active asset if you satisfy the basic conditions that apply to all the CGT small business concessions: section 152-410 of the ITAA 1997.

Sections 104-185 (CGT event J2); 104-197 (CGT event J5) and 104-198 (CGT event J6) of the ITAA 1997 provide the conditions and timeframes within which the roll-over will be available.

One of the roll-over conditions is that you, the taxpayer choosing to apply the roll-over, must acquire a replacement asset by the end of the replacement asset period: section 104-197 of the ITAA 1997.

If you choose to obtain a roll-over and by the end of the replacement asset period you have not acquired a replacement asset, CGT event J5 will apply to reinstate the rolled over capital gain: section 104-197 of the ITAA 1997.

Application to your circumstances

You have applied the small business 50% active asset reduction to a capital gain you made from the sale of a business. The amount remaining after the application of the 50% active asset reduction is subject to income tax.

You have loaned a sum of money to a trust in which your two equal shareholders are the named beneficiaries. The trust has invested this in a unit trust by way of units and loans. The trust owns 50% of the units in a unit trust. The units are active assets.

As you have loaned money to the trust to acquire the replacement assets, the trust and not you has acquired the replacement assets. Accordingly, if you choose to apply the roll-over, you will not satisfy the condition in section 104-197 of the ITAA 1997 in relation to the loan and CGT event J5 will apply to reinstate the capital gain at the end of the replacement asset period.

Question 2

Summary

As the depreciating assets you have acquired are active assets and may be chosen as replacement assets under the small business roll-over, you satisfy the rollover conditions in Subdivision 152-E of the ITAA 1997.

Detailed reasoning

The meaning of replacement asset, which is not defined in Subdivision 152-E of the ITAA 1997, can be found in section 104-185 of the ITAA 1997. Replacement assets include newly acquired assets and/or fourth element expenditure incurred in relation to an existing asset.

A replacement asset can include an asset that is otherwise exempt from CGT on disposal, such as a depreciating asset, provided it is or becomes an active asset of the taxpayer by the end of the replacement asset period.

An active asset is defined in section 152-40 of the ITAA 1997 to mean an asset that is owned by you and is used or held ready for use, in the course of carrying on a business. The business can be carried on by you, your small business CGT affiliate or another entity connected with you. The asset can also be an intangible asset such as goodwill.

Application to your circumstances

You have applied the small business 50% active asset reduction to a capital gain you made from the sale of a business. The amount remaining after the application of the 50% active asset reduction is subject to income tax.

You currently operate a business and have spent a sum of money on depreciating assets for the business. You propose to spend more on depreciable assets within the relevant timeframe.

The depreciating assets may be chosen as replacement assets under the small business roll-over. As you use the assets in the course of carrying on your business they are your active assets. Accordingly, you satisfy the rollover conditions in Subdivision 152-E of the ITAA 1997.