Edited version of private ruling

Authorisation Number: 1011816481834

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Ruling

Subject: CGT- Active asset test- Trusts

Question 1

Does the CGT asset of the taxpayer qualify as an active asset under section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Does the CGT asset of the taxpayer satisfy the active asset test under section 152-35 of the ITAA 1997?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

X Pty Ltd, (the company) carries on a business which distributes equipment.

Prior to the sale of shares in the company, the shareholders in the company were:

(a) Family Trust A- 25 %

(b) Family Trust B- 25 %

(c) Family Trust C- 25 %; and

(d) Family Trust D- 25 %,

(the shareholders).

The shareholders were also all of the partners in a partnership, (the partnership) which owned land, (the land) which was used in the course of carrying on a business carried on by the company.

The partnership acquired the land in 2005.

The land is the only asset in the partnership.

The land has been used by the company in the course of carrying on its business since the formation of the partnership in 2005.

The company leases the land from the partnership under a formal lease agreement.

Y Pty Ltd and Z Pty Ltd, (related entities) also carry on a business on the land under informal subleases with the company. However, the company uses the substantial majority of the land in the carrying on of its business.

The shares in the related entities are held by related parties of the shareholders of the company.

The company receives no income from the related entities in relation to the informal sublease of part of the land.

The company makes part of the land available to the related entities as part of an informal sublease arrangement under which the related entities provide the company with various minor services, such as the provision of staff and plant and equipment.

There is no formal partnership agreement.

The shareholders were equal partners in the partnership with the same rights to the income and capital of the partnership. The shareholders had equal voting rights in respect of any decision of the partnership.

Family Trusts A, B and C, (exiting partners) sold their interests in the partnership and the company to Family Trust D in the year ending 30 June 2011.

The shareholders and exiting partners dealt at arm's length and had no other relationship except for their involvement in managing and running the partnership and the company.

All the shares issued by the company were ordinary shares which carried equal voting rights.

The exiting partners aver they satisfy the conditions set out in paragraphs 152-10(1)(a), (b) and (c)(ii) of the ITAA 1997 following the sale of their interests in the partnership and the company.

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

Income Tax Assessment Act 1997 Section 138-125

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

Under subsection 152-35(1) of the ITAA 1997, a CGT asset will satisfy the active asset test if it meets the following conditions:

(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 specified in subsection (2); 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 71/2 years during the period specified in subsection (2).

The partnership owned the land from 2005 until it was sold in the year ending 30 June 2011. The land was an active asset for most of the duration of the whole period of ownership.

Subsection 152-35(2) of the ITAA 1997 defines the period of ownership as follows:

(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 to be carried on in the 12 months before that time or any longer period that the Commissioner allows- the cessation of the business.

The partnership acquired the land in 2005 and sold it in the income year ending 30 June 2011.

The period of ownership of the land is less than fifteen years and the facts show it has been used in the course of carrying on a business for most of the period of ownership.

Section 152-40 of the ITAA 1997 defines what an active asset is. For a CGT asset of a business to be an active asset, it must satisfy one of the positive tests in subsection 152-40(1) of the ITAA 1997, and also not be excluded by one of the exceptions in subsection 152-40(4) of the ITAA 1997.

Subsection 152-40(1) of the ITAA 1997 provides the definition of a CGT asset being an active asset at a time if, at that time:

(a) you own the asset (whether the asset is tangible or intangible) and it is used, or held ready for use, in the course of carrying on a business that is carried on (whether alone or in partnership) by:

(i) you; or

(ii) your affiliate; or

(iii) another entity that is connected with you; or

(b) if the asset is an intangible asset- you own it and it is inherently connected with a business that is carried on (whether alone or in partnership) by you, your affiliate or another entity that is connected with you.

The partnership acquired the land in 2005. The land has been used by the company in the course of carrying on its business since the formation of the partnership in 2005. The company is a connected entity of the partnership as defined by subsection 328-125(1) of the ITAA 1997, as the partners in the partnership are also the shareholders in the company which controls it.

Subparagraph 152-40(4)(e)(ii) of the ITAA 1997 states that a CGT asset cannot be an active asset if an asset whose main use by you is to derive rent unless its main use for deriving rent was only temporary.

The company utilises the substantial majority of the land in carrying on of its business. The company receives no income from the related entities in relation to the informal sublease of part of the land. Further, the company makes part of the land available to the related entities as part of an informal sublease arrangement under which the related entities provide the company with various minor services, such as the provision of staff and plant and equipment.

Therefore, the asset's main use in this case is not to derive rent.

Paragraph 152-10(1)(d) of the ITAA 1997 states that one of the basic conditions for relief wherein a capital gain (except a capital gain from CGT event K7) you make may be reduced or disregarded under Division 152-A if the CGT asset satisfies the active asset test for the gain.

The land is a CGT asset which satisfies the active asset test.

Therefore, the taxpayer may avail of the small business relief under Division 152 of the ITAA 1997 if it also satisfies the other three remaining basic conditions under subsection 152-10(1) of the ITAA 1997.