Edited version of private ruling

Authorisation Number: 1011834521135

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Ruling

Subject: Capital gains tax disposal of an asset

Question 1

Are you entitled to small business concessions under Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997) on disposal of your asset?

Answer

No

Question 2

Are there any capital gains tax issues for the shareholders when receiving distribution of the proceeds of the above sale?

Answer

No

This ruling applies for the following periods:

1 July 2011 to 30 June 2012

1 July 2012 to 30 June 2013

The scheme commences on:

1 July 2011

Relevant facts and circumstances

The company was registered on over 15 years ago.

You acquired your major asset over 15 years ago.

The Certificate of Title lists the company and shows a small number of tenants.

Your activities involve generating rental income from your major asset.

You state that you satisfy the basic conditions of a small business. Your turnover is less than $2 million, and your only asset is less than $6 million.

You are considering what will happen when the asset is sold. The asset has not been sold yet. You are unsure when the asset will be sold.

Upon disposal of the asset, the company will lodge its final tax return and pay its liabilities before returning the remaining funds to the shareholders.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 47,
Income Tax Assessment Act 1936 Subsection 47(2A),
Income Tax Assessment Act 1997 Subsection 102-3(2),
Income Tax Assessment Act 1997 Division 152,
Income Tax Assessment Act 1997 Subsection 152-40(4) and
Income Tax Assessment Act 1997 Paragraph 152-40(4)(e).

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

Question 1

Summary

As your asset is used to generate rental income, you do not satisfy the active asset test. Therefore you do not meet the requirements to qualify for capital gains tax concessions under the small business relief provisions.

Detailed reasoning

The basic conditions for small business relief are provided in section 152-10 of the ITAA 1997. The relevant conditions are:

· a CGT event happens to a CGT asset of yours

· the event would have resulted in a gain

· at least one of the following applies:

· you are a small business entity for the income year

· you satisfy the maximum net asset value test

· the CGT asset satisfies the active asset test.

You must satisfy the active asset test in order to qualify for any of the small business concessions.

The active asset test is outlined in section 152-35 of the ITAA 1997. Subsection 152-40(1) of the ITAA 1997 states that a CGT asset is an active asset if, at that time:

· you use it, or hold it ready for use, in the course of carrying on a business, or

· it is used, or held ready for use, in the course of carrying on a business by your affiliate or by another entity that is connected with you.

The exceptions in subsection 152-40(4) of the ITAA 1997 should be noted. Particularly paragraph 152-40(4)(e) of the ITAA 1997 which explains that an asset whose main use in the course of carrying on the business is to derive rent cannot be an active asset.

In summary, to satisfy the active asset test, you must be in business and the assets main use must not be to derive rent.

We have not considered if your activities amount to the carrying on of a business.

You have advised that the nature of the activities of the company is to generate rental income from its main asset, therefore, it is not an active asset, even if you were in business.

As you do not comply with the conditions for the active asset test, then you do not satisfy the basic requirements for relief under the small business concessions.

Question 2

Summary

As the distributions to the shareholders are deemed to be dividends, then there will be no capital gains tax issues for the shareholders on the distribution of these funds from the company.

Detailed reasoning

Section 47 of the Income Tax Assessment Act 1936 (ITAA 1936) discusses distributions by liquidators. Subsection 47(2A) of the ITAA 1936 applies where companies are winding up informally. Where the business of a company is in the course of being wound up, providing the company ceases to exist within three years of the distribution to the shareholders, the distribution from the company to the shareholders shall be deemed to be a dividend paid to the shareholders by the company out of profits derived by the company.

As the distributions to the shareholders are deemed to be dividends, then there will be no capital gains tax issues for the shareholders.