Edited version of private ruling

Authorisation Number: 1011847761887

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Ruling

Subject: Capital gains tax small business concessions and active asset test

Question 1

Are the assets active assets of the partnership for the purposes of Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Subject to satisfying the maximum net asset value test, will Partner A be eligible to access the small business capital gains tax concessions contained in Division 152 of the ITAA 1997 in respect of the capital gain they will derive on the disposal of their interest in the partnership assets?

Answer

No.

Question 3

Subject to satisfying the maximum net asset value test, will Partner B be eligible to access the small business capital gains tax concessions contained in Division 152 of the ITAA 1997 in respect of the capital gain they will derive on the disposal of their interest in the partnership assets?

Answer

No.

Question 4

Subject to satisfying the maximum net asset value test, will Partner C be eligible to access the small business capital gains tax concessions contained in Division 152 of the ITAA 1997 in respect of the capital gain they will derive on the disposal of their interest in the partnership assets?

Answer

No.

Question 5

Subject to satisfying the maximum net asset value test, will Partner D be eligible to access the small business capital gains tax concessions contained in Division 152 of the ITAA 1997 in respect of the capital gain they will derive on the disposal of their interest in the partnership assets?

Answer

No.

Question 6

Subject to satisfying the maximum net asset value test, will Partner E be eligible to access the small business capital gains tax concessions contained in Division 152 of the ITAA 1997 in respect of the capital gain they will derive on the disposal of their interest in the partnership assets?

Answer

No.

This ruling applies for the following period:

The 2010-11 income year

The scheme commences on:

1 July 2010

Relevant facts and circumstances

The partnership owns assets which are used by two trusts in their operation.

The Partnership leases the assets to the trusts. Both of the trusts pay the partnership for use of these assets.

The partners in the partnership are:

partner A 20%

partner B 20%

partner C 20%

partner D 20%

partner E 20%

The unit holders in the first trust are:

discretionary trust F 30%

discretionary trust G 30%

discretionary trust H 20%

discretionary trust I 20%

The unit holders in the second trust are:

discretionary trust J 30%

discretionary trust K 30%

discretionary trust L 20%

discretionary trust M 20%

The structure can be summarised as follows:

The partnership originally purchased the assets post-CGT.

The partnership is planning to dispose of the assets.

It is anticipated the partnership will derive a nominal capital gain on the disposal of the assets.

The only source of income for the partnership is the payments from the trusts.

The trusts are not small business entities for the purpose of Division 328 of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Division 152,

Income Tax Assessment Act 1997 - Section 152-10,

Income Tax Assessment Act 1997 - Subsection 152-40(4),

Income Tax Assessment Act 1997 - Division 328,

Income Tax Assessment Act 1997 - Section 328-125,

Income Tax Assessment Act 1997 - Subsection 328-125(6),

Income Tax Assessment Act 1997 - Section 328-130 and

Income Tax Assessment Act 1997 - Subsection 328-130(2).

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

The assets are not an active asset of the partnership for the purposes of Division 152 of the ITAA 1997.

Detailed reasoning

In order to meet the requirements of the active asset test the asset must either:

· be used or held ready for use in the course of carrying on your own business

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

Subsection 152-40(4) of the ITAA 1997 states that an asset whose main use is to derive rent cannot be an active asset. The only source of income for the partnership is rental income derived from the land and buildings. Therefore these assets are not active assets in the hands of the partnership.

Considering if the assets are used in the course of carrying on a business by your affiliate or another entity connected with you. It needs to be determined if the partnership and the two trusts are 'connected with' each other. The definition of affiliate in section 328-130 of the ITAA 1997 explains that affiliate status only applies to an individual or a company. Partnerships and trusts cannot be affiliates.

Section 328-125 of the ITAA 1997 discusses the meaning of 'connected with'. An entity is connected with another entity if either entity controls the other entity or both entities are controlled by the same third entity. Control, in general, means where an entity beneficially owns or has the right to acquire the beneficial ownership of interests in the other entity that carry between them a control percentage of at least 40%.

The structure

The partnership has four partners:

partner A 20%

partner B 20%

partner C 20%

partner D 20%

partner E 20%

The partnership leases the assets to two trusts. The trusts and their unit holders are:

Trust 1

discretionary trust F 30%

discretionary trust G 30%

discretionary trust H 20%

discretionary trust I 20%

Trust 2

discretionary trust J 30%

discretionary trust K 30%

discretionary trust L 20%

discretionary trust M 20%

The unit holders are all discretionary trusts. Each of the discretionary trusts has a corporate trustee. The structure can be summarised as follows:

We have not considered Partner A and Partner B are affiliates. Subsection 328-130(2) of the ITAA 1997 should be noted where it advises that an individual or a company is not your affiliate merely because of the nature of the business relationship that you share. For example, partners in a partnership, directors of the same company or trustees of the same trust would not be affiliates merely because of the relationship.

Person P is the director and shareholder of the corporate trustee for two of the unit holders (for each unit trust). Each of these unit holders controls 30% of the unit trust. This means that Person P has control of 60% of Trust 1 and 60% of Trust 2.

Subsection 328-125(6) of the ITAA 1997 explains that if the control percentage is at least 40%, but less than 50%. The Commissioner may determine that the first entity does not control the other entity if the Commissioner thinks that the other entity is controlled by an entity other than, or by entities that do not include, the first entity or any of its affiliates.

Person P controls both of the trusts and the partners control the partnership. Person P is not a partner in the partnership.

The partnership does not control either of the trusts and neither of the trusts controls the partnership. Nor does another third entity control both the partnership and the trusts. Therefore the partnership and the trusts are not connected with each other. As a result, the assets are not used or held ready for use in the course of carrying on a business by an entity that is connected with you.

As the assets are not used or held ready for use in the course of carrying on your own business or used or held ready for use in the course of carrying on a business by your affiliate or another entity connected with you, then they are not active assets.

Questions 2 to 6

Summary

As the assets do not satisfy the active asset test, then the partners will not be able to access the small business capital gains tax concessions contained in Division 152 of the ITAA 1997.

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.

In order to access the small business relief provisions, you must satisfy the active asset test.

As discussed above, you do not fulfil the requirements for the active asset test. As this is essential in order to qualify for the small business concessions, this means that you will not be eligible to access the small business CGT concessions in Division 152 of the ITAA 1997.