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Ruling

Subject: Capital gains tax - small business concessions - 50% reduction - active asset - fishing licence

Question 1:

Are your fishery licences active assets under 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

Yes

Question 2:

Do the licences satisfy the active asset test under section 152-35 of the ITAA 1997?

Answer:

Yes

Question 3:

Can the capital gain on the sale of the licences be reduced by the 50% active asset concession under section 152-205 of the ITAA 1997?

Answer:

Yes

This ruling applies for the following period

1 July 2009 to 30 June 2010.

The scheme commenced on

1 July 2009.

Relevant facts and circumstances

You purchased a Fishery Licence and Fishing Boat Licence.

You surrendered the licences to the relevant authorities and received the payment.

You have previously provided copies of documents outlining the surrender agreement between yourself and the relevant authority.

A private ruling issued to you previously found the surrender of these licences to be a CGT event.

You wish to know if you can apply the 50% active asset reduction to the subsequent gain.

The licences were used in your relative's business from purchase for about six months.

You then established a Unit Trust and the fishing business began to operate through this entity. The Unit Trust continued to use the licences in its business until the licences were sold.

You and a relative are the trustees of The Unit Trust but do not hold any units.

A Family Trust and B Family Trust are the sole and equal unit holders.

You are the trustee of The A Family Trust.

You have advised that you are your connected entities satisfy the maximum net asset value test.

Relevant legislative provisions

Income Tax Assessment Act 1997 subdivision 152C

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 Section 152-35

Income Tax Assessment Act 1997 Subsection 152-35(1)

Income Tax Assessment Act 1997 Subsection 152-35(2)

Income Tax Assessment Act 1997 section 152-40

Income Tax Assessment Act 1997 Section 152-40(1)(b)

Income Tax Assessment Act 1997 Section 152-40(2)

Income Tax Assessment Act 1997 Subsection 152-205

Income Tax Assessment Act 1997 Section 328-130

Income Tax Assessment Act 1997 Section 328-125(2)

Income Tax Assessment Act 1997 Section 328-125(3)

Income Tax Assessment Act 1997 Section 328-125(4)

Income Tax Assessment Act 1997 Section 328-125(7)

Reasons for decision

Question 1:

Summary

The licences were active assets.

Detailed reasoning

Active Asset

Section 152-40 discusses the meaning of the term 'active asset', and at subsection 152-40(1)(b) states that an intangible asset that you own is an active asset if is inherently connected with a business that is carried on by you, your affiliate, or another entity that is connected with you.

As the fishing licence has not been used by you in the course of carrying on your business, in order for the licence to be an active asset it must have been used in the business of an affiliate or entity connected to you.

Affiliate

The requirements for an entity to be an affiliate within the meaning of the term in section 328-130 of the ITAA 1997 can be summarised as follows:

(a) the entity must be an individual or a company

(b) the entity must carry on a business and

(c) in relation to the affairs of the business of the individual or the company, the entity must act, or could reasonably be expected to act, in accordance with the directions or wishes, or in concert with, the entity.

The licence has been used in the business of Unit Trust. Unit Trust does not satisfy the requirements to be an affiliate as it is not an individual or a company.

Entity connected with you

The basic rule is that an entity is connected with another entity if either entity 'controls' the other, or both entities are controlled by a common third entity.

Where the other entity is not a discretionary trust, subsection 328-125(2) states you have direct control that other entity if you and your affiliates have the right to receive a percentage (the control percentage) that is at least 40% of any distribution of either the income or the capital by the other entity.

Where the other entity is a discretionary trust, the question of control is determined by either the pattern of distribution, or where it is reasonable to expect the trustee to act according to the entity's direction or wishes (subsection 328-125(3) & (4) of the ITAA 1997).

Further, you may be connected with another entity where you indirectly control that entity via a third entity (subsection 328-125(7) of the ITAA 1997).

In your case, the CGT asset has been used in the business of Unit Trust. This is a non-discretionary trust. The rights to the distributions from this trust are held equally by The A Trust and The B Trust. These entities each have a control percentage of 50% in Unit Trust.

You are the trustee of The A Trust and meet the control test in regards this entity. As this entity holds 50% control in Unit Trust, you also meet the control test for Unit Trust. You are therefore 'connected with' Unit Trust, by virtue of subsection 328-152(7) of the ITAA 1997).

As the CGT asset (licences) were inherently connected with a business (Unit Trust), and that entity is connected with you, the asset was an active asset under section 152-40 of the ITAA 1997 whilst they were used in the Unit Trust's business.

Question 2:

Summary

The active asset test is satisfied.

Detailed reasoning

The active asset test in section 152-35 of the ITAA 1997 requires the CGT asset that gave rise to the capital gain to be an active asset for a particular period.

Subsection 152-35(1) of the ITAA 1997 provides that the active asset test 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 the test period, 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 test period.

The test period:

§ begins when you acquired the asset, and

§ ends at the earlier of

o the CGT event, and

o if the business ceased in the 12 months before the CGT event when the business ceased (subsection 152-35(2) of the ITAA 1997).

The asset does not need to be an active asset just before the CGT event.

You owned the licences for a period in excess of 15 years. The asset was an active asset of a business connected with you (Unit Trust) for a number of years.

As you owned the CGT asset for a period in excess of 15 years, and that asset was an active asset for more that half of the ownership period, the active asset test is satisfied.

Question 3:

Summary

You can apply the small business 50% active asset reduction.

Detailed reasoning

The rules covering the small business 50% active asset reduction are contained in Subdivision 152-C of the Income Tax Assessment Act 1997.

To apply the small business 50% active asset reduction, you only need to satisfy the basic conditions for relief under section 152-10 of the ITAA 1997. There are no further requirements.

Essentially, the basic conditions as they relate to you are;

§ a CGT event happens in relation to a CGT asset that you own and that CGT event results in a gain

§ you do not carry on business (other than as a partner) but your asset is used in a business carried on by a small business entity that is connected with you

§ you satisfy the maximum net asset value test

§ the CGT asset satisfies the active asset test, and

§ none of the exceptions specified in section 152-40(4) of the ITAA 1997 apply.

As you satisfy the basic conditions, the capital gain that remains after applying any current year capital losses and any unapplied prior year net capital losses, and the CGT discount (if applicable), is reduced by 50%.