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Ruling

Subject: Active asset test

Question

Does the property satisfy the active asset test?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 2013

The scheme commenced on:

1 July 2012

Relevant facts and circumstances

You acquired the property on during the 200X year.

You are considering disposing of the property and would like to access the small business concessions.

The property was used in two businesses during the period of ownership:

Entity A operated from the property from the acquisition date of the 200Y year.

Entity B operated from the property from the 200Z year and is still actively trading from the property

You were the sole licensee of the business operated Entity A during the relevant period.

The office was the only office run by Entity A. The other offices that operated within Entity A's group of entities were independently owned.

You were one of several directors of the company. At all times you were responsible for the office which ran from the property. The other directors were responsible for the office where they were the licensee in charge.

You were the key public officer for Entity A.

You provided the following examples of your involvement in the business of Entity A:

· You were the director authorised with signing the annual financial minutes and director's declaration.

· You signed the annual company tax return as the public officer.

· You were one of two signatories on the general trading account and trust account. However, transactions could be authorised with your signature only.

In a letter sent to the other directors of Entity A you highlighted financial decisions made by you.

A financial review report prepared by an accountant refers to the recommendations made by you in relation to a proposed new business structure.

Share capital of Entity A consisted of a number of ordinary shares. Z Pty Ltd held a portion of these shares during the relevant period.

Z Pty Ltd had share capital of X ordinary shares. You held a number of these shares, with your spouse holding the remaining number of shares.

You resigned as a director of Entity A and Z Pty Ltd's share capital was redeemed.

The trustee of Entity B is Y Pty Ltd

Your spouse is the sole director of Y Pty Ltd.

You are the appointer of Entity B. The trust deed of Entity B gives you the power, as appointer, to remove the trustee and appoint a new trustee.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 152-35

Income Tax Assessment Act 1997 Section 328-125

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

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

Reasons for decision

The active asset test is contained in section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997). 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 of the test period detailed below, 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 7.5 years during the test period.

The test period is from when the asset is acquired until the capital gains tax (CGT) event. If the business ceases within the 12 months before the CGT event (or such longer time as the Commissioner allows) the relevant period is from acquisition until the business ceases.

A CGT asset is an active asset if it is owned by you and is used or held ready for use in a business carried on (whether alone or in partnership) by you, your affiliate, your spouse or child, or an entity connected with you.

An affiliate is an individual or a company that, in relation to their business affairs, acts or could be reasonably expected to act in accordance with your directions or in concert with you.

An entity is connected with another entity if either entity controls the other entity, or if both entities are controlled by the same third entity (section 328-125 of the ITAA 1997).

Entity A

Entity A used the property in its business. During this period your interest in the company was less than the control percentage so Entity A is not an entity connected to you. Accordingly, for the property to be active during this period, Entity A will need to be considered your affiliate.

The Advanced guide to capital gains tax concessions for small business 2010-11 (NAT 3359), provides a number of relevant factors that may support a finding that a person is an affiliate of a taxpayer:

· the existence of a close family relationship between the parties

· the lack of any formal agreement or formal relationship between the parties dictating how the parties are to act in relation to each other

· the likelihood that the way the parties act, or could reasonably be expected to act, in relation to each other would be based on the relationship between the parties rather than on formal agreements or legal or fiduciary obligations, and

· the actions of the parties.

However, subsection 328-130(2) of the ITAA 1997 points out that an individual or company is not your affiliate merely because of the nature of the business relationship. Companies and trusts are not affiliates of their directors and trustees respectively, and vice versa, merely because of the positions held.

In this case, while it is accepted that you were heavily involved in the financial decisions and the day to day running of the business, we consider that this involvement in the business was as a result of the official positions you held in the business.

Taking the factors listed above into account, you have not provided any evidence of a family or personal relationship between the parties. It is considered that the way that the parties would have acted in relation to each other would have been based on the business relationship you had with the company in your position of licensee, public officer and director, as opposed to any of your personal relationships.

Accordingly, we consider that Entity A was not your affiliate, and subsequently the property will not have been an active asset while being used in Entity A's business.

Entity B

ATO Interpretive Decision ATO ID 2008/139 provides that a person who has the power to remove the trustee of a discretionary trust and appoint a new trustee will control the trust for the purposes of subsection 328-125(3) of the ITAA 1997.

The trust deed nominated you as the appointer and gives you the power to remove the trustee of Entity B and appoint a new trustee. Accordingly, you are considered to control Entity B and it is an entity that is connected to you.

As during the relevant period, the property was used in the business of an entity connected with you it will be an active asset for that period.

Active asset test

You have owned the property for a period of less than 15 years. In accordance with section 152-35 of the ITAA 1997, the property will need to have been active for at least half of the test period to satisfy the active asset test. The property has been active while being used in the business of Entity B. As this period is less than half of the test period, you will not satisfy the active asset test.