Edited version of your private ruling

Authorisation Number: 1012451914568

Ruling

Subject: small business capital gains tax concessions

Question

Does the land satisfy the active asset test in section 152-35 of the Income Tax Assessment Act 1997?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

The trust purchased land in the 200Xfinancial year.

The trust operated a business from the land.

The trust also hired the land to various companies to store their equipment.

One of the companies had a designated area for their use.

The remainder of the land was used by the trust's business and the other companies.

In the 200Y financial year the trust sold the business but continued to hire out the land.

The trust did not have a business plan.

The trust did not advertise their operations and instead gained clients by word of mouth.

The trust's main clientele were the general public.

In the 200Z financial year, the trust began to lease the property to a single company and they had exclusive possession of the land.

The land was sold in the relevant financial year.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-35,

Income Tax Assessment Act 1997 section 152-40,

Income Tax Assessment Act 1997 subsection 152-40(1),

Income Tax Assessment Act 1997 subparagraph 152-40(1)(c),

Income Tax Assessment Act 1997 subsection 152-40(4) and

Income Tax Assessment Act 1997 section 995-1.

Reasons for decision

To qualify for the small business capital gains tax (CGT) concessions, you must satisfy several conditions that are common to all the concessions. These are called the basic conditions.

A capital gain that you make may be reduced or disregarded under Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997) if the following basic conditions are satisfied:

· A CGT event happens in relation to a CGT asset of yours in an income year,

· The event would have resulted in a gain,

· The CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997, and

· 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 in section 152-15 of the ITAA 1997,

- you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an interest in an asset of the partnership, or

- you do not carry on a business, but your CGT asset is used in a business carried on by a small business entity that is your affiliate or an entity connected with you.

Active asset test

A requirement of the active asset test contained in section 152-35 of the ITAA 1997 is that the CGT asset must be an active asset for at least half of the period from when you acquired it until the earlier of the CGT event or when you ceased business, if the relevant business had ceased to be carried on in the 12 months before the CGT event.

The meaning of an active asset is set out in section 152-40 of the ITAA 1997. It must firstly satisfy one of the 'positive tests' in subsection 152-40(1) of the ITAA 1997 and then also not be excluded by one of the exceptions in subsection 152-40(4) of the ITAA 1997.

Under subsection 152-40(1) of the ITAA 1997 a CGT asset is an active asset (subject to the exclusions) if it is owned and used, or held ready for use, in the course of carrying on a business by you or your small business CGT affiliate or another entity that is connected with you under paragraph 152-40(1)(c) of the ITAA 1997.

The combined effect of sections 152-35 and 152-40 of the ITAA 1997 is that the asset will meet the active asset test if the asset was used, or held ready for use, in the course of carrying on a business for at least half of the time period it was owned, subject to the exclusions in subsection 152-40(4) of the ITAA 1997.

The following assets cannot be active assets (subsection 152-40(4) of the ITAA 1997):

· interests in a connected entity (other than those satisfying the 80% test)

· shares in companies and interests in trusts (other than those satisfying the 80% test)

· shares in widely held companies unless they are held by a CGT concession stakeholder of the company

· shares in trusts that are similar to widely held companies unless they are held by a CGT concession stakeholder of the trust or other exceptions for trusts with 20 members or less apply

· financial instruments, including loans, debentures, bonds, promissory notes, futures contracts, forward contracts, currency swap contracts, rights and options

· an asset whose main use in the course of carrying on the business is to derive interest, an annuity, rent, royalties or foreign exchange gains. However, such an asset can still be an active asset if it is an intangible asset that has been substantially developed, altered or improved by the taxpayer so that its market value has been substantially enhanced or its main use for deriving rent was only temporary.

Carrying on a business

Section 995-1 of the ITAA 1997 defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'.

The question of whether you are carrying on a business is a question of fact and degree. There are no rigid rules for determining whether the activity amounts to the carrying on of a business. The facts of each case must be examined. In Martin v FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551, Webb J said:

The test is both subjective and objective; it is made by regarding the nature and extent of the activities under review, as well as the purpose of the individual engaging in them, and, as counsel for the taxpayer put it, the determination is eventually based on the large or general impression gained.

However, the courts have developed a series of indicators that can be applied to your circumstances to determine whether you are carrying on a business.

Taxation Ruling TR 97/11: 'Income tax: am I carrying on a business of primary production?' summarises these indicators. In the Commissioner's view, the factors that are considered important in determining the question of business activity are:

· whether the activity has a significant commercial purpose or character

· whether the taxpayer has more than just an intention to engage in business

· whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

· whether there is regularity and repetition of the activity

· whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business

· whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit

· the size, scale and permanency of the activity, and

· whether the activity is better described as a hobby, a form of recreation or sporting activity.

No one indicator is decisive. The indicators must be considered in combination and as a whole.

In AAT Case 11,229 (1996) 33 ATR 1243; Case 54/96 (1996) 96 ATC 521 the Tribunal accepted that the taxpayer was carrying on a business although no business plan was evident. They stated:

…that formal business plans were just not part of the applicant's agenda, for any of his activities (smash repairs, or horse racing and breeding)…and ...the husband was knowledgeable about matters relating to the racing and breeding of horses.

Application to your circumstances

In this case, the trust purchased land. The trust used a portion of the land in their business and hired out the remainder of the property to companies to store their equipment. We accept that during this period the trust was carrying on a business.

The trust sold the business and from this point in time the entire property was leased to different companies to store their equipment. Having regard to your circumstances and the factors outlined above, we do not consider that the trust was carrying on a business from this point in time.

The land can only be considered an active asset during the period that the trust was carrying on a business. As the land was not used by the trust in the course of carrying on a business after this point in time, it has not been active for more than half of the ownership period. Therefore, the land will not satisfy the active asset test in section 152-35 of the ITAA 1997.