Edited version of your private ruling

Authorisation Number: 1012517499782

Ruling

Subject: Active Asset Test

Question

Does the property satisfy the active asset test?

Answer

Yes

This ruling applies for the following period

Year ended 30 June 2013

The scheme commenced on

1 July 2012

Relevant facts

A commercial property was purchased in 200X by a partnership entity. The property was the only asset of the entity and there were no changes in the ownership during the time the property was held.

The partners were two trusts (X and Y) who each held a 50% share.

The property was rented at arms length to a company, which was a small business entity, from soon after purchase until the relevant financial year.

The company consisted of two trust partners (G and H).

The beneficiaries of the X and G are the same.

The trustees for the X are A and B.

The trustees for the G is A and B.

In the relevant financial year B received 100% of the distribution from the X.

B also received 100% of the distributions from G in the 200Y, 200Z and 20XX financial years

The property was sold in the relevant 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 Section 328-125

Reasons for decision

Small business concessions

To qualify for the small business concessions you must satisfy several conditions that are common to all the concessions. These are called the basic conditions.

If the basic conditions are satisfied the small business active asset reduction can be applied.

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;

o you are a small business entity for the income year

o you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997

o 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

o 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

The active asset test is contained in section 152-35 of the 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; 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 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.

In your case, the business ceased less than 12 months before the CGT event occurred. Accordingly, the relevant period is from the acquisition date to when the business ceased. As you owned the property for less than 15 years, the property will need to have been active for at least half of the test period.

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.

However, paragraph 152-40(4)(e) of the ITAA 1997 states that an asset whose main use is to derive rent cannot be an active asset unless the main use for deriving rent was only temporary. This exclusion may not apply to a CGT asset leased to an affiliate or connected entity. In these cases, it is the use of the asset in the affiliate's or connected entity's business that will determine the active asset status of the asset.

Connected entity

The meaning of a connected entity is defined under section 328-125 of the ITAA 1997.

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. An entity controls another entity if it:

· beneficially owns or has the right to acquire beneficial ownership of, interests in the other entity that give the right to receive at least 40% (the control percentage) of any distribution of income or capital by the other entity, or

· if the other entity is a company, beneficially owns, or has the right to acquire beneficial ownership of, equity interests in the company that give at least 40% of the voting power in the company.

Special rules for the control of a discretionary trust are contained in subsection 328-125(4) of the ITAA 1997. A beneficiary is taken to control a discretionary trust where, for any of the four income years before the year for which relief is sought for a CGT event:

· the trustee paid to, or applied for the benefit of, the beneficiary or their affiliates, or both the beneficiary and any of its affiliates, any of the income or capital of the trust, and

· the amounts paid or applied were at least 40% (the control percentage) of the total amount of income or capital paid or applied for that income year.

The control tests for the 'connected with' rules are designed to look through business structures that include interposed entities. If an entity (the first entity) directly controls a second entity, the first entity will also be taken to control any entity directly controlled by the second entity (subsection 328-125(7) of the ITAA 1997).

Your circumstances

In your situation you held a 50% interest in the partnership and the property held by the partnership was leased to a small business entity which used the property in their business. The small business entity was owned by two trusts, one of which was trust G.

B received 100% of the distributions from X in the relevant financial year and 100% of the distributions from G in the 200Y, 200Z and 20XX financial years. In accordance with subsection 328-125(4) of the ITAA 1997, B controls both X and G. Subsequently, as X controls the partnership and G controls the small business entity, B also controls these entities in accordance with subsection 328-125(7) of the ITAA 1997.

As the partnership and small business entity are controlled by the same third entity, B, they are connected entities. As they are connected entities, the property will be active while it was being used in the small business entity's business and the exclusion contained in paragraph 152-40(4)(e) of the ITAA 1997 will not apply.

Accordingly, the property was active for more than half of the test period and the active asset test contained in 152-35 of the ITAA 1997 has been met.