Edited version of your private ruling

Authorisation Number: 1012520243332

Ruling

Subject: capital gains tax

Question

Does the property satisfy the active asset test?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 2014

Year ending 30 June 2015

Year ending 30 June 2016

The scheme commences on:

1 July 2013

Relevant facts and circumstances

The Family Trust operates a business. The Family Trust is a discretionary trust.

The trustee of the family trust is a company.

The directors of the company and beneficiaries of the trust are you and your spouse.

You are the appointer of the Family Trust.

You and your spouse hold a property.

The property was purchased in the 1995-96 financial year.

There is a building located on the property. It has been consistently used to store business equipment.

The property is not used for any other purpose.

There has never been a lease agreement between you and your spouse and the Family Trust. The Family Trust has never paid rent for the use of the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-47

Income Tax Assessment Act 1997 subsection 152-47(1)

Income Tax Assessment Act 1997 subsection 152-47(2)

Income Tax Assessment Act 1997 section 328-125

Income Tax Assessment Act 1997 section 328-130

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

Reasons for decision

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.

In this case, the property is held by you and your spouse and the business is operated by the Family Trust. For the property to be considered an active asset, the Family Trust must be connected with you and your spouse.

Connected entity

Under section 328-125 of the ITAA 1997 an entity controls a discretionary trust if the trustee either acts, or might reasonable be expected to act, in accordance with the directions or wishes of the entity or the entity's affiliates.

Some factors which might be considered include:

· the way in which the trustee has acted in the past

· the relationship between the trustee and the entity or its affiliates, and the relationship the trustee has with both the entity and its affiliates

· the amount of any property or services transferred to the trust by the entity or its affiliates, or both the entity and its affiliates

· any arrangement or understanding between the entity and any person who has benefited under the trust in the past

This entity may control a discretionary trust in addition to any beneficiary with control.

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.

Affiliate

An affiliate is, according to section 328-130 of the ITAA 1997, an individual or a company who acts, or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you, in relation to the affairs of the business of the individual or company.

A spouse or a child under the age of 18 years is not automatically an affiliate. Whether a person acts, or could reasonably be expected to act, in accordance with the taxpayer's directions or wishes, or in concert with the taxpayer is a question of fact dependent on all the circumstances of the particular case. No one factor will necessarily be determinative.

However subsection 152-47(1) of the ITAA 1997 applies to deem a spouse or child an affiliate of an entity if:

· one entity (the asset owner) owns a CGT asset (whether the asset is tangible or intangible); and

· either:

o the asset is used, or held ready for use, in the course of carrying on a business in an income year by another entity (the business entity); and

o the asset is inherently connected with a business that is carried on in an income year by another entity (the business entity);and

· the business entity is not (apart from this section) an affiliate of, or connected with, the asset owner.

Under subsection 152-47(2) of the ITAA 1997, in determining whether the business entity is an affiliate of, or is connected with, the asset owner, a spouse or child of the individual is taken to be an affiliate of an individual.

If an entity is an affiliate of another entity as a result of subsection 152-47(2) of the ITAA 1997, then the spouse or child is, in addition, taken to be an affiliate of the individual for the purposes of section 328-125 of the ITAA 1997.

The application of section 152-47 of the ITAA 1997 is not limited to situations where an entity that owns a CGT asset and does not operate a business provides that asset to another entity for use in its business (the standard passively held asset). It also applies to situations where an entity that operates a business owns a CGT asset that it provides to another entity for use in that other entity's business.

Application to your circumstances

In this case, you are the appointer of the Family Trust and therefore control the family trust. Your spouse owned a portion of the property which was used in the business of an entity (the Family Trust) connected with you from the 1995-96 financial year until present.

Accordingly, section 152-47 of the ITAA 1997 will apply to treat you as your spouse's affiliate during the period the Family Trust was using the property. Therefore both you and your spouse are connected with the Family Trust.

You and your spouse purchased a property in the 1995-96 financial year. For the entire ownership period, the building located on the land has been used in the course of carrying on a particular business by the Family Trust. Although only a small portion of the total land is used in the business, the remainder of the land is vacant and has not been used or held ready for use for any purpose.

You and your spouse control the Family Trust. As the property is used in the course of carrying on a business by an entity connected with you and your spouse, it is considered an active asset. As the asset has been active for the entire ownership period, it will satisfy the active asset test.