Edited version of your private ruling

Authorisation Number: 1012604007741

Ruling

Subject: CGT - active asset reduction

Question 1

Are you entitled to the 50% active asset reduction in relation to the disposal of the property?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

You were in a partnership that owned vacant land.

The land was rented to a company for its business use.

You are the company's sole director and shareholder.

The land was rented for the entire ownership period.

The sale of the property has resulted in a capital gain.

You pass the maximum net asset value test.

You do not carry on any other business in partnership.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 Section 152-15

Income Tax Assessment Act 1997 Section 152-40

Income Tax Assessment Act 1997 Section 328-125(1)

Reasons for decision

Summary

The basic conditions for the small business CGT concessions have been met. Therefore, you can apply the small business 50% active asset reduction to the capital gain from the sale of the property.

Detailed reasoning

To apply the 50% active asset reduction small business reduction, you need to only satisfy the basic conditions. If 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%.

Basic conditions

A capital gain that you make may be reduced or disregarded under Division 152 of the 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 capital gains tax (CGT) asset will satisfy the active asset test if:

a) 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

b) 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 7½ years during the test period.

The test period begins when you acquired the asset and ends at the earlier of the CGT event and if the relevant business ceased to be carried on in the 12 months before that time - the cessation of the business.

Section 152-40 of the ITAA 1997 provides the meaning of 'active asset'. A CGT asset will be an active asset at a time if, at that time, you own the asset and the asset was used or held ready for use by you, an affiliate of yours, or by another entity that is 'connected with' you, in the course of carrying on a business.

However, subsection 152-40(4) explains that an asset whose main use is to derive rent cannot be an active asset. Paragraph 152-40(4A)(b) of the ITAA 1997 provides that to determine the main use of an asset, treat any use by your affiliate, or an entity that is connected with you, as your use.

Subsection 328-125(1) of the ITAA 1997 explains that an entity is connected with another entity if:

a) either entity controls the other entity in a way described in this section; or

b) both entities are controlled in a way described in this section by the same third entity.

Subsection 328-125(2) of the ITAA 1997 provides that an entity (the first entity) controls another entity if the first entity, its affiliates, or the first entity together with its affiliates: 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.

Subsection 152-35(1) of the ITAA 1997 states that a CGT asset satisfies the active asset test 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 period of ownership, 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 and a half years.

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

In your case, you disposed of the property and the event resulted in a capital gain. The property was rented for the entirety of the ownership period to a company to use in the course of carrying on a business. The company is an entity that is 'connected with' you as you are the company's sole director and shareholder. As such, the company's use of the asset is considered to be your use of the asset. Therefore, the property will satisfy the active asset test.

As you also satisfy the maximum net asset value test, the basic conditions for the small business CGT concessions have been met. Therefore, the small business 50% active asset reduction to the capital gain from the sale of the property applies.