Edited version of your written advice

Authorisation Number: 1012671896690

Ruling

Subject: Active asset

Question 1

Does the leasing of motor vehicles, plant and equipment constitute the carrying on of a business?

Answer

Yes.

Question 2

Do the shares in the company satisfy the active asset test?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 2015

The scheme commences on:

1 July 2014

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are a private company (the company) who owns a fleet of motor vehicles and items of plant.

The motor vehicles consist of a number of vehicles and trailers. The vehicles are used to carry equipment and accessories to work sites.

There are a number of items of plant and equipment.

The annual turnover of the company is approximately $X.

The administration of the company is undertaken by a paid employee who undertakes the billing and collection of lease fees, administers the company's accounting records, prepares and lodges the business activity statements and attends to any other function that is required.

The company has a two locations the motor vehicles and plant and equipment when they are not in use.

The company leases the assets to two companies, Operation 1 Pty Ltd (Operation 1) and Operation 2 Pty Ltd (Operation 2) on a short term rental basis.

Operation 1 and Operation 2 take the assets from the storage location closest to them for the duration of each project and return them after.

The motor vehicles and plant and equipment are leased out on a per day basis.

Invoices are issued monthly by the company.

Payment is made via a cash transfer to the company.

Records for Operation 1 and Operation 2 are stored at a separate location to the company.

The shareholding in the company is made of a number of entities who each hold a share in the company.

Operation 1 has the same shareholding as the company.

Operation 2 has less than five shareholders being the same number of shareholders as Operation 1 plus another family trust. Each shareholder holds a % interest.

The shareholders of the company are looking to transfer their holdings to other entities.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 152.

Income Tax Assessment Act 1997 Section 152-35.

Income Tax Assessment Act 1997 Section 152-40.

Reasons for decision

Summary

You are currently carrying on a business of the leasing of assets on a short term basis.

The total market value of the company's active assets is more than 80% of the total market value of all the company's assets. Therefore, the shares held in the company satisfy the active asset test.

Detailed reasoning

Carrying on a business

The question of whether a business is being carried on is a question of fact and degree to be determined on a case by case basis. The courts have developed a series of indicators to determine the matter, which are summarised in Taxation Ruling TR 97/11 (TR 97/11). Although TR 97/11 specifically refers to primary production, the same principles apply to all businesses. Some indicators of carrying on a business which the courts have considered to be relevant include:

• whether the activity has a significant commercial purpose or character

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

• 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. Whether a 'business' is carried on depends on the large or general impression.

In this case, the company operates as a plant hire company and leases it's assets to other related companies on a short term rental basis. The assets are used in their business. The company has an annual turnover of approximately $xxx,xxx.

In applying the facts of your case to the indicators outlined above, the general impression gained is that you are currently carrying on a business of the leasing of assets on a short term basis.

Active asset

A capital gain you make may be reduced or disregarded under Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997) if certain conditions are satisfied. One of these conditions requires the capital gains tax (CGT) asset satisfies the active asset test contained in section 152-35 of the ITAA 1997.

A 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 your 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 your for a total of at least 7½ years during the test period.

The test period beings 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.

Subsection 152-40(1) details that a CGT asset is an active asset at a time if it is used, or held ready for use, in the course of carrying on a business that is carried on by you, or your affiliate, or another entity that is connected with you.

Subsection 152-40(3) determines that a share in a company that is an Australian resident can also be an active asset. This is provided that the total of:

• the market values of the active assets of the company or trust; and

• the market value of any financial instruments of the company or trust that are inherently connected with a business that the company or trust carries on; and

• any cash of the company or trust that is inherently connected with such a business;

is 80% or more of the market value of all of the assets of the company or trust.

Subsection 152-40(3B) provides that the 80% test will be taken to have been met where breaches of the threshold are only temporary in nature and in circumstances where it is reasonable to conclude that the 80% threshold has been passed.

A bank account used by a taxpayer in the operation of their business is usually 'inherently connected' with the taxpayer's business and would satisfy subparagraph 152-40(3)(b)(iii) of the ITAA 1997.

Trade debtors are not considered to be financial instruments for the purposes of the active asset exclusions. Rather, they are a business facilitation mechanism that assists in the conduct of the business and are inherently connected with the business.

In order to determine whether the shares in the company are active assets, we need to consider if the assets in the balance sheet satisfy the 80% test. The assets include cash at bank, trade debtors and, motor vehicles, plant and equipment. The motor vehicles, plant and equipment are used or held ready for use in a business carried on. Both the cash at bank and trade debtors are inherently connected with the business and will therefore be considered to be active assets. Therefore, all the assets are active.

The total market value of the company's active assets is more than 80% of the total market value of all the company's assets. You have advised that the market value of the active assets, trade debtors and cash of the company were more than 80% of the market value of the assets of the trust for over half the period of ownership. Therefore, the shares held in the company satisfy the active asset test.