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Edited version of your written advice
Authorisation Number: 1012880438299
Date of advice: 17 September 2015
Ruling
Subject: Capital gains tax
Question 1
Does the property satisfy the active asset test under section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
Yes.
This ruling applies for the following period
30 June 2015
The scheme commences on
1 July 2014
Relevant facts and circumstances
A and B each hold a X% interest in the property.
The property has always mainly been used by the unit trust in the course of carrying on a business, since the date of acquisition.
Since X, the units in the unit trust have been held by:
(a) C in its capacity as trustee for the trust -X% of units
(b) C in its own capacity - X% of the units and
(c) D - X% of the units.
All of the units in the unit trust have fixed rights to income and capital.
A and B are equal shareholders and directors of C.
A and B sold their interest in the property and each made a capital gain.
At the time of the sale A and B each had net assets with a market value of less than $6 million.
A and B are the primary beneficiaries of the trust.
Relevant legislative provisions
Income Tax Assessment Act 1997 Division 152
Income Tax Assessment Act 1997 Subdivision 152-C
Income Tax Assessment Act 1997 Section 152-40
Income Tax Assessment Act 1997 Subsection 152-40(1)
Income Tax Assessment Act 1997 Section 328-125
Income Tax Assessment Act 1997 Section 328-130
Reasons for decision
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 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) of the ITAA 1997 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.
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.
An entity (the first entity) controls another entity if the first entity and its affiliates or the first entity together with its affiliates:
(b) if the other entity is a company - own, or have the right to acquire the ownership of, equity interests in the company that carry between them the right to exercise, or control the exercise of, a percentage (the control percentage) that is at least 40% of the voting power in the company.
In this case, both A and B have 50% of the shares which have rights to voting, income and capital of C. Therefore, they are both connected with C.
An entity (the first entity) controls a discretionary trust if a trustee of the trust acts, or could reasonably be expected to act, in accordance with the directions or wishes of the first entity, its *affiliates, or the first entity together with its affiliates.
In this case, A and B control C which is the trustee of the Trust and therefore the trustee acts or could reasonably be expected to act, in accordance with the directions or wishes of A and B. Accordingly, A and B control the Trust.
An individual or a company is an affiliate of yours if the individual or company 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.
Having full regard to your circumstances, we accept that C is an affiliate of the Trust. Accordingly, the Trust together with its affiliates control the unit trust.
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, and the second entity controls (whether directly or indirectly) a third entity, the first entity is also taken to control the third entity.
In this case, A and B control the Trust which in turn controls the unit trust, consequently A and B are taken to control the unit trust.
The property has always mainly been used by the unit trust in the course of carrying on a business since the date of acquisition. As the unit trust is a connected entity of A and B the property satisfies the active asset test under section 152-40 of the ITAA 1997.