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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of your written advice

Authorisation Number: 1013048613897

Date of advice: 8 July 2016

Ruling

Subject: CGT Small Business Concessions - Active Assets

Question 1

Are the bank accounts of the company "inherently connected" with the business carried on by the company pursuant to paragraph 152-40(3)(b)(ii) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes, in part.

Question 2

Are all the shares you hold in the company active assets pursuant to subsection 152-40(3) of the ITAA 1997?

Answer

Yes.

Question 3

Do all the shares you hold in the company satisfy the Active Asset Test contained in section 152-35 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period(s)

Year ended 30 June 2016

The scheme commences on

On or after 1 July 2000

Relevant facts and circumstances

The company is a private company for income tax purposes and has been established for approximately 15 years.

You have the right to all payments of dividends and capital distributions, as well as voting rights for this company.

You have provided detailed information from historical balance sheets and an independent valuer about the bank accounts, income, expenses and value of assets.

You have two bank accounts that are used in the conducting of the business.

There is a company policy to retain a percentage of the cash inflow in these accounts for the primary purpose of retaining sufficient funds for working capital requirements.

The satisfaction of the Active Asset Test is the specific item of this Ruling Request.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 152-35

Income Tax Assessment Act 1997 Subsection 152-40(3)

Income Tax Assessment Act 1997 Paragraph 152-40(3)(b)(ii)

Income Tax Assessment Act 1997 Section 152-40(4)

Reasons for decision

Under subsection 152-35(1) of the ITAA 1997, a CGT asset satisfies 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 period specified in subsection (2): 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 7.5 years during the period specified in subsection (2).

Shares are not generally 'active assets' (refer paragraph 152-40(4)(b)) of the ITAA 1997. However, shares are deemed to be active assets under subsection 152-40(3) of the ITAA 1997 which states:

    "a CGT asset is also an active asset at a given time if, at that time, you own it and:

      a) it is either a share in a company that is an Australian resident at the time or an interest in a trust that is a resident trust for CGT purposes for the income year in which that time occurs and:

      b) the total of :

      (i) the market value of the active assets of the company; and

      (ii) the market value of any financial instruments of the company that are inherently connected with a business that the company carries on; and

      (iii) any cash of the company that is inherently connected with such business;

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

The term 'inherently connected' is not defined in the ITAA 1936 or the ITAA 1997. Therefore the term takes its ordinary meaning.

You have provided evidence that the cheque account and a proportion of the funds in the cash manager account have been used in running the business. The company policy is to transfer XX% to XX% of the fortnightly cash inflows into the cash manager account for the primary purpose of retaining sufficient funds for working capital requirements. The funds in the cheque account and a portion of the funds in the cash manager account that you have identified as being only for business use, will be included in the calculation for the 80% test because they are inherently connected with the business the company carries on.

You have provided a detailed analysis of the Financials associated with the company's business and a detailed calculation with regards to the 80% test.

Based on the information you have provided and the calculations of the 80% test in relation to the company shares owned by you, you have shown that the shares meet the definition of an active asset in subsection 152-40(3) of the ITAA 1997. Therefore all of the parcels of shares that you hold will satisfy the active asset test contained in section 152-35 of the ITAA 1997.

Please note that as you have specifically only asked for a private ruling on the active asset test, the Commissioner has not considered whether the other basic conditions for the small business CGT concessions have been met.


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