Edited version of your written advice

Authorisation Number: 1051186431759

Date of advice: 13 February 2017

Ruling

Subject: Small Business Concessions - Active Assets Test - Company Shares - 80% Rule

Question

Will the shares of the Company be considered active assets for the purposes of the Small Business capital gains tax concessions up until 30 June 201Z?

Answer

Yes

This ruling applies for the following periods:

1 July 2016 to 30 June 2017

The scheme commences on:

17 June 2014

Relevant facts and circumstances

The Company was incorporated on a date in 201X. The Company carries on a consultancy business.

100% of the shares of the Company have been held by the sole Director since incorporation.

The Director will transfer the shares in the Company to a discretionary trust before a date in 201Z.

The Company has operated a director's loan account. The Director used the loan account to withdraw money from the company for personal use and also to make capital contributions to the company during the first year. The loan account was cleared to zero at the end of the 201Y and 201Z financial years.

Between the months of November 201Y and June 201Z the balance of the Director's loan account was more than 20% of the assets of the company.

Some documents as supplied form part of this ruling.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 152-35

Income Tax Assessment Act 1997 Section 152-40

Reasons for decision

Summary

The shares that the Director owns in the Company are active assets for the purposes of the small business concessions active asset test. If the Director transfers the shares to the discretionary trust before 30 June 201Z, provided the other basic conditions are met, the Director will be eligible to apply small business CGT concessions to the transfer.

Detailed reasoning

At any given time, a share in an Australian resident company that you own is an active asset for the purposes of the capital gains tax (CGT) small business concessions at a given time if the market value of the active assets of the company, as well as any cash or financial assets inherently connected with the business, make up more than 80% of the market value of the company. In order to be active assets, the company's assets need to be used in, or held ready for use in, the carrying on of a business.

Loans - including loans to directors - are excluded from the definition of active assets. At the point where a company's non-active assets - including director loans - exceed 20% of the market value of the company, the shares of the company will cease to be active assets until the non-active assets of the company fall below 20% again. Note that failing the 80% active asset test for a short period of time before meeting it again will not cause the shares to lose their active asset status.

Where company shares have met the 80% active asset test at a given point, a taxpayer is not required to constantly test whether shares qualify as active assets. A taxpayer should perform a check of the 80% test whenever significant events occur that might be expected to cause the company to fail the test - for example when there has been an increase in director loans.

In order to satisfy the active assets test for the small business CGT concessions, at the time of sale or transfer the shares in the company will need to have been active assets for more than half of the ownership period.

Based on the financial information supplied, the active assets of the Company were more than 80% of the market value of the company for more than 70% of the ownership period. Accordingly the shares of the company will meet the active asset test on transfer to the discretionary trust at any point up until 30 June 201Z.