Edited version of your written advice

Authorisation Number: 1051320751118

Date of advice: 16 January 2018

Ruling

Subject: Active asset test within the CGT small business concessions

Question

Is the property an ‘active asset’ for the purposes of the CGT small business concessions under paragraph 152-40(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following period:

Year of income ended 30 June 2017

The scheme commences on:

DDMMYY

Relevant facts and circumstances

Overview of the business and structure of group

The BA Family Trust (“BAFT”) was established in DDMMYY with G Pty Ltd as its corporate trustee. B (spouse 1) and C (spouse 2) are directors and shareholders of G Pty Ltd. The beneficiaries of the BAFT are B and C.

The EA Family Trust (“EAFT”) was established in DDMMYY with T Pty Ltd as its corporate trustee. E (spouse 1) and F (spouse 2) are directors and shareholders of T Pty Ltd. The beneficiaries of the (EAFT) are E and F.

B and E are siblings.

The BAFT and EAFT are partners in the A, A and G partnership (AAG Partnership”). The AAG Partnership consists of the BAFT (1/3), EAFT (1/3) and the G Family Trust) (1/3).

H Pty Ltd (“H”) operated a hardware store in a city in Australia for a certain period of time.

H leased the commercial land and buildings that it operated the store from.

The shareholding of H is B (25%), C (25%), E (25%) and F (25%).

Purchase and history of property

The partnership as co-owners purchased the property in late 199X. From that time H rented the property until it vacated the property in late 201X. From a specific date in 201X an unrelated 3rd party rented the building until purchased by the third party on DDMMYZ.

The purchase of the property by the partnership was part funded by way of bank finance. The bank held the property as security for that loan and also for the overdraft facility of H. To finance their share of the purchase of the property, BAFT & EAFT arranged a joint loan with a bank secured against the property and their personal assets to assist purchase of the property.

When first purchased, the property consisted of a steel structured building with a brick front and some internal offices. In 199X and 199Y H funded and constructed further building improvements. The partnership also constructed and funded further improvements from 199X to 20XX. The improvements increased the size of the building required to expand the H business.

Sale of property

In late 201Z, the Taxpayers sold their ownership interests in the property to an unrelated third party resulting in a taxable capital gain.

Management of business

H was run by B, C, E & F. The division of duties is as follows:

● B – General Manager in charge of budgeting, debtors, creditors, financial management, preparation of financial reports and overseeing office and staff.

● E – Storeman, in charge of stock control, purchasing & pricing, goods receivable and general maintenance.

● C – Managed the nursery which was a substantial part of the business.

● F – Sales assistant and cleaning.

The duties of these positions were integral to the control and running of the business. B, E, C and F all worked together and met regularly to discuss the running of the overall business operations where all opinions were respected and business decisions were made jointly.

At all times the accounting and business advisory affairs were dealt with jointly. The BAFT & EAFT worked together in relation to running H, and as such had a significant degree of influence and control over the business.

B, E, C and F were all employees of the business throughout the period.

T and U ((B and C’s) children), and W and X (E and F’s) children) also worked for (H) at times during the period as sales assistants.

Other relevant facts

The BAFT, the EAFT and H are all small business entities for the purposes of the CGT small business concessions, each having an aggregated turnover of less than $2 million for the relevant income year ended 30 June 2017.

The BAFT and the EAFT also each meet the maximum net asset value test of $6 million.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 152-10

Income Tax Assessment Act 1997 Section 152-35

Income Tax Assessment Act 1997 Section 152-40

Income Tax Assessment Act 1997 Section 328-130

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated.

The basic conditions to be satisfied for the CGT small business concessions are set out in section 152-10. The first requirement is that you must satisfy at least one of the following relevant conditions:

● You are a small business entity with an aggregated turnover of less than $2 million (subparagraph 152-10(1)(c)(i)).

● You don’t carry on business (other than as a partner) 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 (subsection 152-10(1A)).

● You satisfy the maximum net asset value test of $6 million (subparagraph 152-10(1)(c)(ii)).

● The second requirement is that the asset in question must also satisfy the active asset test in section 152-35.

● Section 152-35 provides 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 relevant period; 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 7½ years during the relevant period.

● The relevant 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 or any longer period that the Commissioner allows - the cessation of the business.

Section 152-40 provides that a CGT asset is an active asset at a time if, at that time you own the asset and it is used, or held ready for use, in the course of carrying on a business that is carried on (whether alone or in partnership) by:

● You; or

● Your affiliate; or

● Another entity that is connected with you.

Section 195-1 states that ‘affiliate’ has the meaning given by section 328-130.

Section 328-130 provides that 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.

Your circumstances

The basic conditions for CGT small business relief under section 152-10 are satisfied in for both the BAFT and the EAFT as partners in the partnership because:

● Both entities are small business entities, each with an aggregated turnover below $2 million;

● Both entities do not carry on business (other than as a partner) but their legal interest as co-owners of the property (the CGT asset) was used in a business carried on by a small business entity that is their affiliate, being H; and

● Both entities satisfy the maximum net asset value test of $6 million.

H is a company and a small business entity with an aggregated turnover below $2 million. It is also an affiliate of the BAFT and EAFT as partners of the partnership because H acts, or could reasonably be expected to act, in accordance with the directions or wishes of the partnership, or in concert with it, in relation to the affairs of its business. This conclusion is based on the following facts:

● H was run by B, C, E and F who each held positions as employees that were integral to the control and running of the business.

● The shareholding of H is B (25%), C (25%), E (25%) and F (25%).

● B, C, E and F all worked together and met regularly to discuss the running of the overall business organisation where all opinions were respected and business decisions were made jointly.

● The children of B, C, E and F respectively also worked for H at times during the period as sales assistants.

● The AAG Partnership also constructed and funded further improvements to the property from 1995 to 2000, in addition to those constructed and funded by H.

● At all times the accounting and business advisory affairs were dealt with jointly. The BAFT and EAFT worked together in relation to running H and as such had a significant degree of influence and control over the business.

As H is an affiliate of the BAFT and EAFT as partners in the AAG partnership it is not necessary to consider whether H is connected to the BAFT and the EAFT.

The active asset test in section 152-35 is also satisfied.

The property is an active asset under section 152-40 for the BAFT and EAFT as partners of the AAG partnership, who own the asset and it is used in the course of carrying on the business that is carried on by an affiliate of the partnership, being H (as we established above).

The property also satisfies the active asset test under section 152-35. The property has been owned by the partnership for more than 15 years and the asset was an active asset of the partnership for a total of at least 7½ years during the specified period (20 years in fact from late 199X to late 201X). The specified period begins which the asset was acquired in late 199X and ends at the time of the CGT event, being the sale of the property in late 201X. (The relevant end time is not at the time the business operated by H ceased to be carried on when it vacated the property in late 201X, as the business ceased to be carried on more than 12 months before the CGT event in later 201Z.)