Edited version of your written advice

Authorisation Number: 1051352846004

Date of advice: 6 April 2018

Ruling

Subject: Small business concession - active asset

Question

Does the property (the property) satisfy the active asset test for the purposes of section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on

1 July 20XX

Relevant facts

The Trustee of the X Trust acquired a property.

The property was acquired to be used as the premises of a professional practice known as ‘A’.

There are a number of equal unit holders in the trust.

The trusts are under the practical control of three individuals, ‘B’, ‘C’ and ‘D’.

‘B’, ‘C’ and ‘D’ have been the only directors of the trustee.

The property has been used from 20XX solely as the business premises of ‘A’.

No part of the property has been used to produce assessable income by any other party.

‘A’ has been operated as a partnership between ‘B’, ‘C’ and ‘D’. This partnership ceased to trade on 20XX. From this time a new partner, namely ‘E’ was added and trading continued under the same name.

A formal lease between the trustee and the partnership has been in place.

The amount set out in the lease was not always the amount paid to the trustee.

The business manager of ‘A’ manages the day to day affairs of the trust.

‘B’, ‘C’ and ‘D’ have control over the unit trust bank account.

The trustee is selling the property and has entered into a put and call option in 20XX. The exercise of the call option will occur on or after 1 July 20XX.

The trustee has negotiated for the current partnership to lease the property for a period after completion of the sale. The lease contains a demolition clause in the second and third periods of 12 months. The trustee has negotiated a first right of refusal to lease back part of the new premises for the benefit of the law practice if the building is demolished and rebuilt.

The sale price of the property is less than $xxx million.

All other assets of the connected entities are less than $xxx million.

The aggregated turnover of the trust is greater than $xx.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 152-35(1)

Income Tax Assessment Act 1997 section 152-40

Income Tax Assessment Act 1997 paragraph 152-40(4)(e)

Income Tax Assessment Act 1997 paragraph 152-40(4A)(b)

Income Tax Assessment Act 1997 subsection 328-125(1)

Income Tax Assessment Act 1997 subsection 328-125(2)

Reasons for decision

Detailed reasoning

Subsection 152-35(1) of the ITAA 1997 states 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 period of ownership, 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 7 and a half years.

Section 152-40 of the ITAA 1997 provides the meaning of ‘active asset’. A CGT asset will be an active asset at a time if, at that time, you own the asset and the asset was used or held ready for use by you, an affiliate of yours, or by another entity that is ‘connected with’ you, in the course of carrying on a business.

However, subsection 152-40(4)(e) of the ITAA 1997 explains that an asset whose main use is to derive rent cannot be an active asset. Paragraph 152-40(4A)(b) provides that to determine the main use of an asset, treat any use by your affiliate, or an entity that is connected with you, as your use.

Connected with test

Subsection 328-125(1) of the ITAA 1997 explains that an entity is connected with another entity if:

a) either entity controls the other entity; or

b) both entities are controlled by the same third entity.

Subsection 328-125(2) of the ITAA 1997 provides that an entity (the first entity) controls another entity if the first entity, its affiliates, or the first entity together with its affiliates: if the other entity is a company - owns, or has the right to acquire ownership of, equity interests in the company that give at least 40% of the voting power in the company.

‘B’, ‘C’ and ‘D’ have been the directors of the Trustee throughout the ownership period; therefore, you are connected with each other.

Passively-held assets

The conditions in subsection 152-10(1A) are satisfied in relation to the CGT asset in the income year if:

a) your affiliate, or an entity that is connected with you, is a small business entity for the income year; and

b) you do not carry on a business in the income year (other than in partnership); and

c) if you carry on a business in partnership - the CGT asset is not an interest in an asset of the partnership; and

d) in any case - the small business entity referred to in paragraph (a) is the entity that, at a time in the income year, carries on the business (as referred to in subparagraph 152-40(1)(a)(ii) or (iii) or paragraph 152-40(1)(b)) in relation to the CGT asset.

In your case, the property held in the Unit Trust was used in the course of carrying on a business by a connected entity. As the income generated from the property during these periods was business income, we do not consider that the main use of the property was to derive rent. Therefore, the property was an active asset. As you owned the property for more than XX years, and it was an active asset for more than 7 ½ years, the property satisfies the active asset test in section 152-35 of the ITAA 1997.