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Edited version of your written advice
Authorisation Number: 1051475673576
Date of advice: 15 February 2019
Subject: CGT – small business concessions – active asset
Question
Does the property satisfy the active asset test for the purpose of the capital gains tax small business concessions?
Answer
No
This ruling applies for the following period:
Year ended 30 June 2018
The scheme commences on:
1 July 2017
Relevant facts and circumstances
The Fund is a Self-Managed Superannuation Fund.
The Trustee of the fund is XYZ Pty Ltd and X is the sole director and shareholder.
X (beneficiary) is the sole member of the fund.
The fund acquired a commercial property (the property) on XX August 20XX.
The property was leased to X who operated a small business.
X is a small business entity with turnover less than $2 million and satisfies the $6 million maximum net asset value test.
The property was sold on XX February 20XX.
The fund acquired a second property on XX February 20XX as a replacement asset.
X moved into the second property in September 20XX, after the fit-out was complete and continued to operate the small business.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 152-35
Income Tax Assessment Act 1997 section 152-40
Income Tax Assessment Act 1997 section 328-125
Income Tax Assessment Act 1997 subsection 328-125(1)
Income Tax Assessment Act 1997 paragraph 328-125(1)(a)
Income Tax Assessment Act 1997 paragraph 328-125(1)(b)
Income Tax Assessment Act 1997 subsection 328-125(2)
Income Tax Assessment Act 1997 paragraph 328-125(2)(a)
Income Tax Assessment Act 1997 subsection 328-130(1)
Reasons for decision
Subsection 152-35(1) of the Income Tax Assessment Act 1997 (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.
Under subsection 328-125(1) of the ITAA 1997, an entity is ‘connected with’ another entity if either entity controls the other entity in the way described in section 328-125 of the ITAA 1997 or both entities are controlled in that way by the same third entity.
Under paragraph 328-125(2)(a) of the ITAA 1997, an entity controls another entity, that is not a discretionary trust, if it or its affiliates, or all of them together beneficially own, or have the right to acquire the beneficial ownership of, interests in the other entity that carry between them the right to receive at least 40% of any distribution of income or capital by the other entity.
Taxation determination TD 2006/68 provide guidance on whether trustees or members of a complying superannuation fund ‘control’ the superannuation fund in the way described in section 328-125 of the ITAA 1997.
The members of a complying superannuation fund do not beneficially own, or have the right to acquire beneficial ownership of, interests carrying the right to distributions of income or capital. Further a complying superannuation fund does not distribute income or capital as such, but rather pays benefits in the form of pensions or lump sums on the occurrence of certain events, such as retirement, death while in employment or the attainment of a stated age.
Similarly, the trustee of a complying superannuation fund does not beneficially own, or have the right to acquire beneficial ownership of, interests in the fund carrying the right to receive distributions of income or capital.
Therefore, nether the trustee nor the members of a complying superannuation fund control the fund under paragraph 328-125(2)(a) of the ITAA 1997. The fund is not connected with the members or trustee under paragraph 328-125(1)(a) of the ITAA 1997.
Accordingly, a complying superannuation fund is not connected with another entity under paragraph 328-125(1)(b) of the ITAA 1997 even if the fund’s members or trustees control the other entity.
Neither the members nor the trustee of a complying superannuation fund are affiliates of the fund under subsection 328-130(1) of the ITAA 1997. Accordingly, a complying superannuation fund does not control another entity under subsection 328-125(2) of the ITAA 1997 (via aggregation of its affiliates’ interests) even if the fund’s members or trustee control the other entity and therefore the fund is not connected with the other entity under paragraph 328-125(1)(a) of the ITAA 1997.
In your case, for the small business concessions to apply in relation to the property owned by the fund and used in X’s business, the active asset test in section 152-35 of the ITAA 1997 must be satisfied. Since the fund is not ‘connected with’ X under section 328-125 of the ITAA 1997, the property is not an active asset of the fund and the small business concessions will not be available to the trustee.