Edited version of private advice

Authorisation Number: 1051590375097

Date of advice: 17 October 2019

Ruling

Subject: Entitlement to small business capital gains tax concessions

Question 1

Is the property considered an active asset of yours?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

A Commercial Property was purchased jointly by you and your former partner in 19XX.

The property was used by your former partner's business at the time & this continues to 20XX.

In 20XX your former partner purchases the company & business XXX.

XXX operates at the commercial property.

Later in 20XX, as part of a separation settlement commercial property is now owned solely by you.

You and your former partner are still legally married, although separated.

In 20XX YYY changes its company name to X Pty Ltd the business practice remains the same.

In 20XX Y Pty Ltd sells its business in two separate transactions.

The purchaser of the business will only complete the purchase if the property is sold to the purchaser at the same time as the business sale transaction.

The sale of the business is completely reliant on the simultaneous sale of the property and the sale of the business would not proceed otherwise.

The vendor and business operator negotiated as one to enable the sale of each asset being the business and operating property.

You sell the commercial property to the same purchaser as the other business.

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 subsection 152-40(4)

Income Tax Assessment Act 1997 subsection 152-47(1)

Income Tax Assessment Act 1997 subsection 152-47(2)

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

Income Tax Assessment Act 1997 section 328-130

Reasons for decision

Section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997) contains the basic conditions you must satisfy to be eligible for the small business capital gains tax (CGT) concessions. These conditions are:

(a)    a CGT event happens in relation to a CGT asset in an income year.

(b)    the event would have resulted in the gain

(c)    at least one of the following applies:

(i)    you are a small business entity for the income year

(ii)   you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997

(iii)  you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an asset of the partnership or

(iv) the conditions in subsection 152-10(1A) or (1B) of the ITAA 1997 are satisfied in relation to the CGT asset in the income year.

(d)    the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997.

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.

Section 152-35 of the ITAA 1997 explains that an asset will be an active asset if you have owned the asset for more than 15 years and it was an active asset for a total of at least 7 ½ years from the time when you acquired the asset until the CGT event.

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

Section 328-130 of the ITAA 1997 provides that an individual or a company is an affiliate of yours if the individual or company acts, or could reasonably is 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.

Section 328-125(1) of the ITAA 1997 provides the meaning of "connected with" an entity. An entity is connected with another entity if:

·         either entity controls the other entity; or

·         both entities are controlled by the same third entity

An entity controls another entity, if the first entity, its affiliates or both of them together beneficially own, or have the right to acquire beneficial ownership of, equity interest in the company that give at least 40% (the control percentage) of the voting power in the company under paragraph 152-30(2)(b) of the ITAA 1997.

Subsection 152-47(1) of the ITAA 1997 applies if:

·         one entity (the asset owner) owns a CGT asset (whether the asset is tangible or intangible); and

·         either:

·         the asset is used, or held ready for use, in the course of carrying on a business in an income year by another entity (the business entity), or

·         the asset is inherently connected with a business that is carried on in an income year by another entity (the business entity), and

·         the business entity is not (apart from this section) an affiliate of, or connected with, the asset owner.

Subsection 152-47(2) of the ITAA 1997 states for the purposes of this Subdivision, in determining whether the business entity is an affiliate of, or is connected with, the asset owner, take the following to be affiliates of an individual:

·         a spouse of the individual:

·         a child of the individual, being a child who is under 18 years.

Application to your circumstances

To be an active asset the commercial property needs to be used or held ready for use by you, your affiliate or an entity connected with you, in the course of carrying on a business.

At no time was the commercial property used by you to carry on a business. It will only be able to satisfy the active asset test if it was used by an affiliate or connected entity in carrying on a business. At face value this appears not to be the case.

However, under section 152-47 of the ITAA 1997 spouses or children are taken to be affiliates for certain passively held CGT assets.

The section applies if one entity (you) owns a CGT asset and the asset is used or held ready for use in the course of carrying on a business in an income year by another entity and the business entity is not (apart from this section) an affiliate of or connected with the asset owner.

Therefore your spouse will be an affiliate where an asset is owned by you and that asset is used in a business carried on by an entity that your spouse owns or has an interest in.

As your spouse used an asset of yours in a business run through an entity in which they had a more than 40% interest in and you are not an affiliate or connected with the entity under any other provision of the Act, they are considered to be your affiliate for the purposes of the active asset test.

Therefore you are taken to be connected to X Pty Ltd through your affiliate's connection with the company

The property is considered an active asset of yours as it was used in a business carried on by a connected entity for more than 7 ½ years.