Edited version of private advice

Authorisation Number: 1051606264163

Date of advice: 15 November 2019

Ruling

Subject: CGT small business concessions

Question 1

Will the ownership interest held by you in Property A satisfy the active asset test?

Answer

Yes

Question 2

Will the ownership interest held by you in Property B satisfy the active asset test?

Answer

No

Question 3

Will the Commissioner allow further time as provided in paragraph 103-25(1)(b) of the ITAA 1997 for you to choose to apply the 50% active asset reduction and small business retirement exemption to capital gains that arose in the 20XX financial year?

Answer

Yes, an extension will be granted to XX/XX/XXXX.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You are a partner in the partnership which at all times had the same partners.

The partners owned two properties (Property A and Property B) as partnership assets which are the subject of this ruling request.

You were a director of the company during most of the relevant period. You, along with the other partners were the controlling directors of the company. Decisions of the company were made jointly by the directors with no specific roles allocated between them. You were a shareholder in the company for most of the relevant period. The other partners in the partnership held all the other issued shares. You ceased to be a director and shareholder prior to end of the relevant period. The company was not your affiliate for more than half of the ownership period of Property B.

The company operated a business and leased the properties for business use from the partnership for the relevant period.

At the time of lodging your 20XX and 20XX income tax returns, you were unaware of the small business concessions that may have been available to you.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 103-25(1)

Income Tax Assessment Act 1997 Section 152-10

Income Tax Assessment Act 1997 Section 152-35

Income Tax Assessment Act 1997 Subsection 152-40

Income Tax Assessment Act 1997 Section 328-130

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Summary

Your interest in Property A satisfies the active asset test. Your interest in Property B does not satisfy the active asset test.

The Commissioner will allow further time as provided in paragraph 103-25(1)(b) of the ITAA 1997 for you to choose to apply the 50% active asset reduction and small business retirement exemption to capital gains that arose in the 20XX financial year. This extension of time is granted until XX/XX/XXXX.

Detailed reasoning

Active Assets

For the small business concessions in Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997) to apply to reduce or disregard a capital gain, the relevant CGT asset must satisfy the active asset test in section 152-35 of the ITAA 1997.

The active asset test is satisfied 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 test period detailed below, 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 7.5 years during the test period.

The test period:

·        begins when you acquired the asset, and

·        ends at the earlier of

-   the CGT event, and

-   when the business ceased, if the business in question ceased in the 12 months before the CGT event (or such longer time as the Commissioner allows).

The meaning of an active asset is set out in section 152-40 of the ITAA 1997. It must first satisfy one of the 'positive tests' in subsection 152-40(1) of the ITAA 1997 and then also not be excluded by one of the exceptions in subsection 152-40(4) of the ITAA 1997.

Under subsection 152-40(1) of the ITAA 1997, a CGT asset is an active asset (subject to the exclusions) if it is owned and used, or held ready for use, in the course of carrying on a business by you or your small business CGT affiliate or another entity that is connected with you under paragraph 152-40(1)(c) of the ITAA 1997.

The combined effect of sections 152-35 and 152-40 of the ITAA 1997 is that the asset will meet the active asset test if the asset was used, or held ready for use, in the course of carrying on a business for at least half of the time period it was owned, or in the case where it is owned for 15 years or more, 7.5 years, subject to the exclusions in subsection 152-40(4) of the ITAA 1997.

Affiliates

According to subsection 328-120(1) of the ITAA 1997, an affiliate is an individual or company that in relation to their business affairs, acts or could reasonably be expected to act:

·        in accordance with your directions or wishes, or

·        in concert with you

Broadly, acting 'in concert with you' in relation to their business affairs means there is a substantial degree of dependence on, or connection with you. Whether an entity acts, or could reasonably be expected to act, in accordance with the taxpayer's directions or wishes, or in concert with the taxpayer in question is a matter of fact dependent on the circumstances of a particular case. No one factor will necessarily be determinative.

Relevant factors that may support a finding that a person acts, or could reasonably be expected to act, in accordance with the taxpayer's directions or wishes, or in concert with the taxpayer, include:

·        the existence of a close family relationship between the parties,

·        the nature and extent of the commercial dealings between the parties,

·        one entity's involvement in the managerial decisions and day-to-day management of the other,

·        financial interdependencies (for example, financial support or shared banking arrangements),

·        any common ownership of capital backing,

·        the likelihood that the way the parties act, or could reasonably be expected to act, in relation to each other would be based on the relationship between the parties rather than on formal agreements or legal or fiduciary obligations, and

·        the actions of the parties.

However, a person is not your affiliate merely because of the nature of a business relationship you and the person share. For example, companies and trusts are not affiliates of their directors and trustees respectively and vice versa, merely because of the positions held.

Assets used to derive rent

Subsection 152-40(4) of the ITAA 1997 provides a list of exceptions and outlines which CGT assets cannot be active assets. Paragraph 152-40(4)(e) of the ITAA 1997 excludes, among other things, assets whose main use is to derive rent (unless such use was only temporary). Such assets are excluded even if they are used in the course of carrying on a business.

However, for the purposes of the exclusion in paragraph 152-40(4)(e), attributing use of an asset by an affiliate or connected entity to a taxpayer means that any business use by an affiliate or connected entity is treated as business use by the taxpayer. This is the case even if the taxpayer rents the asset to an affiliate or connected entity for use in the affiliate or connected entity's business.

Application to your circumstances

The Commissioner considers that the interest held by you in Property A satisfies the active asset test. The company was your affiliate during the period where some of the partners in the partnership were the controlling directors and shareholders of the company. The company's main use of Property A was in relation to their business activity and the company was your affiliate for at least seven and a half years of your ownership period. Accordingly, Property A satisfies the active asset test in section 152-40 of the ITAA 1997.

The interest held by you in Property B does not satisfy the active asset test. While the company was your affiliate during the period where some of the partners in the partnership were the controlling directors and shareholders of the company, and the company's main use of property B was in relation to their business activity, the company was not your affiliate for at least half of your ownership period. Therefore, Property B does not satisfy the active asset test in section 152-40 of the ITAA 1997.

Extension of time to choose the small business roll-over

The general rule is that a choice available under the CGT provisions, once made, cannot be changed. Generally, such a choice must be made by the time the income tax return is lodged, or within such further time as the Commissioner allows (subsection 103-25(1) of the ITAA 1997).

The way in which a tax return is prepared by a taxpayer (and any other entity making the choice) is sufficient evidence of the making of the choice (section 103-25(2) of the ITAA 1997).

A taxpayer who has considered the application of the CGT concessions and chosen a particular concession has made a choice which cannot later be changed. However, a taxpayer who did not consider the CGT concessions and accordingly included a capital gain in their income tax return has not made a choice and can, if the Commissioner allows further time, later make a choice for a CGT concession and amend their return to reduce or disregard the capital gain.

In determining if the discretion to allow further time would be exercised, the Commissioner has considered the following factors:

·        evidence of an acceptable explanation for the period of extension requested (and whether it would be fair and equitable in the circumstances to provide such an extension),

·        prejudice to the Commissioner which may result from the additional time being allowed (but the mere absence of prejudice is not enough to justify the granting of an extension),

·        unsettling of people, other than the Commissioner, or of established practices,

·        fairness to people in like positions and the wider public interest,

·        whether any mischief is involved, and

·        consequences of the decision.

The Commissioner considers that it would be appropriate to exercise the discretion in this case. You were not aware of your eligibility for the small business CGT concessions when you lodged your 20XX income tax return. There would be no prejudice to the Commissioner or unsettling of people by allowing the extension. There has been no mischief involved and the Commissioner considers it fair and equitable in these circumstances to exercise their discretion and allow you an extension of time until XX/XX/XXXX to choose to apply the 50% active asset reduction and small business retirement exemption to capital gains that arose in the 20XX financial year.