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Edited version of private advice
Authorisation Number: 1051668529590
Date of advice: 30 April 2020
Ruling
Subject: Capital gains tax - small business concessions
Question 1:
Is the Trust connected with Company A?
Answer:
Yes. It is viewed that based on the information provided the Trust is connected with Company A in accordance with section 328-125 of the Income Tax Assessment Act 1997 (ITAA 1997).
Further information about assets used or held ready for use in the course of carrying of a business by an entity connected with you can be viewed at QC 52272 on our website at ato.gov.au.
Question 2:
Is the Property considered an active asset for the purposes of section 152-35 of the ITAA 1997?
Answer:
Yes. Based on the information provided, it is viewed that the Property was used by an entity connected with Company A in relation to their business activities. Therefore, while it had been used to earn rental income it meets the necessary conditions for it to be an active asset.
Further information on active assets can be viewed at QC 52272.
Question 3:
Is Company A eligible to access the Small business 50% active asset reduction exemption under Subdivision 152-E of the ITAA 1997?
Answer:
Yes. After considering the information provided it is viewed that Company A passed the basic conditions contained in section 152-10 of the ITAA 1997, and is an active asset under section 152-35 of the ITAA 1997. Therefore, Company can apply this exemption to the capital gain made on the disposal of the Property.
Further information on this exemption can be viewed at QC 52289.
This ruling applies for the following period
Year ending 30 June 2020.
The scheme commences on
1 July 2019.
Relevant facts and circumstances
Company A entered a contract to purchase a property (the Property) after 20 September 1985, with settlement occurring after a number of months.
The Property was vacant land that was located in an industrial estate, which had a land area of more than 2,000 square metres.
During the following year the construction of a large shed on the Property commenced and was completed during the next year.
Company A satisfies the maximum net asset value test as the net value of the capital gains tax assets it owns, and those owned by its affiliates and the entities connected with it, are less than $6 million.
Person X:
· is one of the directors of Company A, with Person Y being the other director
· holds XX% of the shares in Company A with Person Y holding the other XX% shareholding, each receiving capital distributions from Company A in accordance with their ownership interest; and
· is the sole director of Company XYZ, which is the corporate trustee of Trust A.
The Property was rented to Trust A after the construction of the shed was completed for $XXX per week (Goods and services tax inclusive).
Trust A commenced trading during the previous year and its depot (the Depot) was located a significant distance from the Property. Prior to using the Property all materials and machinery were kept at the Depot with staff travelling daily to sites where possible, or staff would stay in motel accommodation and vehicles and material would be kept at the job sites.
All of the Property was used by the Trust A from the time the construction of the shed was completed until the Property was sold. During that period the Property was used as a depot/workshop while work was being undertaken in locations near the Property, which made up a large part of their contract work. Materials and machinery were kept at the Property, with facilities provided to staff staying overnight while working in the area.
Trust X is the sole unit holder of Trust A and receives all distributions from it.
Company A is a beneficiary of Trust X from which it has received large distributions (greater than 40%) in recent years.
The Property was sold and a capital gain was made on the sale of the Property.
Relevant legislative provisions
Income Tax Assessment Act 1997 Subdivision 152-A
Income Tax Assessment Act 1997 Subdivision 328-C