ATO ID 2004/378: CGT small business concessions: active asset - joint ownership of a share
Date of decision: 2 April 2004
Year of income: Year ended 30 June 2004
Business line: Private Groups and High Wealth Individuals

Issue
Is a jointly owned share in a company an active asset under paragraph 152-40(3)(a) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
Yes. A jointly owned share in a company is an active asset under paragraph 152-40(3)(a) of the ITAA 1997.

Facts
A company carries on a business and uses all of its assets in the course of carrying on that business. The company has 300 shares on issue and has two shareholders. The two shareholders each own 100 shares in their own right as well as jointly owning the remaining 100 shares. One shareholder is intending to sell and will make capital gains from the sale of their shares.

Reasons for decision
Summary: For a capital gain to qualify for the small business capital gains tax (CGT) concessions the basic conditions in Subdivision 152-A of the ITAA 1997 must be satisfied. One of those conditions is that the CGT asset that gives rise to the capital gain must satisfy the active asset test (paragraph 152-10(1)(d) of the ITAA 1997). Section 152-35 of the ITAA 1997 provides that an asset satisfies the active asset test if it was an active asset at a particular time and for at least half a particular period. Section 152-40 of the ITAA 1997 specifies when an asset is an active asset. In particular, subsection 152-40(3) of the ITAA 1997 provides that a share in a company that is an Australian resident can be an active asset in certain circumstances. A part of, or an interest in, a CGT asset, is itself a CGT asset. A jointly owned share in a company is therefore a CGT asset and accordingly, the sale of a jointly owned share may give rise to a capital gain. The question therefore arises, in the context of the small business CGT concessions, as to whether a jointly owned share can be an active asset such that any gain made on its sale may qualify for those concessions. In other words, the question is whether the reference to a share in a company in paragraph 152-40(3)(a) of the ITAA 1997 includes a reference to a jointly owned share in a company. The same question also arises in relation to the additional basic conditions in subsection 152-10(2) of the ITAA 1997 in that, if a reference to a share includes a reference to a jointly owned share, the controlling individual test must also be satisfied. The purpose and effect of subsection 152-40(3) of the ITAA 1997 and related provisions is to enable individual taxpayers actively involved in managing their businesses through certain companies and trusts to qualify for the small business concessions, without separately selling the active assets of the company or trust. Having regard to this, it is considered that the reference to a share in a company (or to shares) in paragraph 152-40(3)(a) and subsections 152-10(2) and 152-55(1) of the ITAA 1997 includes a reference to a jointly owned share in a company. Accordingly, a jointly owned share may be an active asset if the requirements of paragraph 152-40(3)(b) of the ITAA 1997 are satisfied, and any capital gain arising from its sale may qualify for the small business CGT concessions if the other conditions are satisfied.

Legislative references: Income Tax Assessment Act 1997 Subdivision 152-A paragraph 152-10(1)(d) subsection 152-10(2) section 152-35 section 152-40 subsection 152-40(3) paragraph 152-40(3)(a) paragraph 152-40(3)(b) subsection 152-55(1)
Subject references: Active asset Active asset test Basic conditions for relief Capital gains tax CGT assets CGT small business relief Controlling individual Controlling individual test Shares