Private ruling: CGT and the small business concessions
Published: October 2013
Ruling period: Year ending 30 June 2014 | Year ending 30 June 2015 | Year ending 30 June 2016
Date scheme commenced: 1 July 2013

Ruling: Q1: Does the commercial property (the Property) satisfy the active asset test for the purposes of section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes

Relevant facts and circumstances: In 19XX, individual A and individual B entered into partnership to provide professional services (the Partnership). In 19YY, individual A assigned a portion of his/her interest in the Partnership (less than 50%) to his/her spouse. From the commencement of the Partnership, a Service Trust provided administrative and secretarial personnel from premises leased by the Service Trust and licensed to the Partnership. All units in the Service Trust were held equally by Family Trust A and Family Trust B. Both family trusts are discretionary trusts. Individual A and his/her spouse are both beneficiaries of Family Trust A and are jointly the appointors of that trust (with power to remove and replace the trustee). In 19ZZ, the Property Trust was formed for the purpose of acquiring new premises for the Partnership in the central business district. The Property Trust has a corporate trustee. Individual A and individual B are the shareholders (1 share each) and directors of the corporate trustee. The deed of the Property Trust does not provide any discretion as to the distribution of income or capital to unitholders. The units in the Property Trust have at all times up to the date of this application been held equally by Family Trust A and Family Trust B. The Property Trust purchased the office premises (the Property) in the 19XY financial year and the Property was ready for use by the Partnership in the same year. Since that time the Property has been leased by the Property Trust to the Service Trust for a commercial rent and provided by the Service Trust under licence to the Partnership as part of the services provided under the service agreement between those entities. The unit holdings in the Property Trust have remained unchanged since the Property was purchased. In 20XX, individual C was admitted as a salaried partner to the Partnership and Family Trust C acquired one third of the units in the Service Trust. Individual A and individual B remained the sole capital partners and each continued to hold a 50% equity interest in the Partnership goodwill and tangible assets. The following year, all the partners rolled their respective interests in the Partnership into company entities. None of those companies acts as the trustee for any trust. Individuals A, B and C are each the sole shareholders and directors of their respective incorporated companies. There was no change in the ownership of units in the Property Trust and this remains the case to date - i.e Family Trust A and Family Trust B continue to each hold 50% of the units in the Property Trust.

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 - Section 328-130

Reasons for decision: Summary: 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 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). In this case, the Property Trust has held the Property for more than 15 years. In order to satisfy the active asset test, the property needs to be an active asset for a total of at least 7.5 years. The Property will be an active asset if it is owned by you and is used or held ready for use in a business carried on (whether alone or in partnership) by you, your affiliate, or an entity connected with you. Affiliate Under section 328-130 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. Trusts, partnerships and superannuation funds cannot be your affiliates. In this case, the Property is leased to the Service Trust and used in its business activity of providing administrative and secretarial personnel and legal administration services to the Partnership. The Service Trust cannot be your affiliate. The property is also used by the Partnership as the premises out of which the practice operates. The Partnership also cannot be your affiliate. Individual partners and/or the legal practice companies 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 lack of any formal agreement or formal relationship between the parties dictating how the parties are to act in relation to each other · 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 · the actions of the parties. Generally, another business would not be acting in concert with you if they: · have different employees · have different business premises · have separate bank accounts · do not consult you on business matters · conduct their business affairs independently in all regards. In this case, there is no evidence that the Partnership, either the individuals or the corporate entities, conducted their business in concert with the Property Trust. The Property Trust was only set up to acquire and hold the Property, and is essentially the landlord of the property. On the evidence provided, the business affairs of the individual partners and the Property Trust are conducted independently in all regards, and would not be considered to be affiliates for the purposes of section 328-130 of the ITAA 1997. Entity connected with you Under section 328-125 of the ITAA 1997, 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 it or its affiliate (or all of them together): · beneficially owns or has the right to acquire beneficial ownership of, interests in the other entity that give the right to receive at least 40% (the control percentage) of - any distribution of income or capital by the other entity, or - if the other entity is a partnership, the net income of the partnership, or · if the other entity is a company, beneficially owns, or has the right to acquire beneficial ownership of, equity interests in the company that give at least 40% of the voting power in the company. Indirect control The control tests for the 'connected with' rules are designed to look through business structures that include interposed entities. If an entity (the first entity) directly controls a second entity, and the second entity controls (whether directly or indirectly) a third entity, the first entity is also taken to control the third entity. Control of the Property Trust In this case, Family Trust A and Family Trust B each hold 50% of the units in the Property Trust and each has beneficial interest in at least 40% of the income or capital of the Property Trust, or a control percentage. Both the Family Trust A and Family Trust B are discretionary trusts. An entity controls the discretionary trust if the trustee either acts, or might reasonably be expected to act, in accordance with the directions or wishes of the entity or the entity's affiliates, or both the entity and it's affiliates. ATO Interpretive Decision ATO ID 2008/139 states that a person who has the power to remove the trustee of a discretionary trust and appoint a new trustee, controls the trust for the purposes of subsection 328-125(3) of the ITAA 1997. Individual A and his/her spouse are joint appointors of FamilyTrust A (with power to remove and replace the trustee) and are consider to control the trust for the purposes of subsection 328-125(3) of the ITAA 1997. Under section 152-47 of the ITAA 1997, a spouse may be taken to be your affiliate where an asset is owned by an entity that you own or have an interest in, and that asset is used in a business carried on by your spouse, or an entity that your spouse has an interest in. In this case, individual A's spouse has an interest in the Property Trust which owns the Property used in a business individual A has an interest in. Therefore, Individual A and his/her spouse are affiliates for the purposes of section 152-47 of the ITAA 1997. As individual A (together with his/her affiliate) controls Family Trust A, which in turn controls the Property Trust, individual A is also taken to control the Property Trust. Control of the Partnership From when the Property was ready for use in the Partnership business, to when the individual partners rolled their respective interests in the Partnership into companies, both individual A and individual B had the right to receive 50% of the capital of the Partnership each. For the purposes of section 328-125 of the ITAA 1997, both individual A and individual B controlled the Partnership for more than 7.5 years. | Detailed Reasoning - Conclusion: As stated above, the Property will be an active asset if it is owned by you and is used or held ready for use in a business carried on by an entity connected with you. Based on the above discussion, individual A controlled both the Property Trust and the Partnership either directly or indirectly, therefore, the Partnership is connected with the Property Trust. The Partnership has used the Property in its business and has been a connected entity for more than 7.5 years. As a result, the Property satisfies the active asset test for the purposes of section 152-35 of the ITAA 1997 .