Private ruling: Whether a property is considered an active asset
Published: September 2012
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Does the property qualify as an active asset under section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes

Relevant facts and circumstances: You are a discretionary trust (the primary trust). The trustee of the primary trust is a company. An individual is the sole director and shareholder of the trustee of the trust. The trust purchased a property in the 2009-10 financial year. A discretionary trust (the secondary trust), is a trading trust who rents the property from the primary trust, solely for business purposes. The property is used as the office and consulting rooms of the secondary trust. The property has been used in the business of the secondary trust since it was purchased. The property is zoned for use as offices and for ancillary commercial purposes. The property does not have planning permission to allow its use for residential purposes. The trustee of the secondary trust is a company. An individual (the same individual who is the shareholder of the corporate trustee of the primary trust) is the sole director and shareholder of the corporate trustee of the secondary trust. In the 2010-11 financial year the secondary trust received 100% of the distribution of income from the primary trust. The primary trust intends to sell the property to a related third party during the 2012-13 financial year.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 152-40 | Income Tax Assessment Act 1997 Subsection 152-40(4) | Income Tax Assessment Act 1997 Subsection 152-40(4A) | Income Tax Assessment Act 1997 Section 152-35 | Income Tax Assessment Act 1997 Section 328-125 | Income Tax Assessment Act 1997 Subsection 328-125(3) | Income Tax Assessment Act 1997 Subsection 328-125(4)

Reasons for decision: Detailed Reasoning - Detailed reasoning: Section 152-40 of the Income Tax Assessment Act 1997 (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. 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 152-35 of the ITAA 1997 explains that an asset will be an active asset 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 time from when you acquired the asset until the CGT event. Section 328-125 of the ITAA 1997 provides the meaning of 'connected with' an entity. Under this provision, the secondary trust will be connected with you if you control the secondary trust, the secondary trust controls you or, both entities are controlled in a way described by the same third entity. Under subsection 328-125(3) of the ITAA 1997, you will control the trust if the trustee of the trust acts, or could reasonably be expected to act, in accordance with your directions or wishes. Subsection 328-125(4) of the ITAA 1997 provides that an entity also controls a discretionary trust for an income year if, for any of the 4 income years before that year: · the trustee paid to, or applied for the benefit of, the beneficiary /or their affiliates, or both the entity and any of its affiliates, any of the income or capital of the trust, and · the amounts paid or applied were at least 40% of the total amount of income or capital paid or applied for that income year. In your case, as the secondary trust received 100% of the distributed income of the primary trust in the 2010-11 financial year, the secondary trust is considered to be in control of the primary trust. In addition, as an individual is the sole director and shareholder of the trustee company for the secondary trust and the primary trust, it would be reasonable to expect the primary trust to act in accordance with the directions or wishes of the secondary trust and the individual. Therefore, the primary trust and the secondary trust are connected entities. While the property's main use is to derive rent, the property is used in the course of carrying on a business by a connected entity, and therefore the connected entity's use of the asset is considered your use. In addition, as the property has been used by the connected entity in their business for over half the time you have owned the asset, it will be considered an active asset under section 152-40 of the ITAA 1997.

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