Private ruling: Capital Gains Tax Small Business Concessions Active Assets.
Published: January 2012
Ruling period: 1 July 20TT to 30 June 20UU, | 1 July 20UU to 30 June 20VV, | 1 July 20VV to 30 June 20WW, | 1 July 20WW to 30 June 20XX, | 1 July 20XX to 30 June 20YY, | 1 July 20YY to 30 June 20ZZ.
Date scheme commenced: 1 July 20TT

Ruling: Q1: Is the cash in the cheques account of the company for the years ended 30 June 20UU to 30 June 20ZZ inclusive, inherently connected with its business for the purposes of subsection 152-40(3)of the Income Tax Assessment Act 1997? | A1: Yes | Q2: Are the shares in the company excluded from being an active asset by subsection 152-40(4) of the Income Tax Assessment Act 1997? | A2: No

Relevant facts and circumstances: The shareholders of the company are proposing utilising the small business CGT provisions in respect of a restructure of the shareholdings in that company. To access these concessions the shares in the company must pass the active asset test. This requires the shares to be an active asset for at least half the period from when the shares in the company were acquired until they are transferred,. That is for at least 7.5 years, if the shares have been held for more than 15 years: section 152-35 Income Tax Assessment Act 1997. The company was registered on DD MM YY. The current shareholdings in the company are as follows: Number Type Date Acquired Cost A 1 F Class DD MM YY $1 B 1 A Class DD MM YY $1 C 1 B Class DD MM YY $1 B and C would like to transfer their shares in the company to an interposed family trust for asset protection, superannuation planning, and succession planning purposes. The company's accounts and income tax returns back to 30 June 20UU shows that in each of those years the company held cash at bank in a cheque account. For the shares in the company to be active assets for the small business CGT provisions, the total of the market values of the active assets of the company, and the market value of any financial instruments of the company that are inherently connected with a business that the company carries on, and any cash of the company that is inherently connected with such a business, must be 80% or more of the market value of all of the assets of the company: section 152-40(3) of the Income Tax Assessment Act 1997. The value of the active assets of the company (excluding cash in cheque account), at 30 June 20UU, 20VV, 20WW, 20XX, 20YY, 20ZZ are as follows: Date Active Assets (excluding cheque account) 30 June 20UU $A 30 June 20VV $B 30 June 20WW $C 30 June 20XX $X 30 June 20YY $Y 30 June 20ZZ $Z 30 June 20AA Not ascertained - financial statements not finalised 30 June 20BB Unknown The above figures only include purchased goodwill of $Q. Since the business of this company is profitable the actual value of the business goodwill is likely to be higher than this amount. We have not at this point determined the value of the company's goodwill. The value of all the assets of the company (including cash in cheque account), at 30 June 20UU, 20VV, 20WW, 20XX, 20YY, 20ZZ, 20AA and 20BB are as follows: Date Total Assets per balance sheet 30 June 20UU $A1 30 June 20VV $B2 30 June 20WW $C3 30 June 20XX $X1 30 June 20YY $Y2 30 June 20ZZ $Z3 30 June 20AA Not ascertained - financial statements not finalised 30 June 20BB Unknown These figures include formation expenses and prepayments capitalised for accounting purposes. The balance of the cheque account as at 30 June 20UU, 20VV, 20WW, 20XX, 20YY, 20ZZ, 20AA and 20BB is as follows: Date Cheque account balance 30 June 20UU $A2 30 June 20VV $B4 30 June 20WW $C6 30 June 20XX $X7 30 June 20YY $Y8 30 June 20ZZ $Z9 30 June 20AA $Q1 (balance on bank statement) 30 June 20BB Unknown

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 152 | Income Tax Assessment Act 1997 Subsection 152-A | Income Tax Assessment Act 1997 Subsection 152-35 | Income Tax Assessment Act 1997 Subsection 152-40(3) | Income Tax Assessment Act 1997 Subsection 152-40(3)(b) | Income Tax Assessment Act 1997 Subsection 152-40(4) | Income Tax Assessment Act 1997 Subsection 152-40(4)(e)

Reasons for decision: Summary: The cash in the cheque account of this company is used exclusively for the business. Hence it is inherently connected with its business. | Detailed Reasoning - Detailed reasoning: For the small business CGT concessions in Division 152 of the ITAA 1997 to apply, firstly the basic conditions in Subdivision 152-A of the ITAA 1997 must be satisfied. Once the basic conditions is the asset giving rise to the capital gain, for which tax relief is being sought, passes the active asset test in section 152-35 of the ITAA 1997. This requires the asset to be an active asset for at least half the period of ownership. Active assets being defined in section 152-40 of the ITAA 1997. The assets being disposed of by way of transfer are shares in the company. For a share to be an active asset it must satisfy the conditions in subsection 152-40(3) of the ITAA 1997. Paragraph 152-40(1)(b) of the ITAA 1997 requires an intangible asset, such as a share in a company, to be inherently connected with a business to be an active asset. In accordance with subsection 152-40(3) of the ITAA 1997, a share will be inherently connected if the company is an Australian resident and the 80% test in paragraph 152-40(3)(b) of the ITAA 1997 is passed. The 80% test specifies that if one of the assets of the business is cash, the cash must be inherently connected with the business to count towards satisfying the 80% or more of the total value of assets of the company. One of the assets of the company is cash in a cheque account. Therefore, for the shares in the Company to be an active asset the cash in the cheque account must be inherently connected with the business. The term 'inherently connected' is not defined in the ITAA 1936 or the ITAA 1997. Therefore the term takes on its ordinary meaning. The Macquarie dictionary defines the term as Inherently: is 'existing in something as a permanent inseparable element, quality Or attribute Connected: to bind or fasten together, join or unite, link. to establish communication between, (something followed by with) to put in communication (something followed by with) to associate or attach: the pleasure connected with music. (something followed by with) to associate mentally To become connected; join or unite (something followed by with) (of trains, buses etc) to run so as to make connections Baseball, tennis etc, colloquial to hit the ball, especially with force. Applying the definitions of inherently and connected to 'inherently connected' with the business for Division 52 of the ITAA 1997 it means that the cash in the cheque account us available for use in the business. ATO Interpretative Decision ATO ID 2003/714 confirms the above meaning by stating that if the money in the bank account is held in trust for a client, it is not inherently connected with the business, as the business does not have an equitable interest in the cash. You have provided evidence that the funds in the cheque account have been exclusively used for the running of the business. Therefore, it is clear that the funds are not available to or held for any other entity and the business has an equitable interest in the cash. Hence the case is inherently connected with the business. | Summary: Subsection 152-40(4) does not exclude the shares in the company from being an active asset, as the 80% test in paragraph 152-40(3)(b) of the ITAA 1997 is satisfied. | Detailed Reasoning - Detailed reasoning: For the shares in the company to be an active asset the 80% in test in paragraph 152-403)(b) of the ITAA 1997 must be satisfied. From the wording of paragraph 152-40(3)(b): The total of (i) the market value of the active assets of the company or trust; and (ii) the market value of the financial instruments of the company or trust that are inherently connected with the business that the company or trust carries on; and (iii) any cash of the company or trust that is inherently connected with such a business; is 80% or more of the market value of all the assets of the company or trust. It is clear that cash is not an active asset. As cash is not an active asset subsection 152-40(4) of the ITAA 1997 cannot exclude it from being an active asset. What that subsection may do is exclude the shares in the company from being an active asset. The shares in the company being the assets for which, any capital gain is made on their disposal, you wish to exclude under Division 152 of the ITAA 1997. You have provided evidence that demonstrates that the 80% test in paragraph 152-40(3)(b) has been satisfied and the company is an Australian resident. Therefore subsection 152-40(4) of the ITAA 1997 will not exclude the shares in the company from being an active asset. As cash is not an active asset subsection 152-40(4) of the ITAA 1997 cannot exclude it from being an active asset. What that subsection may do is exclude the shares in the Company from being an active asset. The shares in the company being the assets for which, any capital gain is made on their disposal, you wish to exclude under Division 152 of the ITAA 1997. You have provided evidence that demonstrates that the 80% test in paragraph 152-40(3)(b) has been satisfied and the company is an Australian resident. Therefore subsection 152-40(4) of the ITAA 1997 will not exclude the shares in the company from being an active asset.