Private ruling: Small business concessions and the active asset test
Date of advice: 9 September 2016
Published: November 2016
Ruling period: Year ending 30 June 2017 | Year ending 30 June 2018 | Year ending 30 June 2019
Date scheme commenced: 1 July 2016

Ruling: Q1: Is the property owned by the Trust an active asset? | A1: Yes.

Relevant facts and circumstances: The Trust owns land that is used by the Company to operate its businesses. The Company has used the land owned by the Trust to operate its business since the land was acquired by the Trust over 15 years ago. The Trust and the Company had previously signed a lease agreement for the use of the land. However, this lease agreement lapsed several years ago and has not been renewed. The Company continues to run its business on the land owned by the Trust despite the lack of formal agreement. It also pays rent at under market rate. The Trust does not currently carry on a business and merely derives passive interest and rental income. Both entities operate out of the same business premises. Both the Company and the Trust share IT infrastructure and both have access to the other entities computer data. Network resources and internet access for both entities are fully integrated. Employees of the Company also provide services to the Trust such as administration and management. Accounting and bookkeeping functions for both the Trust and the Company are managed jointly with common staff. The Trust and Company share: Telephone systems, security systems, staff car parking, office space, staff toilets, kitchen amenities and a post office box for incoming mail. The Company and the trust share common insurance policies. The Trust has provided, and continues to provide, financial accommodation by way of an unsecured loan to the Company to help fund the Company's business operations. There is no formal loan agreement or agreed repayment terms. Interest is charged on the outstanding balance. The Company's credit cards are regularly used for the Trust's expenses. Reimbursements are adjusted through inter-entity loan accounts. The Company and the Trust have access to the same online banking facilities and there is a single online banking login for both entities. The affairs of the Trust and the Company are conducted by the same controlling individuals. Meetings for both the Trust and the Company are often held on the same day and in conjunction with each other. The controlling individuals have a longstanding personal and business relationship spanning more than XX years. From 20AA A and B have had equal 50% ownership of the units in the Trust, and are 50% shareholders of the Trusts corporate trustee. A, and B are currently the only two directors of the company. A, and B have been the ultimate majority controllers/shareholders in the Company, since its establishment. By 20AA A and B had bought out the shares in the Company held by other parties. Both the Trust and the Company are Australian residents for tax purposes.

Relevant legislative provisions: Income Tax Assessment Act 1997 - Section 152-35 | Income Tax Assessment Act 1997 - Section 152-40 | Income Tax Assessment Act 1997 - Subsection 328-120(1)

Reasons for decision: Detailed Reasoning - Active asset test: For the small business concessions in Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997) to apply to reduce or disregard a capital gain, the relevant CGT asset must satisfy the active asset test in section 152-35 of the ITAA 1997. 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 at 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). The meaning of an active asset is set out in section 152-40 of the ITAA 1997. It must first satisfy one of the 'positive tests' in subsection 152-40(1) of the ITAA 1997 and then also not be excluded by one of the exceptions in subsection 152-40(4) of the ITAA 1997. Under subsection 152-40(1) of the ITAA 1997, a CGT asset is an active asset (subject to the exclusions) if it is owned and used, or held ready for use, in the course of carrying on a business by you or your small business CGT affiliate or another entity that is connected with you under paragraph 152-40(1)(c) of the ITAA 1997. The combined effect of sections 152-35 and 152-40 of the ITAA 1997 is that the asset will meet the active asset test if the asset was used, or held ready for use, in the course of carrying on a business for at least half of the time period it was owned, subject to the exclusions in subsection 152-40(4) of the ITAA 1997. In this case, it needs to be determined whether the property owned by the Trust is an active asset. Although the Trust does not carry on a business, it is advised that the property is used in the course of carrying on a business by the Company. You have previously determined that the Company is not a connected entity of the Trust. Accordingly, it is necessary to consider whether the Company is an affiliate of the Trust. | Detailed Reasoning - Affiliates: According to subsection 328-120(1) 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 Broadly, acting 'in concert with you' in relation to their business affairs means there is a substantial degree of dependence on, or connection with you. Whether 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 in question is a matter of fact dependent on the circumstances of a particular case. No one factor will necessarily be determinative. 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 nature and extent of the commercial dealings between the parties, • one entity's involvement in the managerial decisions and day-to-day management of the other, • financial interdependencies (for example, financial support or shared banking arrangements), • any common ownership of capital backing, • 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, and • the actions of the parties. However, a person is not your affiliate merely because of the nature of a business relationship you and the person share. For example, companies and trusts are not affiliates of their directors and trustees respectively and vice versa, merely because of the positions held. In this case, A and B hold substantial ownership interests in both the Trust and the Company. They hold a direct 50% each interest in the Trust and its corporate trustee in their own names. In addition, they also have an indirect interest in Company as A being owner and controller of Company A which holds a XX% and B being controller of the FF Trust which has a total of ZZ% interest in the Company. A level of dependency between the Trust and the Company is evident in the fact that the Trusts primary asset is used in the Company's business. The property has always been used by the Company for its business since its purchase. The actions and past behaviour of the entities also point to the fact that they are affiliates. The Trust has provided financial assistance to the Company by way of a loan on an as needs basis. Also the Company's credit card is regularly used to pay for the Trust's expenses and then adjustments are made to the loan account. Furthermore, while the Trust charges the Company rent to use the property, the rent charged by the Trust is lower than the market rate and any formal lease that existed lapsed years ago. While the Trust doesn't carry on a business it shares premises with the Company. The Company's employees also provide services to the Trust such as administration and management. The Trust and Company also share bank accounts, accounting and bookkeeping functions, telephone and security systems, post office boxes and insurance policies. Accordingly, it is considered that the Company is an affiliate of the Trust. Therefore, the Trust can include the Company's use of the property in considering whether the property is an active test. Because the property has been used in the course of carrying on a business of Company for approximately LL years, it will be considered to have been an active asset over this period subject to it not being excluded from being considered an active asset under subsection 152-40(4) of the ITAA 1997. | Detailed Reasoning - Asset used to derive rent: Even though the property is used in the course of carrying of a business of an affiliate of the Trust, subsection 152-40(4) of the ITAA 1997 provides a list of exceptions and outlines which CGT assets cannot be active assets. Paragraph 152-40(4)(e) of the ITAA 1997 excludes, among other things, assets whose main use is to derive rent (unless such use was only temporary). Such assets are excluded even if they are used in the course of carrying on a business. However, for the purposes of the exclusion in paragraph 152-40(4)(e), attributing use of an asset by an affiliate or connected entity to a taxpayer means that any business use by an affiliate or connected entity is treated as business use by the taxpayer. This is the case even if the taxpayer rents the asset to an affiliate or connected entity for use in the affiliate or connected entity's business. In this case, the Trust charges the Company rent to use the property. However, because they are affiliates, the rent that the Trust receives from the Company is not treated as rent for the purposes of determining the Trust's main use of the property. Accordingly, the property can be considered to have been an active asset. In conclusion, the Trust acquired the property approximately LL years ago. For the entire time the Trust has owned the property it has been used by the Company to operate its business. The property satisfies the active asset test because the property has been an active asset for over half of the ownership period.