Private ruling: CGT small business concessions
Published: June 2014
Ruling period: Year ending 30 June 2013
Date scheme commenced: 1 July 20XX

Ruling: Q1: Was property X an active asset in accordance with section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No | Q2: Can you apply the 50% active asset reduction contained in subdivision 152-C of the ITAA 1997 to the capital gain made on the disposal of property X? | A2: No | Q3: Can you apply the small business rollover contained in subdivision 152-E of the ITAA 1997 to the capital gain made on the disposal of property X? | A3: No

Relevant facts and circumstances: You purchased property X. It was your intention when purchasing property X that a business would be operated there. Property X already had facilities that would enable the relevant business to be operated. The business would be run by a discretionary trust (the trust). You are the appointor of the trust and the trust teed provides the appointor with the power to remove and appoint a new trustee. However, the business was never operated from property X. Prior to moving in and commencing operations, it was decided that the business should operate from a different location. Property X was sold. Accordingly, you obtained a lease for a property in a different location (property Y). You paid a bond/deposit on the lease which was subject to you obtaining council approval for the renovations required to be completed on property Y to enable a business to operate. Council approval for renovations to the property Y was obtained and the works commenced shortly after. The trust began operating the business from property Y.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 152-10 | Income Tax Assessment Act 1997 Section 152-40 | Income Tax Assessment Act 1997 Subdivision 152-C | Income Tax Assessment Act 1997 Subdivision 152-E | Income Tax Assessment Act 1997 Section 328-125

Reasons for decision: Detailed Reasoning - Active asset: A capital gains tax (CGT) asset is 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, your spouse or child, or an entity connected with you (section 152-40 of the ITAA 1997). An entity is connected with another entity if either entity controls the other entity, or if both entities are controlled by the same third entity (section 328-125 of the ITAA 1997). ATO Interpretive Decision ATO ID 2008/139 provides that a person who has the power to remove the trustee of a discretionary trust and appoint a new trustee will control the trust for the purposes of subsection 328-125(3) of the ITAA 1997. Accordingly, the trust is an entity that is connected to you. Property X property will therefore be an active asset where it is used, or held ready for use in a business carried on by the trust. A mere intention to start a business is not sufficient to decide a business has commenced. As noted by Brennan J in Inglis v. Federal Commissioner of Taxation (1979) 10 ATR 493; 80 ATC 4001, the level of activity is important in deciding whether a business is being carried on. Brennan J stated at ATC 4004-4005; ATR 496-497 that: The carrying on of a business is not a matter merely of intention. It is a matter of activity. Yet the degree of activity which is requisite to the carrying on of a business varies according to the circumstances in which the supposed business is being conducted. In this case, the trust did not commence business operations until after property X was disposed of. We consider that the activities up to this point were preliminary to the carrying on of the intended business. Accordingly, property X was not used or held ready for use in the trust's business during the period of ownership as the business had not yet commenced. Property X is therefore, not an active asset as defined in section 152-40 of the ITAA 1997. | Detailed Reasoning - 50% active asset reduction and small business rollover: To qualify for the CGT small business concessions, you must satisfy several conditions that are common to all the concessions. These are called the 'basic conditions' (section 152-10 of the ITAA 1997). Each concession also has further requirements that you must satisfy for the concession to apply (except for the small business 50% active asset reduction which applies if the basic conditions are satisfied). One of the basic conditions is that the asset must satisfy the active asset test. As discussed, the property X was not an active asset. Accordingly, you will not be entitled to apply either the 50% active asset reduction or the small business rollover to the capital gain made on the disposal of property X.