Private ruling: Capital gains tax
Date of advice: 16 December 2016
Published: May 2017
Ruling period: Year ended 30 June 201X
Date scheme commenced: 1 July 201X

Ruling: Q1: Does the Trust carry on a business of leasing commercial property? | A1: Yes | Q2: Is the Company an affiliate of the Trust? | A2: Yes | Q3: Is the Property an active asset of the Trust? | A3: Yes

Relevant facts and circumstances: In 19XX the Trust was established. The Trustee represents the Trust as lessor of commercial and residential properties. Individual 1 and Individual 2 are directors of the Trustee and beneficiaries of the Trust. They are involved with the Trust's rental activities including the following: ● Regular visits to meet with tenants to attend to any of their issues and to inspect the property; ● Negotiating lease agreements with new tenants, dealing with solicitors and relevant bodies; ● Attendance to maintenance of the property; ● Design and create an outdoor area. Their involvement in this process included design of the new area, organising contractors and materials and hands on work such as jack hammering concrete and other labour to achieve the outcome; ● Owning the relevant plant and equipment to carry out such maintenance including a ride on mower, tractor, concreting equipment, tiling equipment and other tools as required. Over several years since 19XX the Trust has acquired X commercial motel freeholds and will acquire more. These properties have leases. In the 201X Trust tax return, the Trust reported business details including total business income and net business income. In 20XX the Trust acquired the freehold and leasehold of the Property. In 20XX the Trust sold the leasehold to the Company. The Company's director was Individual 3 and shareholders were Individual 3 and Individual 4 - they are family members to Individual 1 and 2. Individual 1 and 2 work with Individual 3 and 4 for the day to day running of the Property's business. In 201X the Company sold the Property leasehold. The Trust purchased X residential accommodation properties between 20XX and 20XX. These X properties are still owned by the Trust and are rented out as holiday apartments. They are all managed by a property agent and rented to the general public as short term holiday accommodation. Individual 1 and 2 have done all the maintenance of these properties themselves, including painting, re-modelling and general maintenance. The aggregated turnover of the Trust and its affiliates/connected entities is less than $2 million dollars.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 152-10 | Income Tax Assessment Act 1997 Section 995-1 | Income Tax Assessment Act 1997 Section 328-130 | Income Tax Assessment Act 1997 Section 152-40

Reasons for decision: Detailed Reasoning - Basic Conditions: To qualify for the small business CGT concessions, you must satisfy several conditions that are common to all the concessions. These are called the basic conditions. A capital gain that you make may be reduced or disregarded under section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997) if the following basic conditions are satisfied: ● A CGT event happens in relation to a CGT asset of yours in an income year, ● The event would have resulted in a gain, ● The CGT asset satisfies the active asset test in section 152-35, and ● At least one of the following applies; ● you are a small business entity for the income year, ● you satisfy the maximum net asset value test in section 152-15, ● you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an interest in an asset of the partnership, or ● you do not carry on a business, but your CGT asset is used in a business carried on by a small business entity that is your affiliate or an entity connected with you. | Detailed Reasoning - Does the Trust carry on a business of leasing commercial properties?: Section 995-1 of the ITAA 1997 defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'. Taxation Ruling TR 97/11 Income tax: Am I carrying on a business of primary production outlines the Commissioner of Taxation's view on whether a business is being carried on for taxation purposes. TR 97/11 is of general application. Its principles are not restricted to questions of whether a primary production business is being carried on. In the Commissioner's view, the factors that are considered important in determining the question of business activity are: ● whether the activity has a significant commercial purpose or character ● whether the taxpayer has more than just an intention to engage in business ● whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity ● whether there is regularity and repetition of the activity ● whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business ● whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit ● the size, scale and permanency of the activity, and ● whether the activity is better described as a hobby, a form of recreation or sporting activity. Whether a business is being carried on depends on the large or general impression gained ( Martin v. Federal Commissioner of Taxation (1953) 90 CLR 470; (1953) 10 ATD 226; (1953) 5 AITR 548) from looking at all the indicators of carrying on a business, and no one indicator will be decisive ( Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922). The question of whether a business is being carried on is a question of fact and degree. In this case, the Trust has several commercial properties generating significant income. The Trust has conducted its activities for several years, keeping properties leased, and continues to operate generating a profit. The Trustee's directors and beneficiaries are actively involved in obtaining and maintaining the Trust's leasing activities. After considering the indicators of a business, it is considered the Trust is carrying on a business of leasing commercial property. | Detailed Reasoning - Is the Company an affiliate of Trust?: An affiliate is defined by section 328-130 of the ITAA 1997 as being an individual or company who acts or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you, in relation to the affairs of the individual or company. Relevant factors that may support a finding that a person acts in such a manner 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; and ● the actions of the parties. Whether a person is acting in concert with another is essentially a question of fact. The term 'acting in concert' involves at least an understanding between the parties as to a common purpose or object. In this case, the business relationship for the operation of the Property - together as freehold and leasehold owners - between the Company and the Trust does demonstrate the Company is an affiliate of the Trust. | Detailed Reasoning - Does the Property meet the active asset test?: The meaning of an active asset is set out in section 152-40 of the ITAA 1997. It must firstly 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 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. Paragraph 152-40(4)(e) specifically excludes assets whose main use by you is to derive rent. However, an asset that is leased to an affiliate for use in its business may still be an active asset. It is the use of the asset in that entity's business that will determine the active asset status of the asset. In this case, the Trust's affiliate, the Company, operated the Property leasehold (operated motel business) from 20XX to 20XX and the Trust has owned the freehold since 20XX. The Company's use is treated as the Trust's use. The Property would satisfy the active asset test.