Private ruling: active asset and retirement exemption
Published: September 2011
Ruling period: Year ending 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Do the small business capital gain tax (CGT) concessions, in particular, the 50% active asset reduction and retirement exemption under Subdivision 152D of the Income Tax Assessment Act 1997 (ITAA 1997) apply to the sale of your commercial premises? | A1: No.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 152-40 | Income Tax Assessment Act 1997 Section 152-35 | Income Tax Assessment Act 1997 Section 152-10 | Income Tax Assessment Act 1997 Section 328-125 | Income Tax Assessment Act 1997 Section 328-130

Reasons for decision: Summary: Legislative references referred to herein are from the ITAA 1997, unless otherwise stated. The asset would not meet the definition of an active asset in subsection 152-40(1) as you (together with your affiliates) are not connected with (section 328-125) the entity that operates the business from your property. Consequently, the basic conditions to qualify for the small business concessions in section 152-10 are not satisfied. | Detailed Reasoning - Detailed reasoning: For the small business CGT concessions in Division 152 to apply to reduce or disregard a capital gain, the relevant CGT asset must satisfy all the basic conditions for relief as outlined in section 152-10. One of these conditions is the active asset test under section 152-35. The active asset test is presented in section 152-35. Section 152-35 states: 152-35 (1) A *CGT asset satisfies the active asset test if: (a) 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 period specified in subsection (2); or (b) 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 7½ years during the period specified in subsection (2). 152-35(2) The period: (a) begins when you acquired the asset; and (b) ends at the earlier of: (i) the CGT event; and (ii) if the relevant business ceased to be carried on in the 12 months before that time or any longer period that the Commissioner allows - the cessation of the business. You have advised that the unit trust used the premises for the entire period of your ownership. | Detailed Reasoning - Active Asset: Section 152-40 discusses the meaning of the term 'active asset', and at subsection 152-40(1) states, in part, that a CGT asset is an active asset at a time if, at that time, you own the asset and it is used, or held ready for use, in the course of carrying on a business that is carried on by you or your affiliate, or another entity that is connected with you. In order for the property to be an active asset it must be used in the business of an entity connected to you or affiliate. | Detailed Reasoning - Connected with an entity: An entity is connected with another entity if (subsection 328-125(1)): (c) either entity controls the other entity in a way described in this section; or (d) both entities are controlled in a way described in this section by the same third entity. | Detailed Reasoning - Direct control of an entity other than a discretionary trust: Subsection 328-125(2) states an entity (the first entity) controls another entity if the first entity, its affiliates, or the first entity together with its affiliates: (b) except if the other entity is a discretionary trust - beneficially own, or have the right to acquire the beneficial ownership of, interests in the other entity that carry between them the right to receive a percentage (the control percentage) that is at least 40% of any distribution of income by the other entity; or if the other entity is a partnership - the net income of the partnership; or any distribution of capital by the other entity; or This means that an entity is connected to another entity if either entity controls the other entity or both entities are controlled by the same third entity. It also means that an entity is connected to another entity, if the entity, its affiliates or both of them beneficially own, or have the right to acquire the beneficial ownership of interests in, the other entity that give them the right to receive at least 40% of the distribution of income or capital by the other entity. In your case, pursuant to section 328-125(2)(a) an entity (you) are connected with another entity (the unit trust) if: You, together with the other families (affiliates) beneficially own, or have the right to acquire the beneficial ownership of, interest in the unit trust that carry between you the right to receive a percentage that is at least 40% of any distribution of income or capital by the unit trust. | Detailed Reasoning - Are the other families your affiliates?: The meaning of affiliate is under section 328-130, which reads as follows: 328-130(1) An individual or a company is an affiliate of yours if the individual or company 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 business of the individual or company 328-130(2) However, an individual or a company is not your affiliate merely because of the nature of the business relationship you and the individual or company share. 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 is a question of fact dependent on all the circumstances of the 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 lack of any formal agreement between the parties prescribing 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; and · the actions of the parties. In applying the above points to the current situation: One factor to consider is the nature of the relationship between the parties. There is not a close family relationship between the families. Given the nature of the business structure, it is expected there would be formal agreements between the parties. Subsection 328-130(2) states that an individual or a company is not your affiliate merely because of the nature of the business relationship you and the individual or company share, for example a partner in a partnership would not be an affiliate of another partner merely because the first partner acts, or could reasonably be expected to act, in accordance with the directions or wishes of the second partner, or in concert with the second partner, in relation to the affairs of the partnership. Directors of the same company and trustees of the same trust, would be in a similar position. Given the examples of the actions of the parties you have provided, there is no direct evidence that the other families acted, or could be reasonably expected to act, in accordance with your directions or wishes, or in concert with you in respect of the conduct of its business. As the other families are not your affiliates, you do not control the unit trust because your interest in the unit trust is under 40% and you cannot add the interests of the other couples. As a result, the asset would not meet the definition of an active asset in subsection 152-40(1) as you are not connected with (section 328-125) the entity that operates the business from your property. Consequently, the basic conditions to qualify for the small business concessions in section 152-10 are not satisfied.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Relevant facts: You sold commercial premises that you have leased to a unit trust for the full period of ownership. The sale resulted in a capital gain. You are over the age of 55 years old. | The unit trust has operated a business from the commercial premises since its inception. | The units in the unit trust are held equally by a few family discretionary trusts. | You satisfy the maximum net asset value test when taking into account the total net assets of the unit trust as a connected entity and those of the other two families as affiliates. | You have advised that the families hold meetings on a regular basis and decisions are made by all of them regarding the following:- | · capital expenditure on plant etc | · staffing levels and salaries | · the amount to be drawn from the earnings by each family (always equal) | · general strategy for meeting competition | · policy for debtors control. | Only the day to day pricing, volume discounts etc; are the responsibility of those working full time in the business. | Each of the families involved have had to guarantee the borrowings of the business at times and thus commit their own assets to commence and support the business. | The improvements to the premises over the years have been formulated by the three families to suit the business even though the premises were owned by you. The premises have only ever been used by the business of the unit trust and that was the intention at the time of acquisition. | When you were negotiating to sell the premises, you were only prepared to do so to a purchaser who would commit to continuing lease to the unit trust so that the business had continuity of tenure. | Does Part IVA apply to this ruling?: Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable. | We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. | If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply. | For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: 'Part IVA: the general anti-avoidance rule for income tax'.