Private ruling: Small Business Concessions - Active Asset Test
Ruling period: Year ended 30 June 2010 | Year ended 30 June 2011 | Year ended 30 June 2012 | Year ended 30 June 2013
Date scheme commenced: 1 July 2009

Ruling: Q1: Are the Trust and Company B connected entities under Section 328-125 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1:  | Q2: Does the sale of the business real property satisfy the definition of an Active Asset under section 152-40 of the ITAA 1997? | A2: 


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 152-40, | Income Tax Assessment Act 1997 Section 328-125 and | Income Tax Assessment Act 1997 Section 328-130.

Reasons for decision: Detailed Reasoning - General discussion of the law: Section 328-125 of the ITAA 1997 provides the meaning of 'connected with' an entity, this section reads in part as follows: 1. An entity is connected with another entity if: (a) Either entity controls the other entity in the way described in this section; or (b) Both entities are controlled in a way described in this section by the same third entity. Direct control of entity other than a discretionary trust 2. An entity (the first entity) controls another entity if the first entity, its affiliates or the first entity together with its affiliates; (a) Except if the other entity is a discretionary trust beneficially own, or have the right to acquire the beneficial ownership of, interest in the other entity that carry between them the right to receive a percentage (the control percentage) that is at least 40% of: i. Any distribution of income by the other entity; or ii. If the other entity is a partnership the net income of the partnership; or iii. Any distribution of capital by the other entity; or (b) If the other entity is a company beneficially own, or have the right to acquire the beneficial ownership of, equity interest in the company that carry between them the right to exercise, or control the exercise of, a percentage (the control percentage) that is at least 40% of the voting power in the company. Direct control of a discretionary trust 3. An entity (the first entity) controls a discretionary trust if a trustee of the trust acts, or could reasonably be expected to act, in accordance with the directions or wishes of the first entity, its affiliates, or the first entity together with its affiliates. 4. An entity (the first entity) controls a discretionary trust for an income year if, for any of the 4 income years before that year: (a) The trustee of the trust paid to, or applied for the benefit of: i. The first entity; or ii. Any of the first entity's affiliates; or iii. The first entity and any of its affiliates; (b) Any of the income or capital of the trust; and The percentage (the control percentage) of the income or capital paid or applied is at least 40% of the total amount of income or capital paid or applied by the trustee for that year. This means that an entity is connected to another entity if either controls the other entity or both entities are controlled by the same third entity. It also means that another entity is connected with an 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. Section 328-130 of the ITAA 1997 provides the meaning of 'affiliate' 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 or 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 shares. 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 of formal relationship between the parties dictating how the parties are to act in accordance to each other · the likelihood that the way the parties act, or could be reasonably expected to act, in relation to each other would be based on the relationship between the parties rather than on formal agreements or legal fiduciary obligations, and · the actions of the parties. | Detailed Reasoning - Application of the law: In this situation, Persons A and B are the only shareholders of Company B holding a 50% interest each in the shareholdings of the company, therefore as they each own a more than 40% stake of the equity interest of the company, they each have a controlling interest in the company. Additionally, Persons A and B have been allocated 40% of the income of the Trust for the income year. Persons A and B are affiliates due to their close family relationship and therefore they have direct control of the trust. As both Company B and the Trust are controlled by the same third party then the two entities are connected for the purposes of Section 138-125 of the ITAA 1997. | Detailed Reasoning - General Discussion of the law: A CGT asset is an active asset at a given time if, at that time, you own it and: · it is used (or held ready for use) in the course of carrying on a business by you, an affiliate of yours or an entity connected with you; or · it is an intangible asset that is inherently connected with a business you, your affiliate or another entity that is connected with you, carries on There is an exception under paragraph 152-40(4)(e) of the ITAA 1997 which provides that an asset whose main use in the course of carrying on the business is to derive interest, an annuity, rent, royalties or foreign exchange gains, is not an active asset. In this situation, the property is held by the Trust and subsequently leased to Company B and to the unrelated entity, therefore prima facie the property's main use is to derive rent. However, if a CGT asset is leased by an entity to a connected entity for use in the connect entity's business; the question arises as to whether the main use of the asset is to derive rent. It is the use of the asset in the connected entity's business that will determine the active asset status of the asset. An asset that is leased to a connected entity for use in its business is an active asset under subparagraph 152-40(1)(a)(ii) of the ITAA 1997, unless the use of the connected entity itself is excluded by paragraph 152-40(1)(a)(ii) of the ITAA, such as in the case that the connected entity subleases the asset. | Detailed Reasoning - Application of the Law: In this situation, the Trust leases more than 50% of the floor area of the property to Company B, a connected entity. The remaining area is leased to an unrelated entity. Company B subsequently subleases less than 25% of the floor area of the property to an unrelated company. Therefore, currently Company B still leases more than 50% of the total floor area of the property from the Trust to use in the business of Company B. Therefore based on the comparative area used for receiving rental income versus the area used by a connected entity for use in the business of the connected entity, the property is an active asset for the purposes of section 152-40 of the ITAA 1997.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns. | Relevant facts and circumstances | The trustee of the Trust is Company A. | The Directors of Company A are Person A and Person B. | The Appointer of the Trust is Person A. | 40% of the income derived by the Trust has been allocated to Person A and Person B in the current year of income by Company A. | Company B operates a marketing business. | The shareholders of Company B are Person A who holds 1 Ordinary Share and Person B who holds 1 Ordinary share. | Company B has only issued two ordinary shares. | The directors of Company B include Person A and Person B. | The Trust owns business real property. | The Trust is considering the disposal of the Property. | The Trust leases a certain portion, which equates to approximately less than 50% of the total area of the property, to an unrelated entity. | The Trust leases the remaining area, which equates to more than 50% to Company B. | Company B and an unrelated company both operate their business from the square area leased by Company B from the Trust. | The area directly occupied by the unrelated company, equates to less than 25% of the total area of the property. | The area occupied by each tenant has varied in the past however the Company B area has always exceeded 50% of the floor area, if the use by the unrelated company is included. There have been some years when depending on the basis of calculation the combined area by the unrelated entity and unrelated company may have exceeded 50%. The exact use in each year by each occupant other than the unrelated entity prior to 20XX is quite difficult to determine. | The annual turnover of Company B is greater than $2 million. | The maximum net asset test has been satisfied. | Company B receives income from the unrelated company comprising of marketing services and office facilities. | The fee charged by Company B to the unrelated company for the office facilities is below the current market value of such facilities. | Company B believes in allowing the unrelated company to occupy their space acts as a significant barrier to their ability to appoint a new advertising agency and creates a degree of interdependence between the two businesses. | Company B periodically uses the unrelated company's facilities in another location for no fee. | The unrelated company is a major client of Company B.