Private ruling: CGT roll-over and active asset
Published: September 2013
Ruling period: Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016
Date scheme commenced: 1 July 2013

Ruling: Q1: Can the partners obtain a roll-over under section 122-125 of the Income Tax Assessment Act 1997 (ITAA 1997) after transferring the goodwill and operating assets of the partnership to a company? | A1: Yes. | Q2: Will the commercial property remain an active asset for the purposes of section 152-40 of the ITAA 1997? | A2: Yes.

Relevant facts and circumstances: You operate a business from commercial property that you own. You are considering an alteration to your business structure. A company will be formed to operate the business and the company will lease the business premises from the partnership. The goodwill and operating assets of the business will be transferred to the company. The consideration received by the partners will be non-redeemable shares only. The market value of the shares will be the same as the market value of the assets transferred to the company. The partners of the partnership will be the only directors of the company. Their shares in the company will remain the same equal shares they held in the partnership. The partners and the company will all be Australian residents at the time of the asset transfer. You meet the basic conditions for the small business capital gains tax concessions.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-10, | Income Tax Assessment Act 1997 Section 122-125, | Income Tax Assessment Act 1997 Section 122-130, | Income Tax Assessment Act 1997 Section 122-135, | Income Tax Assessment Act 1997 Section 122-140 and | Income Tax Assessment Act 1997 Section 152-40.

Reasons for decision: Detailed Reasoning - Roll-over: All of the partners in a partnership can choose to obtain a roll-over if they dispose of their interests in a CGT asset of the partnership to a company, provided the conditions in sections 122-130 to 122-140 of the ITAA 1997 are met (section 122-125 of the ITAA 1997). | Detailed Reasoning - Requirements of section 122-130: Under section 122-130 of the ITAA 1997 the consideration the partners receive must be only shares in the company, or shares in the company and the company undertaking to discharge one or more liabilities in respect of their interest in the assets of the business. Furthermore, the shares cannot be redeemable shares (subsection 122-130(2) of the ITAA 1997), and the market value of the shares each partner receives must be substantially the same as the market value of the interests in the assets disposed of, less any liabilities the company undertakes to discharge in respect of those assets (subsection 122-130(3) of the ITAA 1997). You have confirmed that the consideration the partners will receive will be only non-redeemable shares in the company, and the market value of those shares will be substantially the same as the market value of the assets disposed of by the individual partners. | Detailed Reasoning - Requirements of section 122-135: Under section 122-135 of the ITAA 1997, the partners must own all the shares in the company just after the time of the disposal of the assets of the business to the company (subsection 122-135(1) of the ITAA 1997). Each partner must own the shares in the same capacity that the partner owned their interest in the assets that the company now owns (subsection 122-135(2) of the ITAA 1997). You have confirmed that the partners will own all the shares in the company just after the disposal, and that they will own the shares in the same capacity that they owned their interests in the assets that the company will own after the transfer. When each partner is an Australian resident, the company is required to be an Australian resident at the time of the disposal. You have confirmed that the partners and the company will all be Australian residents at the time of the disposal (subsection 122-135(6) of the ITAA 1997). | Detailed Reasoning - Requirements of section 122-140: As you have not advised that the company would be discharging a liability of the partnership, section 122-140 of the ITAA 1997 has not been considered. | Detailed Reasoning - Conclusion: The relevant requirements of sections 122-130 and 122-135 of the ITAA 1997 are satisfied. Therefore, the partners can choose to obtain a roll-over under section 122-125 of the ITAA 1997. | Detailed Reasoning - Active asset: A 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. Paragraph 152-40(4)(e) of the ITAA 1997 states, however, that an asset whose main use in the course of carrying on the business is to derive rent can not be an active asset unless the main use for deriving rent was only temporary. This exclusion generally does not apply to a CGT asset leased to an affiliate or connected entity. An affiliate is an individual or a company that, in relation to their business affairs, acts or could be reasonably expected to act in accordance with your directions or in concert with you. The Advanced guide to capital gains tax concessions for small business 2012-13 (NAT 3359), provides a number of relevant factors that may support a finding that a person is an affiliate of a taxpayer. In your case, the partners in the partnership and the directors in the company will be the same people. We therefore consider that the company will be an affiliate of the partnership. Consequently, the commercial property will remain an active asset for the purposes of section 152-40 of the ITAA 1997?