Taxation Determination

TD 2006/65

Income tax: capital gains: small business concessions: can a share in a company or an interest in a trust qualify as an active asset under subsection 152-40(3) of the Income Tax Assessment Act 1997 if the company or trust owns interests in another entity that satisfies the '80% test'?

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Ruling

1. Yes. A share in a company or an interest in a trust can qualify as an active asset under subsection 152-40(3) of the Income Tax Assessment Act 1997 (ITAA 1997) if the company or trust owns interests in another entity that satisfies the '80% test' in paragraph 152-40(3)(b) of the ITAA 1997. The '80% test' operates successively at each level in a chain of entities to determine the active asset status of the underlying interests.

Example 1

2. Ben owns all the shares in Holding Co which, in turn, owns all the shares in Operating Co (both are resident companies). The only assets of Holding Co are the shares in Operating Co and all of Operating Co's assets are active assets.

3. As Operating Co satisfies the 80% test, the shares owned by Holding Co in Operating Co are active assets. As those shares are the only assets owned by Holding Co, Holding Co also satisfies the 80% test and therefore the shares owned by Ben in Holding Co are also active assets.

Note 1

4. Although the small business concessions may apply if Ben sold his shares in Holding Co, none of the concessions can apply if Holding Co sold its shares in Operating Co because Operating Co does not have a controlling individual.

Example 2

5. Bill owns all the units in a unit trust (UT1). UT1 owns all the units in another unit trust (UT2). UT2 owns all the shares in a private company (C1). All of UT2's other assets are active assets. The market value of the C1 shares is 15% of the market value of all the assets owned by UT2.

6. C1 owns an active asset, the market value of which is 50% of the market value of all C1's assets. All entities are Australian residents.

7. The operation of the '80% test' is set out in the following table:

8. The shares in C1 are not active assets of UT2 because C1 does not satisfy the '80% test'. The market value of C1's active assets is only 50% of the market value of all its assets.

9. The units in UT2 are active assets of UT1 because UT2 satisfies the '80% test'. Although UT2's shares in C1 are not active assets, the market value of UT2's active assets is 85% of the market value of all its assets.

10. The units in UT1 are active assets of Bill because UT1 satisfies the '80% test'. All of UT1's assets, being the units in UT2, are active assets.

Note 2

11. Although the units in UT2 are active assets of UT1 none of the concessions can apply if UT1 sells its units in UT2 because UT2 does not have a controlling individual.

Date of effect

12. This Determination applies to years commencing both before and after its date of issue. However, the Determination does not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of the Determination (see paragraphs 75 and 76 of Taxation Ruling TR 2006/10).

Commissioner of Taxation
15 November 2006

Appendix 1 - Explanation

Explanation

13. The '80% test' is a numerical calculation that determines whether a company or trust owns sufficient active assets to allow active asset status to effectively flow through to the underlying interests.

14. Under the '80% test' a share in a company or an interest in a trust is an active asset at a given time if:

•

the company is an Australian resident at that time or the trust is a resident trust for capital gains tax (CGT) purposes for the income year in which that time occurs; and

•

the total of:

-

the market values of the active assets of the company or trust; and

-

any capital proceeds the company or trust received, during the two years before that time, from CGT events happening to active assets the company or trust holds in the form of cash or debt pending the acquisition of new active assets;

is 80% or more of the market value of all the assets of the company or trust (subsection 152-40(3) of the ITAA 1997).

15. If an entity owns a share in a company or interest in a trust that is an active asset because the company or trust satisfies the '80% test', the share or interest is included in that entity's '80% test' calculation to determine if the underlying interests in the entity are themselves active assets.

16. As the active asset test requires a CGT asset to be an active asset for at least half a particular period (generally the ownership period), the '80% test' must also be satisfied for that same period for a share in a company or interest in a trust to satisfy the active asset test.

Note 3

17. As noted in the Treasurer's Press Release No. 38 of 2006 (9 May 2006), the Board of Taxation's report on its Post-Implementation Review of the small business CGT concessions contains a number of administrative recommendations. This Taxation Determination is part of the Commissioner's response to Recommendation 7.3 of the Board's report. The Board's report also contains a number of legislative recommendations. This Taxation Determination may be affected by the legislative change relating to the new significant individual 20% test and Recommendations 7.5 and 7.6 of the Board's report.

Previously issued in draft form as TD 2006/D25

References

ATO references:
NO 2006/8977

Related Rulings/Determinations:

TR 2006/10

Subject References:
active asset
active asset test
basic condition for relief
capital gains tax
CGT events
CGT small business relief

Legislative References:
ITAA 1997 152-40(3)
ITAA 1997 152-40(3)(b)
TAA 1953

Other References:
Treasurer's Press Release No. 38 of 2006 (9 May 2006)