R
E
L
P
M
SA
This is an extract from
Australian Tax Handbook
Tax Return Edition 2011
the Australian Tax Handbook 2012 - publishing february
TABLE OF CONTENTS
Authors .............................................................................................................................................. iii
Acknowledgments .............................................................................................................................. iv
Preface ............................................................................................................................................... v
Abbreviations .................................................................................................................................... ix
Year in Review .................................................................................................................................. xi
AUSTRALIAN TAX SYSTEM
1 Australian Tax System ............................................................................................... 1
2 Residence and source .............................................................................................. 22
INCOME
3 Income – general principles .................................................................................... 36
4 Employment income ................................................................................................ 64
5 Business income ...................................................................................................... 98
6 Income – specific categories ................................................................................. 120
7 Exempt income ...................................................................................................... 164
DEDUCTIONS
8 Deductions – general principles ............................................................................ 211
9 Deductions – specific items .................................................................................. 250
10 Capital allowances ............................................................................................... 334
11 Specific incentives ............................................................................................... 426
CAPITAL GAINS TAX
12 CGT – overview .................................................................................................. 479
13 CGT events .......................................................................................................... 489
14 Cost base, capital proceeds and calculation matters .......................................... 528
15 CGT – exemptions and concessions ................................................................... 548
16 CGT roll-overs ..................................................................................................... 583
17 CGT – special assets and topics ......................................................................... 617
18 CGT – international aspects ................................................................................ 662
ENTITIES
19 Individuals ........................................................................................................... 672
20 Companies ........................................................................................................... 735
21 Companies – dividends and imputation ............................................................. 771
22 Partnerships .......................................................................................................... 838
23 Trusts .................................................................................................................... 865
24 Consolidation ....................................................................................................... 950
SPECIAL CLASSES OF TAXPAYERS
25 Small business entities ........................................................................................ 992
26 Minors ................................................................................................................ 1006
27 Primary producers ............................................................................................. 1017
28 Special professionals ......................................................................................... 1055
vi
2011 THOMSON REUTERS
TABLE OF CONTENTS
29 Natural resource industries ................................................................................ 1064
30 Life insurance companies .................................................................................. 1070
FINANCIAL ARRANGEMENTS
31 Debt and equity rules ........................................................................................ 1085
32 Financial transactions ........................................................................................ 1108
33 Asset-based financing ........................................................................................ 1165
INTERNATIONAL TAXATION
34 Residents and foreign source income ............................................................... 1187
35 Foreign residents and Australian-sourced income ............................................ 1218
36 Double taxation agreements .............................................................................. 1251
37 Transfer pricing ................................................................................................. 1271
38 Thin capitalisation ............................................................................................. 1288
SUPERANNUATION
39 Superannuation contributions ............................................................................ 1300
40 Superannuation benefits .................................................................................... 1355
41 Superannuation funds ........................................................................................ 1402
ANTI-AVOIDANCE PROVISIONS
42 General anti-avoidance – Part IVA ................................................................... 1431
43 Specific anti-avoidance provisions .................................................................... 1447
44 Financial transaction reporting and exchange control ..................................... 1458
RULINGS, RETURNS, ASSESSMENTS AND OBJECTIONS
45 Tax rulings system ............................................................................................. 1463
46 Returns and record-keeping .............................................................................. 1478
47 Assessments ....................................................................................................... 1496
48 Objections and appeals ...................................................................................... 1508
COLLECTION, RECOVERY AND AUDITS
49 Payment of tax – general .................................................................................. 1526
50 PAYG withholding ............................................................................................. 1546
51 PAYG instalments .............................................................................................. 1581
52 RBA & BAS ...................................................................................................... 1613
53 Tax audits and investigations ............................................................................ 1622
OTHER ADMINISTRATION
54 Penalties and offences ....................................................................................... 1643
55 Tax File Numbers and Australian Business Numbers ...................................... 1679
56 Tax agents .......................................................................................................... 1692
FRINGE BENEFITS TAX
57 FBT – introduction ............................................................................................ 1707
58 Valuation of fringe benefits ............................................................................... 1733
59 FBT – collection and administration ................................................................ 1779
2011 THOMSON REUTERS
vii
AUSTRALIAN TAX HANDBOOK TAX RETURN EDITION 2011
OTHER TAXES
60 GST .................................................................................................................... 1789
61 Pay-roll tax ........................................................................................................ 1828
62 Stamp duty ......................................................................................................... 1836
TAX PLANNING
63 Tax planning ...................................................................................................... 1851
PENDING DEVELOPMENTS
64 Pending developments ....................................................................................... 1867
TABLES AND READY RECKONERS
100 Tax rates and tables – individuals .................................................................. 1875
101 Tax rates and tables – trustees and companies .............................................. 1881
102 Tax rates and tables – CGT, FBT, withholding tax ....................................... 1887
103 Tax rates and tables – superannuation and retirement ................................... 1901
104 Tax rates and tables – miscellaneous items .................................................... 1906
105 Tax payable ready reckoner ............................................................................ 1930
106 Depreciation rates ............................................................................................ 1970
107 Tax calendar ..................................................................................................... 2128
Legislation Table ..................................................................................................... 2133
Cases Table ............................................................................................................. 2161
Rulings Table .......................................................................................................... 2180
Index ........................................................................................................................ 2192
viii
2011 THOMSON REUTERS
[15 500]
CGT – EXEMPTIONS AND CONCESSIONS
SMALL BUSINESS EXEMPTIONS AND ROLL-OVER
[15 500] Overview
Division 152 provides a range of concessions to reduce, eliminate or roll over a capital gain
made on a CGT asset that has been used in a ‘‘small’’ business. These concessions are as follows:
(1) the ‘‘15-year exemption’’ (Subdiv 152-B): see [15 560]
(2) the ‘‘50% reduction’’ (Subdiv 152-C): see [15 570]
(3) the ‘‘retirement exemption’’ (Subdiv 152-D): see [15 580]
(4) the ‘‘roll-over’’ concession (Subdiv 152-E): see [15 590].
The availability of the concessions is subject to satisfying a range of ‘‘basic’’ conditions. In
addition, the concessions themselves contain conditions that must also be met. Note also that the
concessions can, in effect, be applied successively to eliminate a capital gain (apart from the
‘‘15-year exemption’’ which eliminates a capital gain in its own right).
Division 152 applies to capital gains realised after 11.45 am on 21 September 1999.
Succinct
overviews
to each chapter
introducing
the subject area.
Basic conditions
There are 2 basic conditions that must be met for a capital gain made by a taxpayer to qualify
for the small business concessions.
Firstly, the taxpayer must satisfy either (a) the ‘‘maximum net asset value’’ test (see [15 510])
or (b) the ‘‘small business entity’’ test (see [15 520]) or (c) be a partner in a partnership that is a
‘‘small business entity’’ where the CGT asset is an interest in an asset of the partnership (see [15
520]): s 152-10(1).
Secondly, the CGT asset that gives rise to the gain must be an ‘‘active asset’’ (see [15 530]):
s 152-40(1). This can include shares or trust interests, subject to satisfying certain conditions (see
[15 540]): s 152-40(3).
Relevant CGT events
The concessions are available in respect of most CGT events that happen ‘‘in relation to a
CGT asset’’ that is an active asset: s 152-10(1)(a). For example, in ATO ID 20011/45, the Tax
Office ruled that this includes CGT event D2 (about granting, renewing or extending an option: see
[13 160]) as the CGT event happens ‘‘in relation to’’ the underlying asset. It also specifically
includes CGT event D1 (creating contractual or other rights: see [13 150]), provided the CGT
event is inherently connected with a CGT asset that satisfies the ‘‘active asset’’ test (eg it applies if
a restrictive covenant is granted on the sale of business assets): s 152-12.
However, the concessions are not available for gains arising under CGT event K7 (balancing
adjustment event for depreciating asset) as this event relates to the use of an asset for non-income
producing purposes. Further, capital gains reinstated under CGT events J2, J5 or J6 (for gains
previously rolled-over under Subdiv 152-E) are not entitled to the 15-year exemption under
Subdiv 152-B or the 50% reduction under Subdiv 152-C. Likewise, capital gains reinstated under
CGT events J5 and J6 are not entitled to the Subdiv 152-E roll-over again: s 152-10(4).
Commentary
is written in a
manner that
helps you find
answers quickly
with only the
core information
you require.
Availability to LPR, beneficiary and surviving joint tenant
The concessions are also available to the legal personal representative (LPR) or beneficiary of
a deceased estate, a surviving joint tenant and the trustee of a testamentary trust provided: (a) the
deceased would have qualified for the concessions just before his or her death; and (b) the CGT
event that gives rise to the gain in the hands of the LPR or beneficiary occurs within 2 years of the
deceased’s death (or such further time as the Commissioner allows): s 152-80.
[15 510] Maximum net asset value test
Under the maximum net asset value test, the net value of all the CGT assets of the taxpayer,
the taxpayer’s ‘‘affiliates’’ and entities ‘‘connected with’’ the taxpayer (subject to certain
exceptions) must not exceed $6m: s 152-15. A debt owed to the taxpayer, affiliate or connected
566
2011 THOMSON REUTERS
session: 5 August 2, 2011 page no: 19 folio no: 566
@syd-tlrapp-p19/syd-tlrapp-p191/CLS_law/GRP_aust.tax.handbook/JOB_update310/DIV_1205
PROOF COPY
CGT – EXEMPTIONS AND CONCESSIONS
[15 510]
entity would be such a CGT asset, and would, prima-facie, be brought into account at its face
value: see AAT Case [2010] AATA 591, Re Cannavo and FCT. In the case of a foreign resident,
their worldwide CGT assets are included in the net value of their CGT assets for the purposes of
the maximum net asset value test, and not just ‘‘taxable Australian property’’ (see [18 100]): ATO
ID 2010/126.
Meaning of ‘‘affiliate’’ and ‘‘connected’’ entity
Expert
commentary
giving you the
appropriate
depth of
analysis.
Practical
examples to
aid your
understanding
of the
principles,
making the
information
easier to
understand.
An ‘‘affiliate’’ is defined as an individual or company that acts, or could reasonably be
expected to act, in accordance with the directions or wishes of the taxpayer, or in concert with the
taxpayer, in relation to the business affairs of the individual or company: s 328-130(1). See [25
040] for further details.
An entity will be ‘‘connected with’’ a taxpayer if one entity controls the other, or if each is
controlled by a third party in accordance with the ‘‘control’’ rules in s 328-125. ‘‘Control’’ is
determined broadly by reference to voting, income and capital distribution rights in the entity of
40% or more. See [25 040] for further details.
Meaning of net value
The ‘‘net value’’ of CGT assets of the taxpayer, an ‘‘affiliate’’ and a ‘‘connected entity’’
means the amount (including negative amounts) by which the market value of each of the CGT
assets exceeds the liabilities that are related to the asset and various specified provisions:
s 152-20(1). These ‘‘specified provisions’’ are provisions for annual leave, long service leave,
unearned income and tax liabilities: s 152-20(1)(b). See also Determination TD 2007/14.
The term ‘‘liabilities’’ extends to legally enforceable debts due for payment and to presently
existing obligations to pay either a sum certain or an ascertainable sum. Furthermore, they can
include liabilities that relate to assets of the business as a whole (eg a bank overdraft). However,
they do not include contingent liabilities, future obligations or expectancies. For example, in Re
Tingari Village North Pty Ltd and FCT (2010) 78 ATR 693 [2010] AATA 233, the AAT found that
a borrowing liability allocated to a unit trust was a ‘‘contingent liability’’ as it was merely an
indemnity against the property of the unit trust in the event that the individuals who took out the
loan (and on-lent it to the trust) defaulted. The AAT also found that even if it were a relevant
liability, it did not ‘‘relate to’’ the assets of the unit trust.
EXAMPLE [15 510.10]
Valerie has CGT assets with a market value of $7m. The liabilities that relate to those
assets are $1m. She has also made provisions for the income year of $300,000 for annual
leave, $150,000 for unearned income and $50,000 for tax liabilities (totalling $1/2m). She
therefore has a net asset value of $5.5m for that year. Valerie also owns 70% of the shares in
LAE Pty Ltd (a ‘‘connected entity’’), which has CGT assets with a market value of $2m and
liabilities relating to those assets of $3m, ie a negative net asset value of $1m.
Therefore, as the net asset value of a taxpayer includes the value of connected entities,
Valerie’s net asset value is $4.5m, ie $5.5m less the $1m negative net asset value of LAE Pty
Ltd.
Note also that liabilities will be included in the net asset value test if those liabilities relate to
interests in an entity connected with the taxpayer, where those interests have been disregarded to
avoid double counting (see ‘‘Excluded assets’’ below). Such liabilities would include money
borrowed by the taxpayer to buy shares in a connected entity, where the net value of the shares is
otherwise disregarded. This measure applies to CGT events happening on or after 23 June 2009.
Excluded assets
The following CGT assets are excluded from the maximum net asset value test (s 152-20(2)):
• shares, units or other interests (except debt) in an affiliate or a connected entity (to
prevent double counting of the value of the underlying assets of those entities that have
already have been taken into account under the test);
2011 THOMSON REUTERS
session: 5 August 2, 2011 page no: 20 folio no: 567
@syd-tlrapp-p19/syd-tlrapp-p191/CLS_law/GRP_aust.tax.handbook/JOB_update310/DIV_1205
567
PROOF COPY
[15 520] CGT – EXEMPTIONS AND CONCESSIONS
• if the taxpayer is an individual, an asset used over its entire ownership period (ATO ID
2011/38) solely for the personal use and enjoyment of the taxpayer or his or her affıliates
(ATO ID 2011/39) – but excluding an interest earning personal bank account (ATO ID
2009/33), vacant land on which the taxpayer intends to construct a dwelling for private
use (ATO ID 2009/34) and the personal use by others of an individual’s holiday house
for which rent is paid (ATO ID 2011/41), but not one for which no rent is paid (ATO ID
2011/40);
• the net value of a dwelling that is an individual’s main residence (see ATO ID 2011/39),
but only to the extent that it was not used for income producing purposes (as determined
by the proportion of the dwelling and the period for which interest could be claimed as a
deduction): s 152-20(2A); and
• a right to any payment from, or asset of, a superannuation fund or approved deposit fund,
or a policy of insurance on the life of an individual.
Note that the assets of a taxpayer’s affiliate, or an entity connected with that affiliate, are not
included in the net asset value test for the taxpayer if they are used by an entity connected with the
taxpayer and that connection only arises because of the ‘‘affiliate’’ relationship with the taxpayer
(eg a spousal relationship): s 152-20(3) – (4). See the Example in s 152-40(4).
Partnership assets
If the taxpayer is a partner in a partnership, and the relevant CGT event happens to
partnership assets, the maximum net assets value test does not include all the partnership assets,
but only the partner’s interest in the partnership.
However, all the partnership assets will be taken into account for the purposes of the
maximum net asset value test (or the ‘‘small business entity’’ test: see [15 520]) if the partner
controls the partnership in terms of the 40% distribution control rule under s 328-125(2) for
connected entities, or to the extent that the partners are ‘‘affiliates’’ of each other under s 328-130.
See [25 040] for the meaning of ‘‘connected entities’’ and ‘‘affiliates’’. In this regard, note that a
partnership is specifically included as a ‘‘connected entity’’ of a partner under the 40% distribution
test: s 328-125(2)(a)(ii).
Application – just before CGT event
The maximum net asset value test is required to be met ‘‘just before the CGT event’’ that
gave rise to the gain: s 152-15. However, in AAT Case [2010] AATA 455 (2010) (on appeal), the
AAT ruled that the costs of the sale of a CGT asset (ie legal fees, commissions etc) were liabilities
to be taken into account for the purposes of the test even though they were incurred after CGT
event A1 occurred, ie after entering into the contract of sale. This was because the AAT said that
they were ‘‘inextricably connected’’ to the disposal of the asset that gave rise to the gain.
[15 520] Small business entity test
A taxpayer can also qualify for the concessions under the ‘‘small business entity’’ test in
Subdiv 328-C: s 152-10(1)(c)(i). This requires:
(a) the taxpayer who owns the CGT asset to be carrying on a business (subject to the
exception for ‘‘passively held assets’’ – see below), and
(b) the annual turnover of the taxpayer, ‘‘affiliates’’ and ‘‘connected entities’’ not to exceed
$2m in the income year.
See [25 020] and following for further details of this test (and for the meaning of ‘‘affiliate’’
and ‘‘connected entity’’).
In the case of partners, this test will be met if the partnership is a ‘‘small business entity’’ and
the CGT asset is ‘‘an interest in an asset of the partnership’’: s 152-10(1)(c)(iii). However, a
partner cannot be a ‘‘small business entity’’ in their own right: s 328-110(6).
Headings help
you scan the
page to quickly
find the subject
area you want.
‘‘Passively held’’ assets
A taxpayer can also use the concessions under the small business entity test for ‘‘passively
held’’ assets (ie where the taxpayer does not carry on a business but an asset they own is used in
a business carried on by an affiliate or a connected entity): s 152-10(1A). This could occur if, for
568
2011 THOMSON REUTERS
session: 5 August 2, 2011 page no: 21 folio no: 568
@syd-tlrapp-p19/syd-tlrapp-p191/CLS_law/GRP_aust.tax.handbook/JOB_update310/DIV_1205
PROOF COPY
CGT – EXEMPTIONS AND CONCESSIONS
[15 530]
example, an asset owned by an individual taxpayer is used in a business carried on through their
wholly owned company. Likewise, a partner (or partners) who owns a CGT asset that is not an
interest in a partnership asset can access the small business concessions via the ‘‘small business
entity test’’ if the asset is made available for use in the partnership: s 152-10(1B).
For these purposes, the meaning of ‘‘affiliate’’ is extended to allow spouses and children
(under 18 years) to qualify as affiliates for the purpose of treating an asset owned by the taxpayer
(or an entity in which a taxpayer has an interest) as an ‘‘active asset’’ if it is used in, or is
inherently connected with, a business carried on by the spouse or child through another entity:
s 152-47.
Note that while this provision increases access to the concessions under the ‘‘small business
entity test’’, it potentially reduces access to the concessions under the ‘‘maximum net asset value’’
test (see [15 510]) by including more ‘‘affiliates’’ for the purpose of that test.
There are also special rules for calculating aggregated turnover for passively held assets, in
addition to the basic aggregated turnover rules in Subdiv 328-C (see [25 020]). Broadly, these rules
treat an entity that is an affiliate or connected entity of the owner of a passively held CGT asset as
an affiliate or connected entity with the entity that uses the passively held asset in its business:
s 152-48. As a result, this rule includes the turnover of all entities that are, in effect, part of the
same business operation.
If the CGT event that gives rise to the capital gain occurs in a later year than that in which the
asset owner ceased to carry on the business, and the business is being wound up in the CGT event
year, s 152-49 effectively allows access to the small business concessions by treating the entity as
carrying on the business in the CGT event year and treating the CGT asset as being used in, or
being inherently connected with, the business in that year. This ensures the same treatment applies
to passively held assets as for other assets under s 152-35(2): see [15 530].
[15 530] Active asset test – general
A CGT asset of the taxpayer is an ‘‘active asset’’ if it is used, or held ready for use, in
carrying on a business by the taxpayer or by an ‘‘affiliate’’ or a ‘‘connected entity’’ of the taxpayer:
s 152-40(1)(a). As a result, an active asset can include land owned by a family trust that is used by
a beneficiary in the beneficiary’s business, provided the parties are ‘‘connected entities’’ or
‘‘affiliates’’. Likewise it can include an asset leased by a taxpayer to a connected entity or affiliate
for use in their business. See [25 040] for the meaning of ‘‘affiliate’’ and ‘‘connected entity’’.
For the purposes of the ‘‘active test’’ only, an affiliate includes the taxpayer’s spouse or child
under 18 (see [15 510]): s 152-47. Likewise, for the purpose of the ‘‘active asset’’ test, the trustee
of a discretionary trust can nominate up to 4 beneficiaries as being controllers of the trust in a year
in which it did not make a distribution (because of tax losses or nil taxable income) in order for
beneficiaries to be ‘‘connected’’ to the trust (see [25 040]) for the purpose of accessing the
concessions under the maximum net asset value test (albeit they are currently not required to
aggregate the market value of their assets in these circumstances): s 152-42.
Case references
that are most
relevant to the
main principles
being discussed.
For CGT events occurring from 1 July 2007, the concessions can also be accessed via the
small business entity under this nomination rule: s 152-78. In such a case, the trust and the
beneficiary (or beneficiaries) will also be required to aggregate the market value of their CGT
assets or turnovers (but only with effect from 27 June 2011). Currently, no such aggregation is
necessary where the parties are deemed to be connected under this active asset ‘‘nomination’’ rule.
Whether an entity is ‘‘carrying on a business’’ is considered at [5 020]. In Re
Karapanagiotidis and FCT (2007) 68 ATR 348; [2007] AATA 1961, the AAT decided that vacant
land on which a taxpayer stored business records in containers was not being used in a business
and therefore the land was not an active asset. Note that the rule in s 392-20(1) of the ITAA 1997,
that a beneficiary who is entitled to income of a trust carrying on a primary production business is
deemed to be also carrying on the business for averaging purposes, is disregarded for the purposes
of the ‘‘active asset’’ test: s 152-40(2). Note also that a partner is considered to be carrying on a
business not in their own right, but collectively with the other partners.
For the meaning of ‘‘used, or held ready for use’’, see [10 080]. For example, a farm to which
improvements have been made in preparation for the return of stock would be considered as being
‘‘held ready for use’’ in the taxpayer’s business. See ATO ID 2002/354, ATO ID 2002/405 and
2011 THOMSON REUTERS
session: 5 August 2, 2011 page no: 22 folio no: 569
@syd-tlrapp-p19/syd-tlrapp-p191/CLS_law/GRP_aust.tax.handbook/JOB_update310/DIV_1205
569
PROOF COPY
[15 530]
CGT – EXEMPTIONS AND CONCESSIONS
ATO ID 2002/766 for instances where the Tax Office ruled that assets were not being used, or held
ready for use, in a business. In addition, s 152-40(1)(b) provides that an ‘‘active asset’’ also
includes intangible assets inherently connected with carrying on the business (eg goodwill and
rights under a restrictive covenant) by the taxpayer, an affiliate or a connected entity. Trade debts
can also be an active asset under this test: Determination TD 2006/65.
An active asset includes shares and trust interests if relevant conditions are met (see [15 540]).
Period for which asset must have been an active asset
The asset must have been an ‘‘active asset’’ for at least half the period of its ownership, or at
least 7½ years if the asset was owned for more than 15 years: s 152-35(1). This ownership period
is measured from the time the asset was acquired until the earlier of either (a) the CGT event that
gives rise to its disposal or (b) the cessation of the business, provided the asset is disposed of
within 12 months of the cessation of the business (or such further time as the Commissioner
allows): s 152-35(2).
This holding rule is adjusted for assets acquired under the Subdiv 124-B roll-over (assets
compulsorily acquired, lost or destroyed: see [16 100]) and assets subject to the Subdiv 124-O
roll-over (financial services reform relief: see [16 250]) to take account of the period of ownership
of the original asset. Likewise, an optional extended ‘‘holding period’’ is available for assets
acquired under the marriage or relationship breakdown roll-over (see [16 350]) to take into account
the former spouse’s ownership of the asset: s 152-45.
Legislation
references
directing you to
the applicable
source of law.
Specific exclusions
Section 152-40(4) provides that the following assets cannot be ‘‘active assets’’:
• shares and trust interests in ‘‘connected entities’’ (see [25 040]), other than those which
qualify as active assets under the 80% active asset test (see [15 540]): s 152-40(4)(a);
• certain shares and trust interests in widely held entities: s 152-40(4)(b) and (c) (see [15
540]);
• financial instruments (such as loans, debentures, promissory notes, futures contracts,
currency swap contracts and a right or option over a share, security, loan, etc):
s 152-40(4)(d). Note that Australian currency is not an active asset, with the result that
moneylenders cannot access the small business concessions. However, trade debts are
not financial instruments and therefore would qualify as active assets (see withdrawn
ATO ID 2002/1003);
• an asset whose main use in the course of carrying on a business is to derive interest, an
annuity, rent (see below), royalties or foreign exchange gains. However, the exclusion
does not apply if the main use of the asset for deriving rent was only ‘‘temporary’’, or if
an intangible asset has been substantially developed or improved so that its market value
has been substantially enhanced: s 152-40(4)(e).
Exclusion for assets used to derive rent
A number of important points should be noted concerning the exclusion for an asset used, in
the course of carrying on a business, mainly to derive rent.
• If the asset is not used in carrying on a business the exclusion will not apply as the asset
will not qualify as an ‘‘active asset’’ in the first place (eg in Re Carson and FCT 71 ATR
301; [2008] AATA 156, where the exclusion was not relevant as there was no business
being carried on in relation to a holiday unit used for short-term holiday accommodation).
• Whether an asset is used to derive rent will depend on the particular circumstances (eg in
Re Tingari Village North Pty Ltd and FCT (2010) 78 ATR 693 [2010] AATA 233, the
AAT found that the exclusion applied to the sale of a mobile home park business as the
relationship between the taxpayer and each resident was in the nature of a lease from
which the taxpayer derived rent).
570
2011 THOMSON REUTERS
session: 5 August 2, 2011 page no: 23 folio no: 570
@syd-tlrapp-p19/syd-tlrapp-p191/CLS_law/GRP_aust.tax.handbook/JOB_update310/DIV_1205
PROOF COPY
CGT – EXEMPTIONS AND CONCESSIONS
[15 540]
• It is the ‘‘use’’ of the asset in the business, and not by the taxpayer who owns it, that is
relevant. For example, if a taxpayer rents an asset to a connected entity for use in its
business, the asset is not excluded, unless the connected entity itself uses the asset to
derive rent: see Determination TD 2006/63.
• If an asset is used by the taxpayer’s affiliate or an entity connected with the taxpayer, all
the uses of the asset (except for personal use by the taxpayer or an affiliate, etc) will be
taken into account in determining whether the asset’s main use is to derive rent.
Note that as an asset is only required to be an active asset for half the period of its ownership,
or 71/2 years if it has been owned for more than 15 years (see above), if an asset is used in a
business partly for rental use and partly for some other use, it may still qualify as an active asset
depending on what was its ‘‘main use’’ over the qualifying business-use period.
[15 540] Active assets – shares and trust interests
A share in a resident company or a trust interest in a resident trust qualifies as an ‘‘active
asset’’ if the market value (see [3 210]) of the active assets of the company or trust is 80% or more
of the market value of all the assets of the company or trust: s 152-40(3). In addition, the ‘‘CGT
concession stakeholder’’ test in s 152-10(2) must be satisfied (see below).
A share in a company or a trust interest in a trust can also qualify as an active asset if the
company or trust owns interests in another company or trust (ie an interposed entity) that satisfies
the 80% test. In other words, the active asset test operates successively at each level in a chain of
entities: see Determination TD 2006/65.
EXAMPLE [15 540.10]
Virginia owns all the shares in Aegean Holdings Pty Ltd which, in turn, owns all the shares
in Aegean Home Furnishings Pty Ltd, which operates a furniture and home furnishings
business (both are resident companies). The only assets of Aegean Holdings are the shares in
Aegean Home Furnishings and all of Aegean Home Furnishings’ assets are active assets.
As Aegean Home Furnishings satisfies the 80% test, the shares owned by Aegean
Holdings in Aegean Home Furnishings are active assets. As those shares are the only assets
owned by Aegean Holdings, that company also satisfies the 80% test and therefore the shares
owned by Virginia in Aegean Holdings are also active assets.
Note that like other active assets, shares or trust interests must qualify as ‘‘active assets’’ for
half the period of their ownership, or 7½ years if they have been owned for 15 years or more (see
[15 530]).
80% test – assets included
Cash and financial instruments inherently connected with the business can, in effect, be
treated as active assets in determining whether the 80% test is satisfied: s 152-40(3)(b).
Furthermore, the 80% test will be satisfied if it is ‘‘reasonable to conclude’’ that it has been met, so
that it does not need to be applied on a day-to-day basis (eg it will be met if there has been no
significant change to the assets or liabilities of the entity): s 152-40(3A). Likewise, a breach of the
80% test that is only temporary will not result in the test being failed (eg if a company borrows
money to pay a dividend): s 152-40(3B).
Shares in a company being wound-up can also qualify as active assets if they qualified as
‘‘active assets’’ for more than half their period of ownership or at least 7½ years if the asset was
owned for more than 15 years. This means that the shares could be disposed of some time after the
liquidation and still qualify as active assets.
CGT concession stakeholder requirement
Appropriate
subheadings
making it
easier to find
core content.
For a share or trust interest to qualify as an ‘‘active asset’’, the ‘‘CGT concession
stakeholder’’ test in s 152-10(2) must also be satisfied.
If shares or trust interests are owned directly by an individual, the test will be met if the
individual is a ‘‘significant individual’’ – which broadly requires their ‘‘interest’’ (ie their ‘‘small
business participation percentage’’) in the company or trust to be at least 20%): see [15 550].
2011 THOMSON REUTERS
session: 5 August 2, 2011 page no: 24 folio no: 571
@syd-tlrapp-p19/syd-tlrapp-p191/CLS_law/GRP_aust.tax.handbook/JOB_update310/DIV_1205
571
PROOF COPY
[15 550]
CGT – EXEMPTIONS AND CONCESSIONS
If the shares or trust interests are owned by an interposed entity, the test will be met if there is
at least one ‘‘significant individual’’ for the company or trust in which the shares or trust interests
are held by the interposed entity (as traced through the interposed entity), and the significant
individual/s have a ‘‘small business participation percentage’’ (see [15 420]) in the interposed
entity of at least 90%. See example in s 152-10(2) and Example at [15 550 40].
This ‘‘CGT concession holder’’ requirement ensures that the CGT small business concessions
apply in respect of the shares and trust interests of those individuals (and their spouses) who, in
effect, own the business being carried on by a company or trust.
Exclusion of shares and trust interests in widely held entities
Shares and trust interests in widely held entities (see [20 560]) are prevented from being
active assets, unless the entity passes the ‘‘80% active asset’’ test and the shares or trust interests
are held by CGT concession stakeholders: s 152-40(4)(b).
Likewise, s 152-40(4)(c) and (5) provides that a trust interest cannot be an active asset unless
the trust passes the 80% active asset test and, in the case of trusts listed on an approved stock
exchange (listed in Sch 5 to ITA Regs) or a trust with 50 ‘‘members’’ r more, the trust interest is
owned by a CGT concession stakeholder. However, this rule does not apply to a trust with 50
members or more that is a discretionary trust or a trust if control is concentrated in 20 members or
less by reference to ‘‘membership interests’’, voting interests or distributions rights of at least 75%.
Easy-to-read
cross references
directing you to
further useful
commentary.
[15 550] Significant individual test
For a share or trust interest to qualify as an ‘‘active asset’’, the ‘‘CGT concession
stakeholder’’ test in s 152-10(2) must also be satisfied: see [15 540].
A ‘‘CGT concession stakeholder’’ is defined in s 152-60 as (a) a ‘‘significant individual’’ in
the company or trust, or (b) the spouse of a significant individual in the company or trust, if the
spouse has a ‘‘small business participation percentage’’ (SBPP) in the company or trust greater
than zero. For these purposes, a shareholder or the holder of a trust interest will be a ‘‘significant
individual’’ if the total of their direct and indirect SBPP (see below) in the company or trust is at
least 20%: s 152-55.
Amendments have been proposed to ensure that, for the purposes of the CGT concession
stakeholder test, taxpayers can have a non-zero direct small business participation percentage if:
(a) shares in a company are held jointly by taxpayers; and (b) a discretionary trust has not made a
distribution in an income year where the trust had a tax loss or no net income for that year (see
2011-12 Federal Budget Paper No 2 [pp 18, 48]).
Note also that the ‘‘15-year exemption’’ (see [15 560]) and the ‘‘retirement exemption’’ (see
[15 580]) also require the existence of a significant individual.
Direct small business participation percentage
For shareholders, their ‘‘direct SBPP’’ is measured by reference to the smallest of their
voting, dividend and capital distribution rights under the shares they hold in the entity (ignoring
redeemable shares): s 152-70(1) and (2). That is, if a shareholder owns different percentages of
these rights in a company, the SBPP will be the smallest percentage.
EXAMPLE [15 550.10]
Jay has shares that entitle him to 25% of any dividend and capital distributions of ABC Pty
Ltd. However, the shares do not carry any voting rights. As a result, Jay’s SBPP in ABC Pty Ltd
is nil and he is not a significant individual.
For trust interest holders who have entitlements to all the income and capital of the trust, their
direct SBPP will be the actual percentage of distributions of income or capital or, if they are
different, the smallest percentage. For trust interest holders who do not have entitlements to all the
income and capital of the trust, their direct SBPP will be the actual percentage of distributions of
income or capital they are entitled to in an income year or, if they are different, the smallest
572
2011 THOMSON REUTERS
session: 5 August 2, 2011 page no: 25 folio no: 572
@syd-tlrapp-p19/syd-tlrapp-p191/CLS_law/GRP_aust.tax.handbook/JOB_update310/DIV_1205
PROOF COPY
CGT – EXEMPTIONS AND CONCESSIONS
[15 560]
percentage: s 152-70(1). Therefore, if the trust does not make a distribution of income or capital
during the income year, it will not have a significant individual in that year.
EXAMPLE [15 550.20]
A family trust has income of $10,000 in the relevant income year. It distributes $2,000 of
this income to Gus, who is a beneficiary. This means that Gus has a direct SBPP of 20% in the
trust and is a significant individual. However, if the trust also distributed $10,000 of capital in the
same year, of which the beneficiary received $1,000, Gus would only have an SBPP of 10%
(the smaller of the two SBPP entitlements). In that case, Gus would not be a significant
individual.
Indirect SBPP
The indirect SBPP of a shareholder or a trust interest holder is calculated by multiplying their
‘‘direct SBPP’’ in an interposed entity by the interposed entity’s total SBPP (both direct and
indirect) in the company or trust: s 152-75.
EXAMPLE [15 550.30]
Carl owns 60% of the shares in Interposed Co, which in turn owns 50% of the units in
Interposed Unit trust, which in turn owns 100% of the shares in Operating Co.
Carl’s indirect SBPP in Operating Co is 30%. This is calculated by multiplying his direct
SBPP (60%) in Interposed Co by Interposed Co’s total SBPP (both direct and indirect) in
Operating Co (50% × 100%). That is, Carl’s indirect SBPP is 60% × (50% × 100%) = 30%
Carl is therefore a significant individual (and CGT concession stakeholder) in operating Co
via his indirect SBPP in Operating Co.
Interposed entities
The significant individual test also applies in determining if an interposed entity qualifies for
the concessions in respect of the disposal of its shares or trust interest in another entity under the
90% SBPP test (see [15 540]). Specifically, the test will be met if there is at least one ‘‘significant
individual’’ for the company or trust in which the shares or trust interests are held by the
interposed entity (as traced through the interposed entity), and the significant individual/s have a
‘‘small business participation percentage’’ in the interposed entity of at least 90%.
EXAMPLE [15 550.40]
All of the shares in ABC Pty Ltd are held by a family discretionary trust. In the 2009-10
income year, the trust distributes 50% of its income to Lisa and 40% to Dean.
Assuming ABC Pty Ltd satisfies the 80% active asset test, if the trust sold its shares in
ABC Pty Ltd in 2010-11, the shares would qualify as active assets because: (a) Lisa and Dean
are CGT concession stakeholders in ABC Pty Ltd in view of their SBPP of greater than 20%
each, ie Lisa 50% (50% x 100%) and Dean 40% (40% x 100%); and (b) between them they
have an SBPP in the family discretionary trust of at least 90%.
*Extract from Australian Tax Handbook Tax Return Edition 2011 ends here.
For more information, please visit www.thomsonreuters.com.au/essentials
2011 THOMSON REUTERS
session: 5 August 2, 2011 page no: 26 folio no: 573
@syd-tlrapp-p19/syd-tlrapp-p191/CLS_law/GRP_aust.tax.handbook/JOB_update310/DIV_1205
573
PROOF COPY