Tax Bites: Properties used in a business of a related entity

When applying the Small Business CGT Concessions, one of the threshold tests is firstly determining whether the asset being disposed of is an active asset.

Pursuant to section 152-40 of the ITAA97, properties used mainly to derive rent are not classified as active assets unless the property is being used in the business of a connected entity or an affiliate of the taxpayer.

Pursuant to section 328-125 of the ITAA97, there is generally a minimum control threshold of 40% that needs to be met in order for two entities to be connected entities.

Having regard to the above, where say a business is operated out of a company structure and the business premises are owned in a separate unit trust structure, then it will be imperative that at least one taxpayer (and/or their other connected entities/affiliates) have a minimum controlling interest of at least 40% in both the company and the unit trust in order for the company to be treated as a connected entity of the unit trust.

If for example, the shares in the company and the units in the unit trust are owned equally by 3 taxpayers (i.e. 1/3rd / 1/3rd / 1/3rd), none of the owners will have a controlling interest in the company or unit trust meaning that the business premises in the unit trust will not be seen as being used in the business of a connected entity.

In this situation however, it may still be possible to conclude that the company is an affiliate of the unit trust if it is reasonable to conclude that the company acts in accordance with the directions or in concert with the unit trust in relation to the affairs of its business.  This may be possible for example where the company and the unit trust have the same directors and the same ultimate owners.  However, with the withdrawal of TR 2002/6, this position becomes less certain.

If you have any further questions, please do not hesitate to contact Tim Olynyk at or on (03) 9810 0700.

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