Issue
Will units acquired in a unit trust qualify as active assets for the purposes of Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
Yes, the units will be active assets, subject to the assets of all entities involved satisfying the requirements of section 152-35 and subsection 152-40(3) of the ITAA 1997.
Facts
A unit trust (UT1) has acquired a 50% interest in another unit trust (UT2).
UT2 owns 50% of the shares in a private company (C1).
C1 satisfies the 80% market value test under subsection 152-40(3) of the ITAA 1997.
All of UT2's other assets are active assets.
Reasons for Decision
The units in UT2 will be active assets in the hands of UT1 if UT2 satisfies the '80% market value test'(80% test) in subsection 152-40(3) of the ITAA 1997.
UT2 will pass the 80% test, at a given time, if the market value of its active assets are 80% or more of the total market value of all its assets.
Therefore, before UT2 can meet the 80% test the shares in C1 must be active assets of UT2, that is C1 itself satisfies the 80% test. Alternatively, if the C1 shares are not active assets, the units held by UT1 in UT2 may still be active assets, provided the total value of the C1 shares and any other non active assets held by UT2 are not more than 20% of the total value of all UT2's assets.
As C1 meets the 80% test, the C1 shares are active assets of UT2. Therefore UT2 satisfies the 80% test under subsection 152-40(3) of the ITAA 1997 and its units will be active assets in the hands of UT1.
Whether or not the units in UT2 or the shares in C1 meet the 80% test and are active assets for the purposes of the small business concessions is not simply determined at the time that the units or the shares were acquired. Section 152-35 of the ITAA 1997 specifies that the asset must be an active immediately before the CGT event occurring in respect of the asset (paragraph 152-35(a) of the ITAA 1997) and for more than half the period of ownership (paragraph 152-35(b) of the ITAA 1997.