Private ruling: CGT – small business concessions – active asset – use by connected entity
Date of advice: 14 March 2018
Published: June 2018
Ruling period: Year ending 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Does the property satisfy the active asset test in section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes.

Relevant facts and circumstances: You acquired a property more than 15 years ago. The property has been used partly in a business carried on by a connected entity of yours and also to derive rent. The business income derived by the connected entity far outweighs the income you derived from rent. You disposed of the property and made a capital gain.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 152-35(1) | Income Tax Assessment Act 1997 section 152-40 | Income Tax Assessment Act 1997 paragraph 152-40(4)(e) | Income Tax Assessment Act 1997 subsection 328-125(1) | Income Tax Assessment Act 1997 subsection 328-125(2)

Reasons for decision: Summary: Subsection 152-35(1) of the ITAA 1997 states that a CGT asset satisfies the active asset test if: ● you have owned the asset for 15 years or less and the asset was an active asset of yours for a total of at least half of the period of ownership, or ● you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of at least 7 and a half years. Section 152-40 of the ITAA 1997 provides the meaning of ‘active asset’. A CGT asset will be an active asset at a time if, at that time, you own the asset and the asset was used or held ready for use by you, an affiliate of yours, or by another entity that is ‘connected with’ you, in the course of carrying on a business. However, subsection 152-40(4)(e) explains that an asset whose main use is to derive rent cannot be an active asset. Paragraph 152-40(4A)(b) of the ITAA 1997 provides that to determine the main use of an asset, treat any use by your affiliate, or an entity that is connected with you, as your use. Connected with test Subsection 328-125(1) of the ITAA 1997 explains that an entity is connected with another entity if: a) either entity controls the other entity; or b) both entities are controlled by the same third entity. Subsection 328-125(2) of the ITAA 1997 provides that an entity (the first entity) controls another entity if the first entity, its affiliates, or the first entity together with its affiliates: if the other entity is a company - owns, or has the right to acquire ownership of, equity interests in the company that give at least 40% of the voting power in the company. Having regard to your circumstances and subsection 328-125 of the ITAA 1997, you and the other entity are connected. Main use to derive rent Taxation Determination TD 2006/78 considers, amongst other issues, the situation where there is part business and part rental use of an asset. It states that an asset owned by the taxpayer and used partly for business purposes and partly to derive rent can be an active asset under section 152-40 of the ITAA 1997 where it is considered that the main use of the premises is not to derive rent. In deciding if the property was mainly used to earn rent the Commissioner will consider a range of factors such as: ● the comparative areas of use of the premises (between rent and business) ● the comparative levels of income derived from the different uses of the asset. In this case, you owned a CGT asset that was used in the course of carrying on a business by a connected entity. However, as part of the property has been used to produce rental income, we must consider whether the main use of the asset is to derive rent. You have provided a comparison of the business income earned by the connected entity and the rental income earned from the property. The majority of the income from the property is business income generated by your connected entity. As the vast majority of the income generated from the property was business income, we do not consider that the main use of the property was to derive rent. As you owned the property for more than 15 years, and it was an active asset for more than 7 ½ years, the property satisfies the active asset test in section 152-35 of the ITAA 1997.