Private ruling: Capital gains tax – Small business concessions – Active asset
Date of advice: 26 July 2017
Published: November 2017
Ruling period: Year ending 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Is the property an 'active asset’ within the meaning of section 152-40(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes

Relevant facts and circumstances: The Trust acquired property. Individual A and Individual B are the directors and shareholders of Company A, each holding one A class ordinary share and one B class ordinary share each. There are no other directors or shareholders. Since the date of purchase of the property, Individual A and B have lived in the property as authorised by the Trust’s deed. The property has not been used to derive rental income. Individual A and B are also the only directors and shareholders of Company B. Company B, via its employee, Individual A, carries on a business. The company receives a commission when it sells the items, based on the value of the items sold. It has been carrying on this business since 1992. The company presently acts as an agent for and receives commission income from several different principal customers. The company operates the business entirely from the property. One room in the property is used solely as the company’s office. The office is used for the following business related activities; (a) ordering stock using the fax machine located in the office; (b) phoning retailers regarding orders, delivery times, etc; and (c) storing invoices, order forms and other business documents in the filing cabinets located in the office. Another room in the property is used for the sole purpose of storing Stock which Individual A takes to current and prospective customers. At times, stock is also stored in other rooms within the property. The company does not use any other place as a business premises. The property was purchased in the trust for asset protection reasons, however Individual A and B no longer have asset protection concerns and would like the property transferred to their names to reduce costs ongoing administration costs. The Trust intends to transfer the property to Individual A and B by way of an in specie capital distribution, as beneficiaries of the trust. Individual A and B are affiliates of the company. The property is listed as the registered address of the company. The Trust has an aggregated turnover of less than $2 million. You have also provided additional documents that have been considered as part of this application to demonstrate that the company has used the property in the course of carrying out the company’s business.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 152-40 | Income Tax Assessment Act 1997 section 328-110 | Income Tax Assessment Act 1997 section 328-125 | Income Tax Assessment Act 1997 section 328-130

Reasons for decision: Detailed Reasoning - Active Asset: The meaning of an active asset is given in subsection 152-40 (1) of the ITAA 1997. Paragraph 152-40(1)(a) states that a CGT asset is an active asset at a given time if at that time, you own it and: (a) use it in the course of carrying on a business, or (b) hold it ready for use in the course of carrying on a business by: i. you; or ii. your affiliate; or iii. another entity that is connected with you Accordingly, for the property in this case to be considered an active asset it must satisfy one of the above conditions. The central issue to be determined in this case is whether the property was being used, or held ready for use, in the course of carrying on a business. The term use is not explained in either the legislation or the Explanatory Memorandum to the New Tax System (Capital Gains Tax) Bill 1999 which introduced Division 152 into the ITAA 1997. The Shorter Oxford English Dictionary uses an expression make use of a thing, especially for a particular end or purpose to express the ordinary meaning of the word use. The ordinary English meaning of the term would cover the storage of clothing samples and the use of the home office. This is a physical use of the property that was connected with the conduct of the business. As a general rule, a property used to carry on business by a taxpayer, which does not fall within one of the exclusions under subsection 152-40(4) of the ITAA 1997 will be an active asset. The definition of 'active asset’ does not require exclusive use of the asset for business purposes. The fact that part of the property is used for private purposes, such as for main residence purposes, does not affect the property’s standing as an active asset in the hands of the taxpayer. The taxpayer may choose to use the CGT small business concessions and treat the entire property as an active asset. | Detailed Reasoning - CGT affiliate and connected entity: It is accepted that the company is an affiliate of Individual A and B as defined in section 328-130 for the ITAA 1997 and that the company is connected with the trust, within the meaning of section 328-125 of the ITAA. | Detailed Reasoning - Application to your situation: The property has been used by the company as a premise to store items and as an office for Individual A to undertake the business activities of the company. In addition, you have provided records that demonstrate the property is used as a delivery address for the business. It is concluded that the essential activities of the business were carried out at the property, as income was not derived elsewhere and it is critical to the business operations that a premise is required to store items and have an office to carrying out the fundamental activities of the business. As the property is used in the course of carrying on a business by a connected entity it will be an active asset as defined by section 152-40 of the ITAA 1997.