Private ruling: Active asset test
Published: April 2015
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Does the property satisfy the active asset test? | A1: Yes.

Relevant facts and circumstances: The company operates a business. The shareholders were you and your spouse. There have been no changes in the shareholdings since the formation of the company. You and your spouse purchased a property more than 15 years ago. For a period of time, the entire property was used by your affiliate (the company) to conduct a business activity. For a period of time, approximately half of the property was used by your affiliate (the company) to conduct a business activity. For a period of time, the entire property was rented to unrelated parties.

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

Reasons for decision: Detailed Reasoning - Active asset test: The active asset test is contained in section 152-35 of the ITAA 1997. The active asset test is satisfied 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 test period detailed below, 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 7.5 years during the test period. The test period is from when the asset is acquired until the CGT event. If the business ceases within the 12 months before the CGT event (or such longer time as the Commissioner allows) the relevant period is from acquisition until the business ceases. A CGT asset is an active asset if it is owned by you and is used or held ready for use in a business carried on (whether alone or in partnership) by you, your affiliate, your spouse or child, or an entity connected with you. Paragraph 152-40(4)(e) of the ITAA 1997 states, however, that an asset whose main use in the course of carrying on the business is to derive rent cannot be an active asset unless the main use for deriving rent was only temporary. | Detailed Reasoning - Mixed use of a property: Taxation Determination TD 2006/78 considers the active asset test and the main use to derive rent concept. Paragraph 26 of TD 2006/78 states that: If an asset is used partly for business and partly to derive rent at any given time, it will be a question of fact depended on all the circumstances as to whether the main use of the asset at that time is to derive rent. No on single factor will necessarily be determinative, and resolving the matter is likely to involve a consideration of a range of factors such as: • the comparative areas of use of the premises (between deriving rent and other uses); and • the comparative levels of income derived from the different uses of the asset. Example 5 considers mixed use of a property: Mick owns land on which there are a number of industrial sheds. He uses one shed (45% of the land by area) to conduct a motor cycle repair business. He leases the other sheds (55% of the land by area) to unrelated third parties. The income derived from the motor cycle repair business is 80% of the total income (business plus rentals) derives from the use of the land and buildings. In determining if the main use of the land is to derive rent, it is appropriate to consider a range of factors. In this case, a substantial (although nevertheless not a majority) proportion by area of the land is used for business purposes. As well, the business proportion of the land derives the vast majority (80%) of the total income. In all the circumstances, the Tax Office considers the main use of the land in this case is not to derive rent and accordingly the land is not excluded from being an active asset by paragraph 152-40(4)(e) of the ITAA 1997. | Detailed Reasoning - Application to your circumstances: In this case, you and your spouse have used the property to produce rental income. The property has also been used in the course of carrying on a business by your affiliate. We must consider whether the main use of the asset during the periods it was used for a dual purpose was to derive rent. The property will be considered an active asset during the period it was used by an affiliate in the course of carrying on a business. It will also be considered an active asset during the period approximately half of the property was being used by the affiliate. However, it will not be considered an active asset during the period it was solely used to derive rent from an unrelated party. The property has been owned by you and your spouse for more than 15 years. During this period, it has been an active asset for at least 7.5 years. Therefore, the property will satisfy the active asset test.