Private ruling: Small business capital gains tax concessions – active asset test.
Date of advice: 13 February 2018
Published: June 2018
Ruling period: Year ended 30 June 2010 | Year ended 30 June 2011 | Year ended 30 June 2012 | Year ended 30 June 2013 | Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016 | Year ended 30 June 2017 | Year ending 30 June 2018
Date scheme commenced: 1 July 2009

Ruling: Q1: Is your non-residential property consisting of land and buildings considered to be an active asset under section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes

Relevant facts and circumstances: The non-residential was purchased and settled in 200A by the partnership, Partner X and Partner Y. The property includes a number of shops, car parks and common areas. The property is managed by the partners. One of the shops is used to conduct a business by Partner Y, through Company A as trustee for the B Trust from 200B. Both partners are the primary beneficiaries of the trust and directors of the company. The business was sold during the year ending 30 June 201C to a third party. The area of the property comprising land and ground floor is Xm 2 . The combined shop ground floor area is Xm 2 . The common floor area is Xm 2 . The floor area of the X business is Xm 2 , equating to X% of the shop ground floor area. The property has been owned by the partnership for 15½ years. The business operated for 7½ years. Based on the schedule of rental and business income, the X business income accounts for X% of the total income generated by the property, on average over the 7½ years the business operated.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 152-35(1). | Income Tax Assessment Act 1997 Paragraph 152-35(1)(a). | Income Tax Assessment Act 1997 Subsection 152-35(2). | Income Tax Assessment Act 1997 Paragraph 152-40(1)(a). | Income Tax Assessment Act 1997 Paragraph 152-40(4)(e).

Reasons for decision: Summary: The property was used in the course of carrying on a business by an entity that is connected with you for a period exceeding 7½ years and the main use of the asset to derive rent was temporary. Therefore, the premises satisfy the active asset test. | Detailed Reasoning - Active Assets: Under paragraph 152-40(1)(a) of the Income Tax Assessment Act 1999 (ITAA 1997) a CGT asset is an active asset at a given time, amongst other things, if you own the asset and you use it, or hold it ready for use, in the course of carrying on a business. However paragraph 152-40(4)(e) of the ITAA 1997 provides: an asset whose main use by you is to derive interest, an annuity, rent, royalties or foreign exchange gains unless: (i) the asset is an intangible asset and has been substantially developed, altered or improved by you so that its market value has been substantially enhanced; or (ii) its main use for deriving rent was only temporary. | Detailed Reasoning - Active asset test: Under subsection 152-35(1) of the ITAA 1997 a CGT asset satisfies the active asset test if: (a) 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 detailed below, or (b) you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of 7½ years during the period detailed below. Subsection 152-35(2) of the ITAA 1997 identifies the period that has to be considered in applying the active asset test. It states the period: (a) begins when you acquired the asset; and (b) ends the earlier of: (i) the CGT event; and (ii) if the relevant business ceased to be carried on in the 12 months before that time or any longer period that the Commissioner allows--the cessation of the business. | Detailed Reasoning - Application to your circumstances: You acquired the property in 200A, and have owned the property for 15½ years. To satisfy the active asset test for capital gains tax purposes, the property must be an active asset for a total of at least 7½ years in your case. An asset whose main use is to derive rental income cannot be an active asset. In your case, for the period 200A to 200B the property was used to primarily derive rent. From 1 July 200B to the sale of the property in the year ended 30 June 201C, a shop was used by the business to derive approximately X% of the income. The entity conducting the business is Company A as trustee for the B Trust. Partner X and Partner Y are directors of Company A. Therefore the B Trust is your connected entity. The property was used in the course of carrying on a business by an entity that is connected with you for a period exceeding 7½ years and the main use of the asset to derive rent was temporary. Therefore, the premises satisfy the active asset test.