Private ruling: CGT - small business concessions and active asset test
Published: February 2015
Ruling period: 1 July 2013 to 30 June 2014

Ruling: Questions and answers | Do you satisfy the basic conditions necessary to be eligible for the CGT concessions for small business, which therefore automatically entitles you to apply the 50% active asset reduction concession to any capital gain made on disposal of the property? | Yes.

Relevant facts and circumstances: You and your spouse are owners/directors of company A, a small business that predominately is a private label and marketing company. You and your spouse purchase a building (the property) in a mix zoned area with the intention to develop it into a business. You and your spouse purchased the property in your own names, jointly. The property at the time of purchase was tenanted; when the tenants moved out Company A moved into the upper floor occupying more than 52% of the total building area. Company A rented the floor space from you and your spouse. The ground floor area is less than 48% of the total building area. The ground floor comprised of four rooms divided into two tenancies. The shop tenancy and the rear tenancy. The rear tenancy was occupied for the full period by a business which was a referral source for company A. The shop tenancies were operated by a number of tenants over a period of time, however was vacant for approximately two years. During these years of vacancy the shop was used for adverting and storage of products by Company A as the shop front window was a good position for advertising. Company A used level 1 of the property as their head office for training, marketing, private production and ventured into manufacturing of other products. Company A generated income well above 50% of the rent received by the other tenants. The car spaces available were split 50/50 between Company A and the tenants. You have provided a sample of invoices to demonstrate that Company A operated a business out of the property. You have advised that you cannot provide some invoices because you are unable to extract them from old computers and or they were destroyed. You have provided a sample of emails that you believe confirm the existence of a business operation from the premises. The property was sold.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 152-10 | Income Tax Assessment Act 1997 Subsection 152-10(1A) | Income Tax Assessment Act 1997 Subsection 152-10(1B) | Income Tax Assessment Act 1997 Section 152-15 | Income Tax Assessment Act 1997 Section 152-35 | Income Tax Assessment Act 1997 Subsection 152-35(1)

Reasons for decision: Summary: Section 152-10 of the ITAA 1997 contains the basic conditions you must satisfy to be eligible for the small business CGT concessions. These conditions are: (a) a CGT event happens in relation to a CGT asset in an income year. (b) the event would have resulted in the gain (c) at least one of the following applies: (i) you are a small business entity for the income year (ii) you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997 (iii) you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an asset of the partnership or (iv) the conditions in subsection 152-10(1A) or (1B) of the ITAA 1997 are satisfied in relation to the CGT asset in the income year. (d) the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997. Section 104-10 of the ITAA 1997 provides that CGT event A1 occurs when your ownership in a CGT asset (eg. land or buildings) is transferred to another entity. 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) explains that an asset whose main use is to derive rent cannot be an active asset. 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. | Detailed Reasoning - Application to your circumstances: The asset in question has been used in the course of carrying on a business and part of the asset has been rented out. Company A moved occupied over 50% of the total building area. The sometimes tenanted ground floor area is less than 50% of the total building area. The available car parking space has been shared 50/50 between company A and the tenants. Accordingly, you satisfy all the basic conditions to be eligible for the CGT small business concessions. As you satisfy all the basic conditions, you automatically qualify for the 50% active asset reduction concession.