Private ruling: CGT - small business concession - active asset
Date of advice: 27 February 2024
Published: 15 April 2024
Ruling period: Year ending 30 June 2024
Date scheme commenced: 1 July 2023

Ruling: Q1: Are you an affiliate under section 328-130 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes | Q2: Does the property satisfy the active asset test under section 152-35 of the ITAA 1997? | A2: Yes

Relevant facts and circumstances: In 19XX, your spouse (person A) and their brother, (person B), each acquired a 25% interest in a commercial property (the property), with the remainder 50% interest being owned by a company (the company). The property was used in the operating of a business, as well as deriving rental income. The majority of income derived from the property is from the business. From 19XX to 20XX, you had an active role in the administration of the business, undertaking the following tasks: • undertaking tasks associated with the production of reporting and attending a range of community events; • managing the business's retail outlet; and • meeting with business consultants and regularly attending conventions for the purpose of improving the operations of the business. In 20XX, the company was liquidated, resulting in you acquiring a 25% interest in the property, with the remainder interest being owned by person A, person B and person C as tenants in common. From 20XX, the business was operated by a partnership with the partners consisting of you, person A, person B and person C (the partnership). The property was sold in 20XX.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 152-35 | Income Tax Assessment Act 1997 section 152-40 | Income Tax Assessment Act 1997 section 328-130

Reasons for decision: Detailed Reasoning - Meaning of affiliate: Under subsection 328-130(1) of the ITAA 1997, an individual or a company is an affiliate of yours if the individual or company acts, or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you, in relation to the affairs of the business of the individual or company. Subsection 328-130(2) of the ITAA 1997 also provides that an individual is not your affiliate merely because of the nature of the business relationship shared by the individuals. You have provided evidence that you acted in concert with the other partners in the partnership in relation to the affairs of the business operated from the property, as you had an active role in the administration of the business, undertaking tasks such as: • representing business at community events; • managing the business's retail outlet; and • meeting with business consultants for the purpose of improving the operations of the business. Therefore, you will be taken to be an affiliate of the partners of the partnership, having satisfied requirements outlined in section 328-130 of the ITAA 1997. | Detailed Reasoning - Active asset test: Under subsection 152-35(1) of the ITAA 1997, a CGT asset will satisfy 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 test period, 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 at least 7½ years during the test period. Subsection 152-40(1) of the ITAA 1997 provides that a CGT asset is an active asset at a time if it is used, or held ready for use, in the course of carrying on a business that is carried on by you, or your affiliate, or another entity that is connected with you. However, paragraph 152-40(4)(e) of the ITAA 1997 states 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. 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. 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 dependent on all the circumstances as to whether the main use of the asset at that time is to derive rent. No one 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. In this case, the property both was used in the course of carrying on a business by the partnership, with the partners consisting of you, person A, person B and person C, and for deriving rental income. However, as the majority of income derived from the property is from carrying on the business, the main use of the property will be considered to be for business purpose and not to derive passive rental income. Since you will be taken to be an affiliate of the partners of the partnership, as outlined above, the property will be considered an active asset under 152-35(1) of the ITAA 1997. Furthermore, as the property was used as an active asset since its acquisition until its sale, the period of ownership will also satisfy the active asset test under 152-35(1) of the ITAA 1997