Private ruling: CGT - active asset-connected entity
Date of advice: 23 April 2026
Published: 13 July 2026
Ruling period: Year ending 30 June 20YY
Date scheme commenced: 1 July 20YY

Ruling: Q1: Does the property you sold in the 20XX-XX financial year satisfy the active asset test under section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes.

Relevant facts and circumstances: You are the sole shareholder and director of a company (the Company) providing services. You were employed by the Company in the relevant financial year. The Company paid you wages and those wages were the principal source of your income. The Company provided goods and services to authorities in a remote area. You purchased a residential dwelling in the remote area. Your main residence is in another state. You leased the property to the Company at market rates. The property was used by the Company as business premises and accommodation for yourself as an employee of the Company. You usually spent X months each year residing and working in the remote locality. You sold the house in the relevant financial year and made a capital gain. The property was rented to the Company from the date you purchased it until the date you sold it, a period of a little under X years. The property was not used for any other purpose in this time. No other person has stayed at this address in this time. There was no formal lease agreement. The property was used as the business address of the Company, and for business administration and storage of the equipment and material stocks used in the services you provided. You also used the property to plan, and where possible, integrate or produce goods and materials for these services. You parked the Company owned work vehicle at the property each night and transported goods and materials necessary for your services each day. Approximately one third of the property was used for business purposes, as well as the parking area out the front. Those rooms used for business administration and services were furnished appropriately. You meet the basic eligibility conditions for the Small Business CGT Concessions.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 152-10(1) | Income Tax Assessment Act 1997 subsection 152-35(1) | Income Tax Assessment Act 1997 subsection 152-40(1) | Income Tax Assessment Act 1997 subsection 152-40(4) | Income Tax Assessment Act 1997 paragraph 152-40(4)(e) | Income Tax Assessment Act 1997 section 328-125 | Income Tax Assessment Act 1997 subsection 328-125(1) | Income Tax Assessment Act 1997 subsection 328-125(2) | Income Tax Assessment Act 1997 section 328-130 | Income Tax Assessment Act 1997 subsection 328-130(1)

Reasons for decision: Summary: Under subsection 152-10(1) of the ITAA 1997 capital gains on an asset may be reduced or disregarded on the occurrence of a capital event if you meet the conditions in subsection 152-10(1) and the asset satisfies the active asset test in subsection 152-35(1) of the ITAA 1997. Under paragraph 152-10(1)(c) you are eligible to reduce or disregard the capital gain if at least one of the following applies: • You are a CGT small business entity eligibility with an aggregated turnover of less than $2 million. • You are not running a business (other than as a partner) but your asset is used in your affiliate or connected entity's small business. • You are a partner in a partnership that is a small business entity, and the asset is either ­ an interest in a partnership asset (partnership assets) ­ an asset you own that is not an interest in a partnership asset (partner's assets) but is used in the business of the partnership. • The net value of your, and your affiliates' and connected entities', CGT assets do not exceed $6 million. As you as an individual are not a small business entity, we must consider if the asset is used or held for use in your affiliate or connected entity's small business. An 'active asset' is defined under subsection 152-40(1) of the ITAA 1997 as an asset that you own and is used, or held ready for use, in the course of carrying on a business by you, your affiliate, or another entity connected with you. To meet the conditions of the active asset test in subsection 152-35(1) of the ITAA 1997 you must have used, or have held ready for use, the asset for at least half the time you have owned it if you have owned it for 15 years or less, or for 7 1/2 years if you have owned it for more than 15 years. The meaning of affiliate is set out in section 328-130 of the ITAA 1997. Under subsection 328-130(1) of the ITAA 1997 an individual or a company is an affiliate of a taxpayer if the individual or company acts or could reasonably be expected to act in accordance with the taxpayer's directions or wishes or in concert with the taxpayer in relation to the affairs of the business of the individual or company. The term connected with is defined in section 328-125 of the ITAA 1997. Subsection 328-125(1) of the ITAA 1997 states an entity connects to another entity if: a) either entity controls the other entity in a way as described in this section; or b) both entities are controlled in a way described in this section by the same third entity. Under subsection 328-125(2) of the ITAA 1997 you control a company if you or you and your affiliates have equity rights, or the right to acquire equity rights that together give you the right to: • Exercise or control 40% or more of the voting power in the company • 40% or more of any distribution of income or capital of the company Some assets are excluded from the active asset definition given in subsection 152-40(1) of the ITAA 1997 through the operation of subsection 152-40(4) of the ITAA 1997. Assets specifically excluded under sub-paragraph 152-40(4)(e) of the ITAA 1997 include those that are mainly used by you to derive interest, annuities, 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. The further question of whether the payment of rent for an asset that is leased to a connected entity for use in the connected entity's business excludes it from this active asset definition has been addressed in Taxation Determination TD 2006/63 Income tax: capital gains: is a CGT asset that is leased by a taxpayer to a connected entity for use in the connected entity's business an active asset under section 152-40 of the Income Tax Assessment Act 1997? As explained in paragraphs 9 and 10 of TD 2006/62 such an asset may still be considered an active asset: 9. If a CGT asset, such as land, is leased by a taxpayer to a connected entity for use in the connected entity's business, the question arises as to whether the main use of the asset is to derive rent. In this situation, the asset is wholly used by the taxpayer to derive rent. However, in determining the main use of an asset for the purposes of paragraph 152-40(4)(e) of the ITAA 1997, any use of the asset by a connected entity is treated as the taxpayer's use of the asset (paragraph 152-40(4A)(b) of the ITAA 1997). 10. Therefore, an asset leased to a connected entity for use in the connected entity's business will not, by that reason alone, be excluded by paragraph 152-40(4)(e) of the ITAA 1997 from being an active asset of the taxpayer. Guidance on whether a property is used, or held ready for use, in the course of carrying on a business can be found in case law. In Eichmann v Federal Commissioner of Taxation [2020] FCAFC 155 (Eichmann) the Full Federal Court found that the question of whether an asset was used in the course of carrying on a business for the purposes of subsection 152-40(1) of the ITAA 1997 was matter of fact and degree. Upholding a decision of a previous Administrative Appeals Tribunal review the Full Federal Court in this case found that the requirement for an asset to be used 'in the course of carrying on a business' in subsection 152-40(1) of the ITAA 1997 necessarily encompassed a fairly wide range of activities. The asset in question in this case was a block of land used by a builder to securely store tools and materials for building, bricklaying and paving. Noting, among other things, the proportion of the property used, the nature of the items kept on the property, the fact that tools and items were collected on a daily basis, and that preparatory work was undertaken on the property the Full Federal Court confirmed the previous decision that the property was used in the course of carrying on a business for the purposes of subsection 152-40(1) of the ITAA 1997. Notwithstanding your lease of your property to the Company to accommodate yourself as you carry on the business of the Company the circumstances in this case are similar to those in Eichmann . As in Eichmann you used the property to store the materials and equipment necessary for the work of the company, these materials and equipment were collected on a daily basis, and you used the property to integrate or produce goods and materials for the services you provided. Additionally, you completed administrative work from the office space in the property. You used a significant proportion of the property for this work and used the parking area at the front of the property for work vehicles. In accordance with the reasoning in TD 2006/63 exclusion of the property as an active asset under paragraph 152-40(4)(e) of the ITAA 1997 will not apply as its use by the Company, a connected entity, will be treated as your use of the asset. Your property was used in the course of carrying on a business connected with you and satisfies the active asset test in subsection 152-35(1) of the ITAA 1997.