Private ruling: CGT -Active Asset - Water Licence
Date of advice: 1 June 2017
Published: September 2017
Ruling period: Year ending 30 June 2016
Date scheme commenced: 1 July 20ZZ

Ruling: Q1: Is the water licence that was used at the property 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: You and your late spouse purchased a farm block in 19XX. The farmland included a water license. It was your intention to operate a farming partnership using the irrigation licence to grow a crop. Initially the partnership was formed and commenced by trading of livestock. Your late spouse was also employed independently and needed to save additional funds before the commencement of the new crop business was able to get started. Your spouse died in 20YY. The partnership ceased and you reverted back to being a sole trader. You were not in a financial position to continue with the intention to grow the new crop and remained trading in livestock. You realised the sale of the water licence in 20AA. You have retained the farmland. You have advised that the water licence was not used in actual business operations of the partnership. The water licence was held ready for use, but did not eventuate due to the circumstances above.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 152-35

Reasons for decision: Summary: Under subsection 152-35(1) 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 seven years during the test period. The test period: ● begins when you acquired the asset, and ● ends at the earlier of: ● the CGT event, and ● when the business ceased, if the business ceased in the 12 months before the CGT event (subsection 152-35(2) of the ITAA 1997). Meaning of active asset A CGT asset is an active asset if it is owned by you and is: ● used or held ready for use by you, your affiliate, your spouse or child under 18 years, or an entity connected with you, in the course of carrying on a business, or ● an intangible asset that is inherently connected with a business you, your affiliate, your spouse or child under 18 years, or another entity that is connected with you, carries on, for example, goodwill (section 152-40 of the ITAA 1997). For an asset to pass the active asset test the asset must be 'used, or held ready for use' in the course of carrying on a business for at least half of the period of ownership by a taxpayer - refer section 152-35 of the ITAA 1997. For an asset to be held ready for use in the course of carrying on a business, it needs to be in a state of preparedness for use in the business and functionally operative. In this instance, you acquired the water licence and held the license for a period of more than 15 years. During the period of the partnership, it was your intention to use the water licence to grow a different crop. The water licence has been held ready for use for a period of more than half the time of the ownership of the asset. Accordingly the water licence passes the active asset test.