Private ruling: Active asset test
Date of advice: 23 May 2016
Published: July 2016
Ruling period: Year ending 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Does the property satisfy the active asset test? | A1: No.

Relevant facts and circumstances: You purchased property. You used the building in the course of carrying on a business through a company of yours for less than 7.5 years. You later sold the company to new shareholders. You subsequently leased the property to the company. You then remained in the building as a consultant assisting with the management and running of the business. You carried on these duties for a specified period of time. This was a requirement under the terms of the contract of sale of the business. The property was later sold and you made a capital gain. The property was held for more than 15 years.

Relevant legislative provisions: Income Tax Assessment Act 1997 - Section 152-35 | Income Tax Assessment Act 1997 - Section 152-40

Reasons for decision: Summary: For the small business concessions in Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997) to apply to reduce or disregard a capital gain, the relevant CGT asset must satisfy the active asset test in section 152-35 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 7.5 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 in question ceased in the 12 months before the CGT event (or such longer time as the Commissioner allows). The asset does not need to be an active asset just before the CGT event. The meaning of an active asset is set out in section 152-40 of the ITAA 1997. It must firstly satisfy one of the 'positive tests' in subsection 152-40(1) of the ITAA 1997 and then also not be excluded by one of the exceptions in subsection 152-40(4) of the ITAA 1997. Under subsection 152-40(1) of the ITAA 1997, a CGT asset is an active asset (subject to the exclusions) if it is owned and used, or held ready for use, in the course of carrying on a business by you or your small business CGT affiliate or another entity that is connected with you under paragraph 152-40(1)(c) of the ITAA 1997. The combined effect of sections 152-35 and 152-40 of the ITAA 1997 (as they apply to your case) is that the asset will meet the active asset test if the asset was used, or held ready for use, in the course of carrying on a business of yours for at least 7.5 years, subject to the exclusions in subsection 152-40(4) of the ITAA 1997. | Detailed Reasoning - Application to your circumstances: You used the property to run your business through a company connected with you for less than 7.5 years. Because the property was being used in the course of your company's business over, it is considered to have been an active asset over this period. You later sold the company to new shareholders. You leased the property to them and they continued to carry on the business under the same premises. You remained with the company as a consultant under the owners for a specified period of time. This was a requirement under the terms of the contract of sale of the business. We accept that the property continued to be used by the company in the course of carrying on its business activities. However, upon selling the company you no longer had control over its business. Accordingly, the property ceased to be used or held ready for use in the course of carrying on a business by you, an affiliate of yours, or an entity connected with you. Instead, it is seen that the main use of the property from the time the company was sold was to derive rent, because it was leased to the new company owners. Assets which are primarily used to derive rent are specifically excluded from being considered active assets under subsection 152-40(4) of the ITAA 1997. Therefore, the property is not considered to have been an active asset subsequent to the sale of your company. Because the total period that the property is deemed to have been an active asset is less than 7.5 years, the requirements of the active asset test in section 152-35 of the ITAA 1997 are not met.