Private ruling: active asset test
Published: April 2012
Ruling period: Year ended 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Does your CGT asset satisfy the active asset test for the purposes of section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes.


Relevant legislative provisions: 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(1)(a). | Income Tax Assessment Act 1997 - Paragraph 152-40(4)(e). | Income Tax Assessment Act 1997 - Section 152-40. | Income Tax Assessment Act 1997 - Section 152-35.

Reasons for decision: Summary: The requirements of an active asset and the active asset test are set out in Subdivision 152-A of the ITAA 1997. | Detailed Reasoning - Active asset: For a CGT asset of a business to be an active asset for the purposes of Division 152 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 paragraph 152-40(1)(a) 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. However, paragraph 152-40(4)(e) of the ITAA 1997 provides that an asset whose main use in the course of carrying on the business is to derive rent cannot be an active asset (unless that main use was only temporary). That is, even if the asset is used in a business it will not be an active asset if its main use is to derive rent. In this case, the CGT asset was used as a café business, bed & breakfast and a passive rental property at various times during the period of ownership. It is accepted that the CGT asset was an active asset, for the purposes of Division 152 of the ITAA 1997, during the period it was used as a café business. Equally, it is not contested that the CGT asset was not an active asset, for the purposes of Division 152 of the ITAA 1997, during the period it was used as a passive rental property. The question of whether the CGT asset was an active asset, for the purposes of Division 152 of the ITAA 1997, during the period it was used as a bed and breakfast is discussed below. Taxation Determination TD 2006/78 states (paragraph 22) that whether an assets main use is to derive rent will depend on the particular circumstances surrounding the derivation of income. The issue to be considered is whether an occupant of part of the premises is a tenant or a lodger/boarder with a licence to occupy, and ultimately, this is a question of fact depending on all the circumstances involved. Relevant factors include whether the occupier has a right to exclusive possession ( Radaich v. Smith (1959) 101 CLR 209 at 222), the degree of control retained by the owner and the extent of any services provided by the owner such as room cleaning, provision of meals, supply of linen and shared amenities (Appah v. Parncliffe Investments Ltd [1964] 1 All ER 838 ; Marchant v. Charters [1977] 3 All ER 918). In this case, the services provided at your bed and breakfast premises include: · providing provisions for cooked or continental breakfasts · providing facilities needed for guests to prepare their own meals · providing linen and towels for the guests Furthermore, the trust was responsible for cleaning and maintaining the property when guests departed and for paying all the utilities at the cottage. The arrangements entered into indicate that those staying at the bed and breakfast business do not have the right to exclusive possession of a room but rather only a right to occupy the room. These facts indicate that the relationship between you and those staying at the bed and breakfast accommodation is not that of landlord/tenant under a lease agreement. Accordingly, the income derived during the period that the property was used as a bed and breakfast operation is not 'rent' and the paragraph 152-40(4)(e) exclusion would not apply. Therefore, the CGT asset was an active asset during the period that the asset was used as a bed and breakfast operation within the definition of section 152-40 of the ITAA 1997. | Detailed Reasoning - Active asset test: 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 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. In this case, the CGT asset was owned for a approximately 164 months which also makes up the test period. Of this, the CGT asset was an active asset for 69 months, as a café business, and 52 months, as a bed and breakfast, or a total of 121 months. Therefore, the CGT asset satisfies the active asset test for the purposes of section 152-35 of the ITAA 1997, as it was an active asset for at least half of the test period.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Relevant facts: The trust is a small business entity for CGT purposes. | The contact for the purchase of the CGT asset was signed in 1997. | The CGT asset was a property that was used at various times as a café business, bed & breakfast and a passive rental property. | The contract for sale of CGT asset was signed in 2011. | Total ownership period was approximately 160+ months. | Since ownership, the CGT asset has been used as follows: | Private residential rental or other private purposes | The bed and breakfast operation was conducted as follows: | The average duration of stay was one or two nights and guests paid a nightly rate. | Provisions for cooked or continental breakfasts were provided. | The cottage provided cooking facilities for the guests. | There was a professionally produced sign advertising the accommodation permanently attached to the front gate. | The trust was responsible for cleaning the property after when guests departed. | The trust was responsible for paying the utilities, such as electricity and gas. | The cottage had only one bedroom and was available to one couple at a time, although one child or additional guest could be accommodated if necessary. | The trust provided linen and towels for the guests | The cottage included a visitor's book for guests to fill out.