Private ruling: CGT - small business 50% active asset reduction
Date of advice: 22 October 2024
Published: 2 December 2024
Ruling period: Year ended 30 June 2024
Date scheme commenced: 1 July 2023

Ruling: Q1: Is the Trust entitled to apply the 50% active asset reduction under section 152-205 of the Income Tax Assessment Act 1997 (ITAA 1997) to the capital gain made on the sale of the property? | A1: Yes.

Relevant facts and circumstances: The property was purchased by the Trust in 20XX. The trustee for the Trust is the Company. The sole shareholder and director of the Company is Individual A. The Company as trustee for Trust entered into Deed of Assignment of Caretaking Agreement, Deed of Engagement (Duties Agreement) and Deed of Authorisation (Letting Agreement) in 20XX. The property served as the registered office for the Trust under a real estate licence. The Trust operated its business from the property under the Caretaking Agreement. The turnover of the Trust is less than $X million. The property comprised of X bedrooms and an office area. The total land area was Xm2. The house area was Xm2, the two rented bedrooms were Xm2 and the office and additional bedroom were Xm2. The exterior area of the property included a shed and storage space. These were crucial to performing the caretaker duties such as moving equipment, material and waste from the pool area. The property was rented to various individual tenants over the ownership period. The Trust derived business income of approximately $X in the 20XX financial year and approximately $X in the 20XX financial year. The Trust derived rental income of approximately $X in the 20XX financial year. The property was sold in the 20XX-XX financial year resulting in a capital gain.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 152-A | Income Tax Assessment Act 1997 section 152-35 | Income Tax Assessment Act 1997 section 152-205

Reasons for decision: Summary: Under section 152-205 of the Income Tax Assessment Act 1997 (ITAA 1997) a capital gain can be reduce by the small business 50% reduction if the basic conditions in Subdivision 152-A of the ITAA are satisfied for the gain. A capital gain may be reduced under Division 152 of the ITAA 1997 if the following conditions are met: • A capital gains tax (CGT) event happens to a CGT asset • The event would (apart from Division 152 of the ITAA 1997) result in a gain • You are a CGT small business entity • The CGT asset satisfies the active asset test | Detailed Reasoning - Active asset test: The active asset test is contained 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 is from when the asset is acquired until the CGT event. A CGT asset is an active asset if it is owned by you and is used or held ready for use in a business carried on (whether alone or in partnership) by you, your affiliate, your spouse or child, or an entity connected with you. | Detailed Reasoning - Main use to derive rent: 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 Income tax: capital gains: are there any circumstances in which the premises used in a business of providing accommodation for reward may satisfy the active asset test in section 152-35 of the Income Tax Assessment Act 1997 notwithstanding the exclusion in paragraph 152-40(4)(e) of the Income Tax Assessment Act 1997 for assets whose main use is to derive rent? (TD 2006/78) discusses the circumstances in which premises used for mixed purposes can be active assets notwithstanding the exclusion in paragraph 152-40(4)(e) of the ITAA 1997. TD 2006/78 provides the following example: 15. Mick owns land on which there are a number of industrial sheds. He uses one shed (45% of the land by area) to conduct a motor cycle repair business. He leases the other sheds (55% of the land by area) to unrelated third parties. The income derived from the motor cycle repair business is 80% of the total income (business plus rentals) derived from the use of the land and buildings. 16. In determining if the main use of the land is to derive rent, it is appropriate to consider a range of factors. In this case, a substantial (although nevertheless not a majority) proportion by area of the land is used for business purposes. As well, the business proportion of the land derives the vast majority (80%) of the total income. In all the circumstances, the Tax Office considers the main use of the land in this case is not to derive rent and accordingly the land is not excluded from being an active asset by paragraph 152-40(4)(e) of the ITAA 1997. | Detailed Reasoning - Application to your circumstances: In this case, a CGT event occurred when the Trust sold the property and made a capital gain. The Trust is a small business entity with a turnover of less than $X million. We accept the property is an active asset given the proportion of area used and the proportion of income derived by the business activity. We further conclude that the property satisfies the active asset as it was an active asset for more than half of the ownership period. As the Trust satisfies the basic conditions set out in section 152-A of the ITAA 1997 it can reduce the capital gain by the 50% small business reduction.