Private ruling: Capital gains tax
Date of advice: 22 March 2016
Published: May 2016
Ruling period: 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Does the property satisfy the active asset test under section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No.

Relevant facts and circumstances: You and your spouse purchased a property several years ago. One of the buildings on the property was altered, while another was removed and a new building erected. You and your spouse were actively involved in overseeing the renovations and construction of the new building. The design portfolio was actively instigated and executed by you and your spouse, making use of cutting edge ideas, incorporating best practice to provide a sort after commodity. The property has been earning commercial rent.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 152 | Income Tax Assessment Act 1997 Subdivision 152-C | Income Tax Assessment Act 1997 Section 152-40 | Income Tax Assessment Act 1997 Subsection 152-40(1)

Reasons for decision: Summary: A capital gains tax (CGT) asset will satisfy the active asset test if: a) 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, or b) 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 7½ years during the test period. The test period beings when you acquired the asset and ends at the earlier of the CGT event and if the relevant business ceased to be carried on in the 12 months before that time - the cessation of the business. Subsection 152-40(1) of the ITAA 1997 details that a CGT asset is an active asset at a time if it is used, or held ready for use, in the course of carrying on a business that is carried on by you, or your affiliate, or another entity that is connected with you. Certain assets are, however, excluded from being active assets under subsection 152-40(4) of the ITAA 1997. An asset whose main use is to derive rent (unless such use was only temporary) is excluded from being an active asset. Such assets are excluded even if they are used in the course of carrying on a business. Taxation Determination TD 2006/78 states (paragraph 22) that whether an asset's main use is to derive rent will depend on the particular circumstances surrounding the derivation of income. The term rent has been described as the amount payable by a tenant to a landlord for the use of the leased premises ( C.H. Bailey LTD v Memorial Enterprises Ltd 1 All ER 1003, United Scientific Holdings Ltd v Burnley Borough Council 2 All ER 62). In this case, the property's main use has been to derive rent. Therefore, it is excluded from being an active asset as per subsection 152-40(4) of the ITAA 1997.