Private ruling: CGT – small business concessions – active asset
Date of advice: 27 February 2018
Published: June 2018
Ruling period: Year ending 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Do you satisfy the basic conditions to apply the capital gains tax small business concessions? | A1: Yes | Q2: Will the property be considered an active asset? | A2: Yes

Relevant facts and circumstances: You acquired the property on XX April 20XX. The property consists of a business premises (approximately XX% of floor space) and X residential flats (approximately XX% floor space) used to gain rental income. Your spouse, X uses the property in their business (the business). The business has an aggregated turnover of less than $2 million. The business originally leased the property from an unrelated third party from XX November 19XX until XX April 20XX, at which time you acquired the property. Approximately XX% of the total gross income from the property is derived from the business. You sold the property on XX May 20XX. The business was using still using the property at the time of the sale.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 152-10 | Income Tax Assessment Act 1997 subsection 152-35(1) | Income Tax Assessment Act 1997 section 152-40 | Income Tax Assessment Act 1997 subsection 152-40(4) | Income Tax Assessment Act 1997 paragraph 152-40(4A)(b) | Income Tax Assessment Act 1997 section 328-130

Reasons for decision: Summary: Section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997) contains the basic conditions you must satisfy to be eligible for the small business capital gains tax (CGT) concessions. These conditions are: (a) a CGT event happens in relation to a CGT asset in an income year. (b) the event would have resulted in the gain (c) at least one of the following applies: (i) you are a small business entity for the income year (ii) you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997 (iii) you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an asset of the partnership or (iv) you do not carry on business (other than as a partner) but your CGT asset is used in a business carried on by a small business entity that is your affiliate or an entity connected with you. (d) the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997. To be eligible to apply the small business CGT concessions you must satisfy all four of the basic conditions above. Affiliate Section 328-130 of the ITAA 1997 provides that an affiliate is an individual or a company that, in relation to their business affairs, acts or could be reasonably expected to act in accordance with your directions or in concert with you. Neither a spouse nor a child is automatically your affiliate. However, where you own an asset that your spouse or child (under 18 years) uses in a business they carry on as an individual, they will be taken to be your affiliate. Active asset test Subsection 152-35(1) of the ITAA 1997 states that a CGT asset satisfies the active asset test 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 period of ownership, 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 and a half years. Section 152-40 of the ITAA 1997 provides the meaning of ‘active asset’. A CGT asset will be an active asset at a time if, at that time, you own the asset and the asset was used or held ready for use by you, an affiliate of yours, or by another entity that is ‘connected with’ you, in the course of carrying on a business. Importantly, subsection 152-40(4) of the ITAA 1997 provides that an asset whose main use is to derive rent cannot be an active asset. Paragraph 152-40(4A)(b) of the ITAA 1997 provides that to determine the main use of an asset, treat any use by your affiliate, or an entity that is connected with you, as your use. Taxation Determination TD 2006/78 discusses whether there are circumstances in which a premises used in a business of providing accommodation for reward may satisfy the active asset test in section 152-35 of the ITAA 1997, notwithstanding the exclusion in paragraph 152-40(4)(e) of the ITAA 1997. The taxation determination explains that whether an asset’s main use is to derive rent will depend on the particular circumstances of each case. If an asset is used partly for business and partly to derive rent at any given time, it will be a question of fact dependent on all the circumstances as to whether the main use of the asset at that time is to derive rent. No one single factor will necessarily be determinative and resolving the matter is likely to involve a consideration of a range of factors such as: ● the comparative areas of use of the premises (between deriving rent and other uses); and ● the comparative levels of income derived from the different uses of the asset. In your case, a CGT event occurred upon the disposal of your property which resulted in a gain. You did not carry on a business; however the property was being used by your spouse in their business. In your case, your spouse is considered your affiliate and the business would be considered a small business entity. You owned the property for just over XX years and the property was used in your affiliate’s business for the entire time of your ownership. Although the majority of the property’s floor space (XX%) was being used for the purpose of deriving rent, The majority of the total gross income of the property was derived from the business conducted by your affiliate. The property would therefore be considered an active asset. As such you have satisfied the basic conditions including the active asset test to be eligible to apply the CGT small business concessions.