Private ruling: Small business concessions
Date of advice: 29 March 2017
Published: August 2017
Ruling period: Year ended 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Does the property satisfy the active asset test in section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No.

Relevant facts and circumstances: You owned a property. The property was originally purchased by a partnership. The partnership owned a business which carried on its activities from the property. The property had a building which was originally split into two distinct retail areas. The larger portion was being used by the former partnership until dissolution and then by you to operate the business. The smaller area was rented to various lessees. These tenants are not affiliated or connected with the asset owner. The partnership, which owned the property and the business, was rolled over into a Pty Ltd company. The shareholding was held in the same proportions as the partnership interests. Your Director's decided they wished to sell the business and it was subsequently sold. Ownership of the property was retained and the property became a passive asset, deriving rental income until eventually sold. You owned the property for more than 15 years. For less than 7.5 years your business operated on the property.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 152-40 | Income Tax Assessment Act 1997 section 328-125 | Income Tax Assessment Act 1997 subsection 152-35(1)

Reasons for decision: Summary: 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. However, subsection 152-40(4) explains 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. Subsection 328-125(1) of the ITAA 1997 explains that an entity is connected with another entity if: (a) either entity controls the other entity in a way described in this section; or (b) both entities are controlled in a way described in this section by the same third entity. Subsection 328-125(2) of the ITAA 1997 provides that an entity (the first entity) controls another entity if the first entity, its affiliates, or the first entity together with its affiliates beneficially owns, or have the right to acquire the beneficial ownership of, interests in the other entity that give the right to receive a least 40% (the control percentage) of any distribution of income or capital by the other entity. 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 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). In your case, you acquired the property when the former partnership was rolled over into a company. For the majority of the years that you owned the property it was solely used to derive rent. Consequently, the property was not an active asset of yours during those years. Additionally, as you have owned the asset for more than 15 years and the property was not an active asset for at least 7.5 years during your ownership period you do not satisfy the active asset test. While we acknowledge that the partnership ran a business on the property during its ownership and the shareholding in the company was held in the same proportions as the partnership interests, there is no provision that allows the partnership's use of the asset to count towards the company meeting the active asset test.