Private ruling: Capital gains tax - active asset test
Published: October 2012
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Will the entire property be considered an active asset under section 152-40(1) of the Income Tax Assessment Act 1997 for the purposes of the capital gains tax concessions for small business? | A1: Yes.

Relevant facts and circumstances: You and your spouse purchased house and land. It has always been used to run a business by a partnership of which you and your spouse are the partners. The partnership is a small business entity. The house on the land has never been rented. You and your spouse are planning to retire once the property is sold.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 152-A, | Income Tax Assessment Act 1997 section 152-35, | Income Tax Assessment Act 1997 paragraph 152-40(1)(a), and | Income Tax Assessment Act 1997 subsection 152-40(4).

Reasons for decision: Detailed Reasoning - Basic conditions: The basic conditions for the small business capital gains tax (CGT) concessions in Subdivision 152-A of the ITAA 1997 (as relevant to this case) are: · the small business entity test and · the active asset test. | Detailed Reasoning - Small business entity: You will be a small business entity if you are an individual, partnership, company or trust that is carrying on a business and has an aggregated turnover of less than $2 million. In your case, the information provided is that the partnership is a small business entity. | Detailed Reasoning - Active asset test: This test requires the CGT asset to be an active asset for: · 7 years, if owned for more than 15 years, or · half of the ownership period if owned for 15 years or less (section 152-35 of the ITAA 1997). An active asset may be a tangible asset or an intangible asset. A tangible or intangible asset is a CGT active asset if it is used or held ready for use in the course of carrying on a business by: · the taxpayer · the taxpayer's spouse or child under 18 years · the taxpayer's affiliate, or · an entity connected with the taxpayer (paragraph 152-40(1)(a) of the ITAA 1997). | Detailed Reasoning - Assets which cannot be active assets: The following assets cannot be active assets (subsection 152-40(4) of the ITAA 1997): · interests in a connected entity (other than those satisfying the 80% test) · shares in companies and interests in trusts (other than those satisfying the 80% test) · shares in widely held companies unless they are held by a CGT concession stakeholder of the company · shares in trusts that are similar to widely held companies unless they are held by a CGT concession stakeholder of the trust or other exceptions for trusts with 20 members or less apply · financial instruments, including loans, debentures, bonds, promissory notes, futures contracts, forward contracts, currency swap contracts, rights and options · an asset whose main use in the course of carrying on the business is to derive interest, an annuity, rent, royalties or foreign exchange gains. However, such an asset can still be an active asset if it is an intangible asset that has been substantially developed, altered or improved by the taxpayer so that its market value has been substantially enhanced or its main use for deriving rent was only temporary. | Detailed Reasoning - Private purpose and active asset: As a general rule, a property used to carry on business by a taxpayer, which does not fall within one of the exclusions (listed above) under subsection 152-40(4) of the ITAA 1997 will be an active asset. The definition of 'active asset' does not require exclusive use of the asset for business purposes. The fact that part of the property is used for private purposes, such as for main residence purposes, does not affect the property's standing as an active asset in the hands of the taxpayer. The taxpayer may choose to use the CGT small business concessions and treat the entire property as an active asset. | Detailed Reasoning - Application to your circumstances: In this case, you and your spouse purchased a property and have been running a business as a partnership. The property has been used for business and the house on the land has been lived in by family and never rented to tenants. The property satisfies the requirement of an active asset as it was purchased more than 15 years ago and has been used in the carrying on if a business for the entire ownership period. The exclusions in subsection 152-40(4) of the ITAA 1997 do not apply. The fact that the house on the property has been lived in by family does not affect its status as an active asset. In conclusion, the entire property is considered to be an active asset for the purposes of the CGT small business concessions.

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.