Private ruling: active asset test
Published: October 2013
Ruling period: Year ending 30 June 2014 | Year ending 30 June 2015 | Year ending 30 June 2016
Date scheme commenced: 1 July 2013

Ruling: If the property is sold prior to 30 June 2016, will it satisfy the active asset test pursuant to sections 152-35 and 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997)? | Yes

Relevant facts and circumstances: You own a property that you acquired more than 15 years ago. X operated a business from the property for a period of time. X ceased trading its business and commenced operating a new business in a different location. The new location has become unsuitable. It is intended that X will recommence operating its new business from your property. The property has also been used to derive rent from unrelated entities. You provided a breakdown of the economic benefit obtained from the various uses of the property. You have provided a breakdown of the area of property that was used by X. Y is the appointer of both you and X. The trust deeds provide Y with the power to remove and appoint new trustees. The leasing of property is the only activity carried on by you.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 152-35 | Income Tax Assessment Act 1997 Paragraph 152-40(4)(e) | Income Tax Assessment Act 1997 Section 328-125

Reasons for decision: Summary: 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 least 7.5 years during the test period. The test period: · begins when you acquired the asset, and · ends at the earlier of o the CGT event, and o 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). 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. Paragraph 152-40(4)(e) of the ITAA 1997 states, however, that an asset whose main use in the course of carrying on the business is to derive rent can not be an active asset unless the main use for deriving rent was only temporary. This exclusion generally does not apply to a CGT asset leased to an affiliate or connected entity. An entity is connected with another entity if either entity controls the other entity, or if both entities are controlled by the same third entity (section 328-125 of the ITAA 1997). ATO Interpretive Decision ATO ID 2008/139 provides that a person who has the power to remove the trustee of a discretionary trust and appoint a new trustee will control the trust for the purposes of subsection 328-125(3) of the ITAA 1997. Taxation Determination TD 2006/78 provides that where there are multiple uses of an asset, including deriving rent, 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: o the comparative areas of use of the premises (between deriving rent and other uses); and o the comparative levels of income derived from the different uses of the asset. | Detailed Reasoning - Application to your circumstances: In this case, the property has been owned by you for more than 15 years. Accordingly, the active asset test will be satisfied if the property has been active for at least 7.5 years. In accordance with ATO ID 2008/139, Y controls both you and X. As you and X are both controlled by the same third entity, you are connected entities in accordance with section 328-125 of the ITAA 1997. While the property has been used to derive rent from unrelated parties, we accept the main use of the property was in the course of X's business for a period of time. Accordingly the exclusion contained in paragraph 152-40(4)(e) of the ITAA 1997 will not apply to this time period. Accordingly, the property was an active asset while it was being used in X's previous business. As this period is more than 7.5 years, the active asset test contained in section 152-35 of the ITAA 1997 will be met.