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

Ruling: Q1: Does the property satisfy the active asset test? | A1: Yes.

Relevant facts and circumstances: In 20XX you and your spouse purchased a commercial property. You and your spouse lease the property to a company for the purpose of conducting a business. You and your spouse each own 50% of the shares in the company. The property contains X rooms, a reception area, a waiting area and a bathroom. The property is X square meters. Less than 10% of the floor area is rented to an unrelated entity.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 152-35 | Income Tax Assessment Act 1997 section 152-40 | Income Tax Assessment Act 1997 subsection 152-40(1) | Income Tax Assessment Act 1997 paragraph 152-40(1)(c) | Income Tax Assessment Act 1997 subsection 152-40(4) | Income Tax Assessment Act 1997 paragraph 152-40(4)(e) | Income Tax Assessment Act 1997 subsection 328-125(2)

Reasons for decision: Detailed Reasoning - Active asset test: A requirement of the active asset test contained in section 152-35 of the ITAA 1997 is that the CGT asset must be an active asset for at least half of the period from when you acquired it until the earlier of the CGT event or when you ceased business, if the relevant business had ceased to be carried on in the 12 months before the CGT event. The meaning of an active asset is set out in section 152-40 of the ITAA 1997. It must firstly satisfy one of the 'positive tests' in subsection 152-40(1) of the ITAA 1997 and then also not be excluded by one of the exceptions in subsection 152-40(4) of the ITAA 1997. Under subsection 152-40(1) of the ITAA 1997 a CGT asset is an active asset (subject to the exclusions) if it is owned and used, or held ready for use, in the course of carrying on a business by you or your small business CGT affiliate or another entity that is connected with you under paragraph 152-40(1)(c) of the ITAA 1997. The combined effect of sections 152-35 and 152-40 of the ITAA 1997 is that the asset will meet the active asset test if the asset was used, or held ready for use, in the course of carrying on a business for at least half of the time period it was owned, subject to the exclusions in subsection 152-40(4) of the ITAA 1997. A number of assets cannot be active assets (subsection 152-40(4) of the ITAA 1997) including: • 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) • 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 - Connected entity - company: An entity is connected with another entity if either entity controls the other entity, or both entities are controlled by the same third entity. Under subsection 328-125(2) of the ITAA 1997, an entity controls a company if it beneficially owns, or has the right to acquire beneficial ownership of, equity interests in the company that give at least 40% of the voting power. | Detailed Reasoning - Application to your circumstances: In this case, you and your spouse own a property which is leased to a company. You and your spouse each own 50% of the shares in this company. Therefore, the company is connected with you and your spouse. The company operates a business from the premises. Less than 10% of the total floor area is used to derive rental income from an unrelated entity. Given the floor area utilised by the connected entity, we do not consider that the main use of the property is to derive rent. As the property has been used in the course of carrying on a business by an entity that is connected with you and your spouse, for more than half the ownership period, it will satisfy the active asset test.