Private ruling: Capital gains tax and the active asset test
Published: May 2015
Ruling period: Year ending 30 June 2015.
Date scheme commenced: 1 July 2014.

Ruling: Q1: Does your property satisfy the active asset test for the small business capital gains tax (CGT) concessions under section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes.

Relevant facts and circumstances: The X Family Trust (the trust) is carrying on a business. The trust owns property which is available for long and short-term hire. The property first earned income in the 199X financial year and has been available for hire since. The property is managed by a property manager under instructions from the trustees of the trust. The agreement is provided by the trustees. Bad debts are followed up by the trustees. A website advertising the property has been set up by the trustees. The trustees have direct communication with the property manager in regards to negotiations of the terms and conditions of the agreement. The property is cleaned and repaired by the trustees. Site maintenance and gardening is undertaken by the trustees. All expenses are paid by the trustees apart from pest control which is paid from the income collected by the property manager. The trustees spend approximately a combined total of X hours per week working for the property. One portion of the property is used to store equipment for gardening and maintenance for the use of the trustees. Security is provided by way of a locked compound and each part of the property is locked with padlock bolts. Security lighting is also provided. Under the terms of the agreement the client hiring the property can be relocated without consent. The client cannot assign rights to access the property. Under the agreement, the property is only accessible during access hours posted by the Facility Owner. The Facility Owner can enter in certain circumstances.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 152-35.

Reasons for decision: Detailed Reasoning - Active asset test: 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 • the CGT event, and • when the business ceased, if the business in question ceased in the 12 months before the CGT event (under subparagraph 152-35(2)(b)(ii) of the ITAA 1997 the Commissioner can allow a longer period than 12 months). 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, or an entity connected with you. A CGT asset is not an active asset if its main use is to derive rent (subsection 152-40(4) of the ITAA 1997). However, Tax Determination TD 2006/78 clarifies that there may be circumstances under which a premises may be used in a business of providing accommodation for reward that may satisfy the active asset test. TD 2006/78 provides the following example: Christine carries on a business of providing commercial storage space. The storage facility comprises 50 storage sheds which are available for hire for periods of 1 week to 2 years or more. Christine provides office facilities and 24 hour on-site security. She also provides various items of equipment for sale or loan to clients such as trolleys, cardboard boxes, brooms, tape, pens, locks, bolt cutters, torches and shelves. A cleaning service is also provided and charged for. Christine enters into a storage agreement with each client. The agreements provide that in certain circumstances she can relocate the client to another space or enter the space without consent and that the client cannot assign the rights under the agreement. The arrangements entered into in this situation indicate that the users of the storage sheds do not have the right to exclusive possession but rather only the right to enter and use the sheds for certain purposes. Some of the arrangements entered into were short term and a range of services were provided to the users. There was also no intention by the parties to grant a lease. Having regard to all the circumstances, the Tax Office considers a tenant/landlord relationship does not exist between the parties in this example and therefore the amounts received are not rent. Accordingly, the storage facility is not excluded by paragraph 152-40(4)(e) of the ITAA 1997 and is therefore an active asset. In your case, the trust has owned the property for over 15 years, and used the premises to produce assessable income for more than 7.5 years during the test period. The trust is carrying on a business. There is no tenant/ landlord relationship between the trust and entities that hire the property, and accordingly the property is not excluded as an asset whose main use is to derive rent. Therefore the property meets the active asset requirements for the small business CGT concessions under section 152-35 of the ITAA 1997.