Private ruling: Small business concessions - active asset test
Date of advice: 24 October 2025
Published: 8 December 2025
Ruling period: Year ending DD MM 20XX
Date scheme commenced: DD MM 20XX

Ruling: Q1: Will Property 1 satisfy the active asset test under section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Will Property 2 satisfy the active asset test under section 152-35 of the ITAA 1997? | A2: No.

Relevant facts and circumstances: Background You are a company. Property 1 You acquired Property 1 on DD MM 20XX. At the time you acquired the property, you were advised by the seller that the property still had a lease in place. The selling agent advised that the tenant was in the process of moving out. Settlement took place on DD MM 20XX. You received the new title documents which showed the existing tenant had exited but the lease had been re-assigned to another tenant without your knowledge. You immediately contacted the selling agents. The selling agent advised that between when the sale contracts were exchanged and settlement, the management at the time had organised a company buy-out. You were made aware that the management's newly restructured company still had the legal right to enter into a franchise agreement with another tenant by assigning the current lease to them, even though they no longer owned the property. At that point, the lease still had over X years left to run and included options to renew. You immediately sought legal advice. The legal advice that you received was that the original lease had never been cancelled and there was nothing you could do. At the time, you decided to wait out the lease. You were hopeful that the new tenant would not exercise the lease renewal options, and that their occupation would only be temporary. At the end of the original lease term the tenant opted to renew for the available option terms, extending the lease all the way through to DD MM 20XX. Property 2 You acquired Property 2 on DD MM 20XX. Property 2 was acquired to be used as a secure storage facility. Property 2 had an existing building on it. You obtained demolition approval from the local council on DD MM 20XX. After the building was demolished, a hardstand was created and a gated security fence was installed. After construction was completed, you leased the property to an unrelated third party approximately X months after settlement of the property occurred. Property 2 was leased until you sold it on DD MM 20XX. Activity Details After waiting out the original term and the first option, you decided that so much time had already passed, and you had not been able to gain the necessary experience you had hoped for in the relevant market. You decided that it would no longer be feasible for you to continue with commencing your business on the properties as you had originally planned. Approximately X years after acquiring the properties, you handed in your relevant licence related to operating the business. From 20XX you managed the leased properties without the involvement of an agent.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 152-35 | Income Tax Assessment Act 1997 section 152-40 | Income Tax Assessment Act 1997 paragraph 152-40(4)(e)

Reasons for decision: Summary: The property does not satisfy the meaning of an active asset as it was not an active asset of yours for at least 7.5 years and the main use of the property was to derive rent. The property therefore does not satisfy the active asset test. | Detailed Reasoning - Detailed Reasoning: Section 152-35 of the ITAA 1197 provides that a CGT asset satisfies the active asset test if you owned the asset for more than 15 years and the asset was an active asset of yours for at least 7.5 years during the test period. The test period begins when you acquired the asset and ends at the CGT event. Section 152-40 of theITAA 1997 states that a CGT asset is an active asset at a time if at the time if you own the asset and it is used, or held ready for use in the course of carrying on a business that is carried on by you, your affiliate or another entity that is connected with you. ATO Interpretative Decision ATO ID 2002/354 Income Tax: Capital Gains Tax-Small business Rollover Relief - Active Assets - Asset 'held ready for use' (ATO ID 2002/354)discusses when an asset would be held 'ready for use'. For an asset to be held ready for use in running a business, it needs to be in a state of preparedness for use in the business and functionally operative. As such, premises still under construction, or land on which you intend to construct business premises, cannot be said to be 'held ready for use' and would, therefore, not be active assets at that time . Subsection 152-40(4) of the ITAA 1997 lists CGT assets that cannot be active assets. Under paragraph 152-40(4)(e) of the ITAA 1997, an asset whose main use is to derive rent cannot be an active asset unless the main use for deriving rent was only temporary. Such assets are excluded even if they are used in the course of carrying on a business. However, use of the asset by an affiliate or connected entity is treated as the use of the asset owner. Taxation Determination TD 2006/78 Income Tax: capital gains: are there any circumstances in which the premises used in a business of providing accommodation for reward may satisfy the active asset test in section 152-35 of the Income Tax Assessment Act 1997 notwithstanding the exclusion in paragraph 152-40(4)(e) of the Income Tax Assessment Act 1997 for assets whose main use is to derive rent? (TD 2006/78)provides examples on when an asset's main use will be considered to be to derive rent. Example 1 in TD 2006/78 states: Commercial Property Co owns 5 commercial rental properties. The properties have been leased for several years under formal lease agreements to various commercial tenants which have used them for office and warehouse purposes. The terms of the leases have ranged from 1 year to 3 years with a 3-year option and provide for exclusive possession. The company has not engaged a real estate agent to act on its behalf and manages the leasing of the properties itself. In this situation, the company has derived rental income from the leasing of a number of properties. Accordingly, the main (only) use of the properties is to derive rent, and they are therefore excluded from being active assets under paragraph 152-40(4)(e) of the ITAA 1997 regardless of whether the activities constitute the carrying on of a business. | Detailed Reasoning - Application to your circumstances:: In 19XX you acquired a property which had an existing lease in place. Once the property had settled you were informed that the lease had been re-assigned and options for renewal were available to the new tenant, which they exercised. This meant that you were unable to occupy the property for the purposes of your activity. To be an active asset you must have owned the asset for more than 15 years and the asset was an active asset of yours for at least 7.5 years during the test period. An asset will be an active asset if you own the asset and it is used, or held ready for use, in the course of carrying on a business that is carried on by you, your affiliate or another entity connected with you. For an asset to be held ready for use in running a business, it needs to be in a state of preparedness for use in the business and functionally operative. In your case you owned the asset but due to being leased to unrelated third-parties, it has not been used by you, your affiliate or a connected entity and is not held ready for use in the course of carrying on your business. An asset whose main use by you is to derive rent cannot be an active asset. In your case you have always leased the property. Property 1 has not been held for at least 7.5 years as an active asset and the main use by you has been to derive rent. The property therefore does not satisfy the active asset test under section 152-35 of the ITAA 1997. | Summary: The property does not satisfy the meaning of an active asset as it was not an active asset of yours for at least 7.5 years and the main use of the property was to derive rent. The property therefore does not satisfy the active asset test. | Detailed Reasoning - Detailed reasoning: Section 152-35 of the ITAA 1997 provides that a CGT asset satisfies the active asset test if you owned the asset for more than 15 years and the asset was an active asset of yours for at least 7.5 years during the test period. The test period begins when you acquired the asset and ends at the CGT event. Section 152-40 of theITAA 1997 states that a CGT asset is an active asset at a time if at the time if you own the asset and it is used, or held ready for use in the course of carrying on a business that is carried on by you, your affiliate or another entity that is connected with you. ATO ID 2002/354 discusses when an asset would be held 'ready for use'. For an asset to be held ready for use in running a business, it needs to be in a state of preparedness for use in the business and functionally operative. As such, premises still under construction, or land on which you intend to construct business premises, cannot be said to be 'held ready for use' and would, therefore, not be active assets at that time. Subsection 152-40(4) of the ITAA 1997 lists CGT assets that cannot be active assets. Under paragraph 152-40(4)(e) of the ITAA 1997, an asset whose main use is to derive rent cannot be an active asset unless the main use for deriving rent was only temporary. Such assets are excluded even if they are used in the course of carrying on a business. However, use of the asset by an affiliate or connected entity is treated as the use of the asset owner. TD 2006/78provides examples on when an asset's main use will be considered to be to derive rent. Example 1 in TD 2006/78 states: Commercial Property Co owns 5 commercial rental properties. The properties have been leased for several years under formal lease agreements to various commercial tenants which have used them for office and warehouse purposes. The terms of the leases have ranged from 1 year to 3 years with a 3-year option and provide for exclusive possession. The company has not engaged a real estate agent to act on its behalf and manages the leasing of the properties itself. In this situation, the company has derived rental income from the leasing of a number of properties. Accordingly, the main (only) use of the properties is to derive rent, and they are therefore excluded from being active assets under paragraph 152-40(4)(e) of the ITAA 1997 regardless of whether the activities constitute the carrying on of a business. | Detailed Reasoning - Application to your circumstances:: Property 2 had been leased by unrelated third parties from 19XX until you sold it in 20XX. To be an active asset you must have owned the asset for more than 15 years and the asset was an active asset of yours for at least 7.5 years during the test period. The meaning of an active asset at a time if at that time you own the asset and it is used, or held ready for use, in the course of carrying on a business that is carried on by you, your affiliate or another entity connected with you. In your case you owned the asset but due to being leased it is not used by you, your affiliate or a connected entity and is not held ready for use in the course of carrying on your business. For an asset to be held ready for use in running a business, it needs to be in a state of preparedness for use in the business and functionally operative. As such, premises still under construction, or land on which you intend to construct business premises, cannot be said to be 'held ready for use' and would, therefore, not be active assets at that time. An exception to the legislation regarding CGT assets that cannot be active assets states an asset whose main use by you is to derive rent. In your case you have always leased the property for the majority of the time that you owned the property. Property 2 was not held for at least 7.5 years as an active asset and the main use was to derive rent. The property therefore does not satisfy the active asset under section 152-35 of the ITAA 1997.