Private ruling: CGT small business concessions- active asset test
Date of advice: 29 August 2018
Published: October 2018
Ruling period: Year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Will the property satisfy the active asset test to apply the small business rollover to the sale of the property? | A1: Yes

Relevant facts and circumstances: The Company purchased a property in August 200X. The property was purchased with the sole intention of providing accommodation to the Company’s staff. The Company pays the staffs rent as part of their salary package. The accommodation is provided to staff as a necessary tool to keep good quality staff employed with the Company, as the area is very remote and a region which is hard to employ people. The Company has never charged rent to the employees and has never received rent. The property was sold in the 2016-17 financial year with the intention of upgrading the property. A replacement property was purchased in the 2017-18 financial year for $X. Staff have always lived in the property; it has not been used for any personal use. No meals, laundry or cleaning are provided to the staff. The staff lived there full time, with one or two staff always occupying the property at any time. The Company is a CGT small business entity. The Company has owned the property for eight years and has been used in the business as staff housing for the whole period of ownership.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 152-10 | Income Tax Assessment Act 1997 Section 152-35 | Income Tax Assessment Act 1997 Subsection 152-35(2) | Income Tax Assessment Act 1997 Subsection 152-40(1) | Income Tax Assessment Act 1997 Paragraph 152-40(1)(a) | Income Tax Assessment Act 1997 Subsection 152-35(2) | Income Tax Assessment Act 1997 Subsection 152-40(4) | Income Tax Assessment Act 1997 Paragraph 152-40(4)(e)

Reasons for decision: Summary: In order for a taxpayer to be eligible for the capital gains tax (CGT) small business concessions, the basic conditions under section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997) must be met. The basic conditions are: (a) a CGT event happens in relation to a CGT asset of yours in an income year (b) the event resulted in a gain (c) at least one of the following applies: (i) you are a CGT small business entity for the income year (ii) you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997 (iii) you are a partner in a partnership that is a CGT small business entity for the income year and the CGT asset is an interest in an asset of the partnership, or (iv) you do not carry on a business, but your CGT asset is used in a business carried on by a small business entity that is your affiliate or an entity connected with you (section 152-10 of the ITAA 1997). (d) the CGT asset satisfied the active asset test in section 152-35 of the ITAA 1997 | Detailed Reasoning - Active asset test: A CGT asset satisfies the active asset test if: (a) 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, or (b) you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of at least 7½ years during the test period (subsection 152-35 of the ITAA 1997). The test period begins when you acquired the asset and ends at the earlier of the CGT event and if the relevant business ceased to be carried on in the 12 months before that time – the cessation of the business (subsection 152-35(2) of the ITAA 1997). For a CGT asset to be an active asset it must firstly satisfy one of the requirements 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. 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 that is carried on by you, your affiliate or another entity that is connected with you (paragraph 152-40(1)(a) of the ITAA 1997). | Detailed Reasoning - Application to your circumstances: In the Company’s case the basic conditions contained in Subdivision 152-A of the ITAA 1997 were satisfied because: ● a CGT event occurred when the Company disposed of the property ● the event resulted in a gain ● the Company is a CGT small business entity ● the Company owned the property for 15 years or less and the property was used in the business of the Company for a total of at least half the test period, and ● during the year ended 30 June 2017 the Company used the property in its business. The Company provides the property for the Company’s staff to live in due to the remote location of the business in State A. The Company does not receive any form of rent from the staff for providing accommodation. In consideration of the facts of the scheme, the main use of the property is not to derive rent. Paragraph 152-40(4)(e) of the ITAA 1997 will not apply to the property to prevent that property from being considered an active asset. As the Company satisfied the basic conditions in Subdivision 152-A of the ITAA 1997, the Company is able to apply the small business rollover to the capital gain.