Private ruling: Capital Gains Tax - Active Asset
Published: August 2011
Ruling period: 1 July 2010 to 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Is the property which the taxpayer sold a Capital Gains Tax (CGT) active asset as defined in section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes.

Relevant facts and circumstances: The taxpayer was the sole owner of a commercial property. It was owned for a number of years. The sole occupant of the property during the period of ownership was a company which occupied it under lease from the taxpayer. The company used the premises as a warehouse with its main business premises located elsewhere. The taxpayer holds a majority of the shares in the company. They are currently in the process of acquiring the remaining shares. The taxpayer sold the property then purchased another property. The company moved its activities to that new location which it also leased from the taxpayer.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 152-10, Income Tax Assessment Act 1997 Section 152-35, Income Tax Assessment Act 1997 Section 152-40 , Income Tax Assessment Act 1997 Section 328-125 and Income Tax Assessment Act 1997 Section 328-130.

Reasons for decision: Summary: Unless otherwise stated, all legislative references in the following Reasons for Decision are to the Income Tax Assessment Act 1997 . The asset would meet the definition of an active asset in sub-section 152-40(1). Furthermore, the effect of sub-section 152-40(4A) means that the exclusion provision in sub-section 152-40(4) is not applicable. Consequently, the property does qualify as an active asset for the purposes of the small business concessions. | Detailed Reasoning - Detailed reasoning: In order for you to choose to disregard all or part of a capital gain under the small business capital gains tax (CGT) concessions, certain conditions must be satisfied. The basic conditions are set out in section 152-10. One of the basic conditions requires the relevant CGT asset to satisfy the active asset test in section 152-35. That section requires that the relevant asset must be an active asset of the taxpayer for the relevant period of time. Section 152-40 provides the meaning of an active asset. Sub-section 152-40(1) states: A CGT asset is an active asset at a time if, at that time: (a) you own the asset (whether the asset is tangible or intangible) and it is used, or held ready for use, in the course of carrying on a business that is carried on (whether alone or in partnership) by: (i) you; or (ii) your affiliate; or (iii) another entity that is connected with you. In the present case, the asset is being leased to another entity so you cannot be said to be employing it directly in carrying on a business. Furthermore, paragraph 152-40(4)(e) states that even if an asset would otherwise qualify as an active asset, it cannot be an active asset if its main use by you is to derive rent - unless that use was only temporary. As the property was leased to another entity there is no doubt that its main use, indeed sole use, by you was to earn rent and that use was not merely temporary. However, 152-40(4A) provides that any use of an asset by your affiliate, or an entity that is connected with you is treated as your use for the purposes of the main use test in paragraph 152-40(4)(e). Consequently, in order for the property to be an active asset, the entity carrying on business from the premises would ultimately need to be either your affiliate, as defined in section 328-130, or connected with you as defined in section 328-125. | Detailed Reasoning - Definition of connected with: The meaning of connected with is found in section 328-125. It states at paragraph 328-125(1)(a) that an entity is connected with another entity if either controls the other in the manner described in the section. For present purposes, the relevant paragraph is 328-125(2)(b) which states that an entity controls another if it beneficially owns, or has "the right to acquire the beneficial ownership of, equity interests in the company that carry between them the right to exercise, or control the exercise of, a percentage (the control percentage ) that is at least 40% of the voting power in the company". Since you hold the majority of the shares in the company, you hold a control percentage. Therefore, by definition the company which is using the asset in the course of carrying on a business is connected with you. Given that the company meets the definition in section 328-125, the asset would meet the definition of an active asset in sub-section 152-40(1). Furthermore, the effect of sub-section 152-40(4A) means that the exclusion provision in sub-section 152-40(4) is not applicable. Consequently, the property does qualify as an active asset for the purposes of the small business concessions.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns. | Does Part IVA apply to this ruling?: Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable. | We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply. | For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.