Private ruling: Active asset test
Date of advice: 4 November 2016
Published: March 2017
Ruling period: Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018 | Year ending 30 June 2019
Date scheme commenced: 1 July 2013

Ruling: Q1: Was the property considered to be an active asset to satisfy the active asset test in section 152-35 of the Income tax Assessment Act 1997 (ITAA 1997)? | A1: Yes.

Relevant facts and circumstances: The partnership purchased X businesses in 19XX. The business was operated from leased premises (the Property). In 20AA, the partnership acquired the freehold title to the Property. At the time of acquisition the business had been operating for approximately YY years. There were improvements to the site made over time. The business occupied less than 50% of the land area of the site. The remaining 50% of the land area was unimproved hardstand that was used to operate the other business. The partnership was aware that there were previous issues with the Property prior to its acquisition. The issues related to long term use of the site. Remediation work on the site had been completed in which was thought to have rectified the damage by the time the partnership acquired the land in 20AA. In 20BB the partnership sold the business to an unrelated third party, whilst retaining the freehold title to the land. The partnership continued to conduct their other business from the site as per normal. This arrangement continued unchanged between 20BB and 20CC. In 20DD the partnership attempted to sell the property with the lease to the third party intact. An Offer and Acceptance (O&A) for the sale of the land was signed in 20DD, with settlement to take place in 20EE. Clause 9 of the O&A stated: The buyer is aware that the current owner will provide EPA clearance. The partnership undertook the necessary testing to gain the relevant clearance, including drilling test holes on the site with extracted material sent for analysis. As a result of the testing it was found that the land was contaminated and the prospective purchasers opted out of the agreement to acquire the land. In 20EE the Relevant Department placed a memorial on the land and classified the site as contaminated with remediation required. This meant that the land could not be developed, subdivided or amalgamated without recourse to the Relevant Department for approval. This made the land unsaleable until the contamination was corrected. In order for the corrective action to proceed in the most cost effective way the partnership needed to remove all buildings and improvements allowing direct access to the land. Negotiations between the partnership and the third party bought an end to the lease of the service station in 20FF. The other business continued trading until 20GG. Cessation of both businesses allowed for clean-up to begin. This continued until the de-contamination was completed to the satisfaction of the Relevant Department and the memorial was lifted in 20HH. After the clean-up was complete the partnership again put the property on the market for sale. Due to the end of the mining construction boom the property was very difficult to sell. It was decided that the best and most lucrative way to sell the property was to sub-divide and the sell each parcel of land. Approval for sub-division was granted. The property was sub-divided into X lots. X lots were sold under contract between 20JJ and 20KK. With settlement occurring later in 20KK once the sub-divided titles became available. The remaining X lots are still for sale at the time of applying for this private ruling.

Relevant legislative provisions: Income Tax Assessment Act 1997 - Subsection 112-25(2) | Income Tax Assessment Act 1997 - Section 152-35 | Income Tax Assessment Act 1997 - Section 152-40

Reasons for decision: Detailed Reasoning - Detailed reasoning: To qualify for the small business capital gains tax (CGT) concessions, you must satisfy several conditions that are common to all the concessions. One of the conditions to be satisfied is the active asset test contained in section 152-35 of the Income Tax Assessment Act 1997 (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 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 detailed below. 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 to be carried on 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. The asset does not need to be an active asset just before the CGT event occurred. 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. Certain assets are, however, excluded from being active assets under subsection 152-40(4) of the ITAA 1997. An asset whose main use is to derive rent (unless such use was only temporary) is excluded from being an active asset. Such assets are excluded even if they are used in the course of carrying on a business. Taxation Determination TD 2006/78 provides the Commissioner's view on when an assets main use is to derive rent. It states that whether an assets main use to derive rent is dependent on the circumstances of the case. The factors considered in TD 2006/78 are: ● the comparative use of the area of land used in the business and to derive rent; and ● a comparison of the gross income derived from the use of the land in your business and the gross income derived from renting the property. In your case, you have stated that the partnerships business used more than 50% of the land in its business, with the remaining land being used to derive rent from a third party. While less than 50% of the revenue generated from the land during the 20XX-YY and 20ZZ-SS financial years the majority of the land area is used for the partnerships business, therefore, the main use of the land since purchasing the land in 20AA and closing down the partnerships business in 20GG is not to derive rent. You have held the land continuously since 20AA. Its main use was as a business asset and not to derive rent. It was actively used to operate a business from 20AA until the partnerships business ceased in 20GG. Accordingly, because you have owned the property for more than 15 years and it was an active asset for just over X years, the active asset test is satisfied. You have sold X parcels of land in 20JJ and 20KK and still have X parcels of land to be sold. If you subdivide a block of land, each block that results is registered with a separate title. For capital gains tax (CGT) purposes, the original land parcel is divided into two or more separate assets. Subdividing land does not result in a CGT event if you retain ownership of the subdivided blocks (subsection 112-25(2) of the ITAA 1997). The subdivided properties will retain the same acquisition date as the original property. Accordingly, when applying the active asset test to each of the newly formed blocks, the use of the property over the entire ownership period is taken into account. As stated above it has been determined that the property, as a whole, satisfied the active asset test. In the case of this subdivision of land, even though X blocks of land were sold before the other blocks they were still active assets for just over X years and, therefore, longer than half of the test period. As the remaining blocks are likely to have a test period of 15 years or longer, they too satisfy the minimum active asset period of seven and a half years. The active asset test will therefore be satisfied in relation to all X of the blocks.