Private ruling: Capital Gains Tax - small business relief - active asset test
Published: January 2014

Ruling: Is the property considered to be used for promotional activity and is therefore an active asset of the trust for the purposes of Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997)? | No | 1 July 2013 to 30 June 2014 | 1 July 2013 | A unit trust (the trust) conducts business at a number of locations. | The trust owns property which was purchased post CGT. | A planning application was lodged with the council for business premises to be built at the property and for a promotional sign to be located at an adjacent property on a highway. An Administrative Tribunal directed the council to approve the promotional signage however the decision regarding the business premises was silent. | A deed of licence was entered into to enable the trust to locate their promotional sign on the land owned by another entity. | The sign was placed on the land in order to increase visibility and effectiveness of the advertising of the business. | It has been estimated that a percentage of assessable income is generated by clients located in the suburbs in close proximity to the sign and the property. The trust believes that the signage has assisted in generating this level of assessable income. | It was considered important by the trust that the business maintain a presence in that locality hence the continued ownership of the property. | No activities have been conducted on the property by an affiliate or connected entity in the course of carrying on a business. | The trustees intend to transfer the land at market value into their self-managed superannuation fund. | None | Income Tax Assessment Act 1997 section 152-10 | Income Tax Assessment Act 1997 section 152-35 | Income Tax Assessment Act 1997 section 152-40 | Summary | It has not been demonstrated that the property has been used for promotional activities or in any other capacity as an active asset of the business conducted by the trust. | Detailed reasoning | The active asset test in section 152-35 of the ITAA 1997 requires the capital gains tax (CGT) asset that gave rise to a capital gain to be an active asset for a particular period. As the trust has owned the property for more than 15 years, the active asset test in section 152-35 of the ITAA 1997 will be satisfied if the property was an active asset for a total of at least 71/2 years during the period of ownership. | Section 152-40 of the ITAA 1997 provides the meaning of 'active asset'. The property would be an active asset during the ownership period if it was used or held ready for use by the trust, affiliates, or by any other connected entity, in the course of carrying on a business. | The trust operates its business at a number of locations. It previously owned land located on a highway which was considered a good location for the placement of a promotional sign for the business which is conducted at a different location. Subsequent to the sale of the land the trust has maintained its presence by the construction of a promotional sign which has been permitted by a deed of licence. | The property is located adjacent to the highway location. It was purchased post CGT and a building application was lodged. The proposed building was not constructed and no activities have been conducted on the property by an affiliate or connected entity in the course of carrying on a business. It is stated in the application that the property has been used to maintain a presence in the area. | The expression 'held ready for use' is not defined in the legislation, nor is the meaning of the expression discussed in the Explanatory Memorandum to the New Tax System (Capital Gains Tax) Bill 1999 which introduced Division 152 into the ITAA 1997. However the interpretation of those words relevant to other parts of the income tax legislation has been tested by the Boards of Review. For example in Case 103 (1964) 11 CTBR(NS) 615 the taxpayer carried on a business as a primary producer. On 30 June 1961 the taxpayer commenced construction of a building to provide accommodation for future employees. The building was not completed until after 30 June 1962 and during the year was not used for the purpose of producing assessable income. The taxpayer had sought to claim a deduction for depreciation for the year ended 30 June 1962. It was held by the Board of Review that since construction was not complete the building could not be said to be 'ready for use'. | With the exception of the building proposal lodged there has not been any usage or proposed usage for the property, therefore it cannot be considered to be used or held 'ready for use' in the course of carrying on the business conducted by the unit trust. A promotional sign located on adjacent land owned by another entity is insufficient to treat the property as an active asset. | The Commissioner does not consider that the property owned by the unit trust has been used, or held ready for use, in the course of carrying on its business. The property is therefore not an active asset as described in section 152-40 of the ITAA 1997 for the purposes of satisfying the active asset test in section 152-35 of the ITAA 1997.