Private ruling: Small business entity status and active asset test
Date of advice: 6 February 2026
Published: 30 March 2026
Ruling period: Year ending 30 June 20XX

Ruling: Q1: Was the Company carrying on the business of leasing property? | A1: Yes | Q2: Is the Company a small business entity under section 328-110 and a CGT small business entity under subsection 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A2: Yes | Q3: Does the farm meet the active asset test under section 152-35 of the ITAA 1997? | A3: Yes

Relevant facts and circumstances: 1. The Company was established in Australia on DD MM YYYY. Person A and Person B each hold one ordinary share and are the Company's directors, with Person A also acting as company secretary. 2. The Company acquired its farming property at Address A under an instalment contract with payments made annually between YYYY and YYYY, and later purchased an adjoining parcel in around MM or MM YYYY. 3. The Company operated a XX-growing business on the property until MM YYYY, using the land, irrigation systems, sheds and accommodation buildings in the course of its operations. 4. In MM YYYY, the Company ceased farming and began leasing the XX plantation and associated infrastructure to an unrelated operator. The Company remained involved in managing the enterprise, including negotiating the lease through its solicitor, issuing monthly invoices, collecting rent, attending to repairs and insurance, and liaising with the tenant about irrigation, water access and maintenance. 5. For aggregation purposes, the Company is connected or affiliated with Entity A, Entity B, Fixed Unit Trust A (Entity C as trustee) and Entity D. 6. The aggregated turnover of the Company and these entities was approximately $XX in 20XX and is expected to be approximately $XX in 20XX. 7. On 12 August 20XX, the Company sold the farmland and business as a going concern for $XX.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 152 | Income Tax Assessment Act 1997 section 152-10 | Income Tax Assessment Act 1997 subsection 152-10(1) | Income Tax Assessment Act 1997 subparagraph 152-10(1)(c)(iv) | Income Tax Assessment Act 1997 subsection 152-10(1A) | Income Tax Assessment Act 1997 paragraph 152-10(1A)(d) | Income Tax Assessment Act 1997 subsection 152-10(1AA) | Income Tax Assessment Act 1997 section 152-35 | Income Tax Assessment Act 1997 section 152-40(4)(e) | Income Tax Assessment Act 1997 Division 328 | Income Tax Assessment Act 1997 Subdivision 328-C | Income Tax Assessment Act 1997 section 328-110 | Income Tax Assessment Act 1997 subparagraph 328-110(1)(b)(ii)) | Income Tax Assessment Act 1997 section 328-115 | Income Tax Assessment Act 1997 section 328-120 | Income Tax Assessment Act 1997 section 328-125 | Income Tax Assessment Act 1997 section 328-130 | Income Tax Assessment Act 1997 section 995-1

Reasons for decision: Summary: Yes. The Company was carrying on the business of leasing property during the relevant period prior to the sale of the farm on DD MM YYYY. | Detailed Reasoning - Detailed reasoning: 8. Taxation Ruling TR 2019/1 Income Tax: when does a company carry on a business? provides the Commissioner's view on when a company carries on a business. The concept of 'carrying on a business' is a longstanding feature of the income tax law and is relevant to various provisions of general and specific application. 9. Subsection 995-1(1) defines 'business' to include 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'. 10. It is not possible to definitively state what amounts to a business, however in Federal Commissioner of Taxation v Murry (1998) 193 CLR 605 at [54], the majority observed: A business is not a thing or things. It is a course of conduct carried on for the purpose of profit and involves notions of continuity and repetition of actions. 11. The case law highlights that it is not possible to state a precise test for whether a person is carrying on a business. Whether the activities of an entity constitute the carrying on of a business is a question of fact, and must be answered based on a wide survey, and the overall impression gained, of the activities of the entity having regard to the indicia of carrying on a business as a whole. 12. Paragraph 21 of TR 2019/1 provides that the key indicia considered by the courts in determining whether the activities carried on by an entity amount to the carrying on of a business are: • whether the person intends to carry on a business • the nature of the activities, particularly whether they have a profit-making purpose • whether the activities are - repeated and regular - organised in a business-like manner, including the keeping of books, records and the use of a system • the size and scale of a company's activities including the amount of capital employed in them, and • whether the activity is better described as a hobby, or recreation. 13. Consistent with the observations in paragraph 19 and paragraphs 25-29 of TR 2019/1, a company's activities are inherently more likely to have a commercial character and therefore be characterised as the carrying on of a business. There is a rebuttable presumption that where a company undertakes profit-making or gainful activities, it intends to and does in fact carry on a business, unless the facts show it has no real aim or prospect of profit. This differs from individuals and trusts, whose similar activities are less likely to be regarded as business activities. 14. In this case, the Company leased rural farming land and associated infrastructure (including irrigation equipment, sheds and staff housing) under formal lease arrangements. It issued monthly invoices, recorded transactions in its accounting system, maintained insurance, undertook repairs, and prepared business activity statements (BAS). These activities were undertaken for the purpose of deriving rental income. 15. Companies formed to make gainful use of assets are ordinarily regarded as carrying on business unless the facts show no profit aim. Here, the Company has consistently used capital assets to earn assessable rental income over an extended time. 16. Based on these factors, the Company was carrying on a business of leasing property during the relevant period. In addition, TR 2019/1 explains that the standard for determining whether a business is being carried on is not uniform across all entity types. Companies are generally more likely than individuals or trustees to be regarded as carrying on a business because their profit-making activities typically have a commercial character and, where a company engages in gainful activities with a prospect of profit, a presumption arises that it is carrying on a business unless the facts indicate otherwise. | Detailed Reasoning - Question 2: Is the Company a small business entity under section 328-110 and a CGT small business entity under subsection 152-10? | Summary: Yes. The Company satisfies the requirements to be a small business entity under section 328-110 and to be a CGT small business entity under subsection 152-10. | Detailed Reasoning - Detailed reasoning: 17. Determining whether an entity is a 'CGT small business entity' requires consideration of the statutory definition in Subdivision 328-C, which involves deciding whether the entity is carrying on a business and satisfies a turnover test. 18. Subsection 152-10(1AA) states: You are a CGT small business entity for an income year if: (a) you are a *small business entity for the income year; and (b) you would be a small business entity for the income year if each reference in section 328-110 to $10 million were a reference to $2 million. 19. The definition in section 328-110 of a 'small business entity' requires you to carry on a business in the income year, and that your aggregated turnover for the previous year was less than $10 million and/or your aggregated turnover for the current income year is likely to be less than $10 million. 20. We determined in our answer to Question 1 that the Company carried on a business in the 2026 income year. Therefore, we only need to consider the turnover requirement. 21. Determining a company's aggregated turnover for an income year under section 328-115 requires including its annual turnover and the annual turnover of entities that are 'connected with' or 'affiliates' of the entity under sections 328-125 and 328-130. The meaning of annual turnover is provided in section 328-120 and excludes GST. 22. You have told us that the aggregated turnover of the Company (which includes the annual turnover of the Company, the annual turnover of entities that are connected with the Company, and the annual turnover of entities that are affiliates of the Company) was less than $2 million in the 20XX income year (approximately $XX). Therefore, the Company meets the aggregated turnover requirement to be both a small business entity under section 328-110 (involving the $10 million turnover test) and a CGT small business entity (involving the $2 million turnover test). | Detailed Reasoning - Question 3: Does the farm meet the active asset test under section 152-35? | Summary: Yes. The farm passes the active asset test in section 152-35. | Detailed Reasoning - Detailed reasoning: 23. One of the conditions for the CGT small business concessions is that the CGT asset passes the 'active asset' test in section 152-35 (see paragraph 152-10(1)(d)). 24. A CGT asset will satisfy the active asset test if the asset was an active asset of yours for certain periods. • Where you owned the asset for 15 years or less, the asset must be an active asset of yours for at least half of the specified period. • Where you owned the asset for more than 15 years, the asset must be an active asset of yours for a total of at least 7 ½ years during the specified period. • In either case, the specified period is between a) when you acquired the asset, and b) the earlier of the CGT event, or the cessation of the business (if the business ceased to be carried on in the 12 months before the time of the CGT event, or if the Commissioner allows, a longer period). 25. Although the farm ceased to be used in the Company's business upon its sale on DD MM YYYY, the farm will still pass the active asset test. 26. The farm satisfies the active asset test in section 152-35 for the following reasons: • The farm was acquired by MM YYYY (at the latest), and disposed of on DD MM YYYY, resulting in an ownership period exceeding 15 years. • The farm was used directly in the Company's XX farming business from the time of acquisition until MM YYYY (more than 15 years). • The farm was used in the Company's XX farming business, and so was an active asset, for more than 7½ years. 27. In brief, the farm satisfies the active asset test because it was owned for more than 15 years, and was an active asset for more than 7 ½ years.

Reasons for decision: All legislative references are to the Income Tax Assessment Act 1997 .