Private ruling: Active asset
Date of advice: 2 July 2015
Published: July 2015
Ruling period: Year ending 30 June 2015
Date scheme commenced: 1 July 20YY

Ruling: Q1: Does the property satisfy the active asset test? | A1: Yes.

Relevant facts and circumstances: From the 20AA-BB financial year until the 20WW-XX financial year, you carried on a professional practice in partnership (the practice). The partners jointly owned a property (the property). The property was acquired during 20AA-BB financial year. The property was sold during the 20YY-ZZ financial year. The property is located approximately X metres from the offices of the practice. Prior to your purchase of the property, sheds were constructed at the rear and side of the property. The sheds were fitted out so they could be used to store client files and business records of the practice. The property is also rented out to a third party. The third party have lived in the property since the early 1990's. There is no formal lease in place and the third party pay below market rent. The low rent is in recognition of the fact that they did not enjoy exclusive possession of the property and their presence at the property provided a level of security for the contents of the sheds. The partners and staff of the practice have unfettered access to the sheds. The partnership pays all outgoings associated with the property. The total land area of the property is Y square metres. The house takes up approx. Z square metres and the fenced off section of the backyard with the sheds is also approx. Z square metres. The partners and staff of the practice and the third party shared access to the driveway and the car port. The front yard was generally used for parking. The sheds were accessed by employees on an 'as-needed' basis. This could be as little as once a week but more often several times a week. During periods when files were being archived or sent for destruction, access would be daily. Bins within which files that had been earmarked for destruction were stored along the side of the driveway at the front of the house. During the 20WW-XX financial year, you sold the practice to an unrelated third party. As a condition of sale, you remained as an employee for a further 12 months. At the time of the sale, all storage sheds were full. After the sale of the practice, the files continued to be stored in the sheds (as a condition of sale). In early 20YY, all files less than seven years old were taken away and stored commercially by the person who had purchased the practice. Income derived by the partnership: Income Year Gross income - rental Gross income - practice 20BB 1,000 1,400,000 20CC 12,000 1,500,000 20DD 14,000 1,500,000 20EE 14,000 1,700,000 20FF 15,000 1,700,000 20WW 16,000 2,000,000 20XX 17,000 1,100,000 20YY 23,000 85,000

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 152-35 . | Income Tax Assessment Act 1997 Paragraph 152-40(4)(e).

Reasons for decision: Summary: The active asset test is 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 for more than 15 years and the asset was an active asset of yours for a total of at least 7.5 years during the test period. The test period is from when the asset is acquired until the CGT event. If the business ceases within the 12 months before the CGT event (or such longer time as the Commissioner allows) the relevant period is from acquisition until the business ceases. A CGT asset is an active asset if it is owned by you and is used or held ready for use in a business carried on (whether alone or in partnership) by you, your affiliate or an entity connected with you (subsection 152-40(1) of the ITAA 1997). The property was purchased during the 20AA-BB financial year and sold during the 20YY-ZZ financial year. The property must have been an active asset for at least half that time. Taxation Determination TD 2006/78 considers, amongst other issues, the situation where there is part business and part rental use of an asset. It states that an asset owned by the taxpayer and used partly for business purposes and partly to derive rent can be an active asset under section 152-40 of the ITAA 1997 where it is considered that the main use of the premises is not to derive rent. In deciding if the property was mainly used to earn rent the Commissioner will consider a range of factors such as: • the comparative areas of use of the premises (between rent and business) • the comparative times of use of the premises (between rent and business), and • the comparative levels of income derived from the different uses of the asset. The total land area of the block is Y square metres. The fenced off area for the sheds is approx. Z square meters, the same area as the house. Access is shared to the driveway and the car port. The front yard was generally used for parking. The unrelated, third party tenant pays a below market rate of rent. The property has been used for both business and rental for the entire period of ownership. The majority of the income from the property is derived by the business. While there was income received from the property being rented, the significant portion of the income was earned from the business. Therefore the main use of the property is to derive business income and not rent. Accordingly, the property satisfies the active asset test under section 152-35 of the ITAA 1997.