Private ruling: Small business CGT concessions and the active asset test.
Date of advice: 3 September 2015
Published: September 2015
Ruling period: Year ended 30 June 2016 | Year ended 30 June 2017
Date scheme commenced: 1 July 2015

Ruling: Q1: Does your property (the property) satisfy the active asset test for the purposes of section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes.

Relevant facts and circumstances: You acquired the property jointly more than 15 years ago. The property is used for two purposes and has been since it was purchased: 1. minority % used to derive rent, and 2. majority % used in a business carried on by a connected entity. The gross income derived from the two uses of the property in the year ended 30 June 20XX was: 1. rent % - vast minority, and 2. business income % - vast majority. The usage and gross income percentages for the year ended 30 June 20XX are proportionately indicative of your business throughout your ownership period.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 152 | Income Tax Assessment Act 1997 section 152-35 | Income Tax Assessment Act 1997 subsection 152-40(1) | Income Tax Assessment Act 1997 paragraph 152-40(1)(a) | Income Tax Assessment Act 1997 subsection 152-40(4) | Income Tax Assessment Act 1997 paragraph 152-40(4)(e)

Reasons for decision: Summary: For a CGT asset of a business to be an active asset for the purposes of Division 152 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. 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 that is carried on by you, your affiliate or another entity that is connected with you (paragraph 152-40(1)(a) of the ITAA 1997). However, an asset whose main use in the course of carrying on the business is to derive rent cannot be an active asset (unless that main use was only temporary) (paragraph 152-40(4)(e) of the ITAA 1997). That is, even if the asset is used in a business it will not be an active asset if its main use is to derive rent. In determining the main use of an asset for the purposes of paragraph 152-40(4)(e) of the ITAA 1997, any use of the asset by a connected entity is treated as your use of the asset (paragraph 152-40(4A)(b) of the ITAA 1997). Therefore, an asset leased to a connected entity for use in the connected entity's business will not, by that reason alone, be excluded by paragraph 152-40(4)(e) of the ITAA 1997 from being an active asset. Whether an assets main use is to derive rent will depend on the particular circumstances surrounding the derivation of income (paragraph 22 of Taxation Determination TD 2006/78). If an asset is used partly for business and partly to derive rent at any given time, it is a question of fact dependent on all the circumstances as to whether the main use of the asset at that time is to derive rent. No one single factor is necessarily determinative and consideration is given to a range of factors such as: • the comparative areas of use of the property (between deriving rent and other uses), and • the comparative levels of income derived from the different uses of the property. Example 5 in TD 2006/78, which considers mixed use of a property, provides: Mick owns land on which there are a number of industrial sheds. He uses one shed (45% of the land by area) to conduct a motor cycle repair business. He leases the other sheds (55% of the land by area) to unrelated third parties. The income derived from the motor cycle repair business is 80% of the total income (business plus rentals) derived from the use of the land and buildings. In determining if the main use of the land is to derive rent, it is appropriate to consider a range of factors. In this case, a substantial (although nevertheless not a majority) proportion by area of the land is used for business purposes. As well, the business proportion of the land derives the vast majority (80%) of the total income. In all the circumstances, the Tax Office considers the main use of the land in this case is not to derive rent and accordingly the land is not excluded from being an active asset by paragraph 152-40(4)(e) of the ITAA 1997. In your case, throughout your entire ownership period: • the majority of the land area has been used in a business carried on by an entity connected with you, and • the vast majority of the gross income derived has been from the use of the property in a business carried on by an entity connected with you. We do not consider the main use of the property to have been to derive rent. Therefore, the property has been an active asset throughout your ownership period. | Detailed Reasoning - Active Asset test: A CGT asset satisfies the active asset test if 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. In your case, you have jointly owned the property for over 15 years and it has been used in a business carried by an entity connected with you throughout your ownership period, and it will continue to be used in this manner until it is sold. As any use of the property by a connected entity is treated as your use of the property, it has been an active asset for at least 7.5 years during the test period and will therefore satisfy the active asset test for the purposes of section 152-35 of the ITAA 1997.