Private ruling: Capital gains tax - small business concession - active asset test
Date of advice: 9 May 2016
Published: June 2016
Ruling period: Year ending 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Do properties A & B, which are owned by the family trust, qualify as active assets? | A1: Yes. | Q2: Do properties C & D, which are owned by the family trust, qualify as active assets? | A2: No.

Relevant facts and circumstances: Person A and person B are married and are health care professionals. Person A and person B are the beneficiaries of the family trust. Person A and person B have control over the family trust. The following properties are owned by the trustee of the family trust; • property A • property B • property C • property D All assets were acquired after 20 September 1985. Person A and person B operate health care practices which are run through company A. The business premises of these practices are located at property A and property B. Person A and person B have control over company A. The family trust and company A are connected entities, as they are both controlled by the same third entity. Property A and property B are used in the course of carrying on a business that is carried on by an entity connected with you. Company A pays commercial rent to the family trust for its tenancies at property A and property B. Property A • was purchased in the 19XX-XX financial year, • has a small residential component • is the business premises of one of the practices which has been conducted continuously at this location for over 15 years Property B • was purchased in the 19XX-XX financial year and • is the business premises of one of the practices which has been conducted continuously at this location for over 15 years. Property C • was purchased in the 20XX-XX financial year • is a residential property, • contains non-strata residential units, • leasing activities, including the selection of tenants and collection of rents in respect of tenants are managed by a property management agency, • is part of the property investment business of the family trust and related entities and • is held as a long term asset to produce rental income and to produce long term capital gain. Property D • was purchased in the 19XX-XX financial year, • is a residential property, • contains strata residential units, • leasing activities, including the selection of tenants and collection of rents in respect of tenants are managed by a property management agency, • is part of the property investment business of the family trust and related entities, • is held as a long term asset to produce rental income and to produce long term capital gain.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 115-25, | Income Tax Assessment Act 1997 subsection 115-215(3), | Income Tax Assessment Act 1997 section 152-35, | Income Tax Assessment Act 1997 section 152-40, | Income Tax Assessment Act 1997 subsection 152-40(4) and | Income Tax Assessment Act 1997 paragraph 152-40(4)(e).

Reasons for decision: Detailed Reasoning - Meaning of active asset: Under section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997), a capital gains tax (CGT) asset is an active asset at a time if, at that time, you own the asset and it is used, or held ready for use, in the course of carrying on a business that is carried on by: • you, or • your affiliate, or • another entity that is connected with you. However under paragraph 152-40(4)(e) of the ITAA 1997, CGT assets cannot be active assets, where their main use is to derive interest, an annuity, rent, royalties or foreign exchange gains. | Detailed Reasoning - Active asset test: The active asset test, contained in section 152-35 of the ITAA 1997, 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 least 7.5 years during the test period. The test period: (a) begins when you acquired the asset, and (b) ends at the earlier of (i) the CGT event, and (ii) when the business ceased, if the business in question ceased in the 12 months before the CGT event (or such longer time as the Commissioner allows). The periods in which the asset is an active asset do not need to be continuous. However, they must add up to the minimum periods specified above, depending on the total period of ownership. The asset does not need to be an active asset just before the CGT event. | Detailed Reasoning - Question 1: An asset that is used in the business of an entity connected with you is considered to be an active asset under section 152-40 of the ITAA 1997. In your case, assets A & B were used in the course of carrying on a business by another entity connected with you, being that these assets were used as business premises. These assets are therefore considered to be active assets. Although property A has a small residential component; the main use of the premises is not to derive rent and therefore can still be considered an active asset. Furthermore under section 152-35 of the ITAA 1997 the properties satisfy the active asset test because they were owned by the family trust for more than 15 years and were actively used in a business carried on by another entity connected with family trust for more than 7.5 years. | Detailed Reasoning - Question 2: In the case of Jakjoy Pty Ltd v Federal Commissioner of Taxation [2013] AATA 526; 2013 ATC 10-328; (2013) 96 ATR 185, the taxpayer owned multiple commercial investment properties and argued it was carrying on a leasing business and the properties should therefore be treated as active assets for the purposes of the small business CGT concessions. The case went before the Administrative Appeals Tribunal (AAT), and it was determined that the properties were not active assets. Even though the taxpayer was carrying on a property leasing business, the fact that the properties were rented out to derive passive rental income meant that they were not capable of being active assets. You state that you had two purposes in owning these properties, which were that you wanted the properties to produce rental income as well as produce a long term capital gain. However, it would still be considered that the main use of these properties was to derive rent. Therefore property C & D, do not qualify as active assets, under subsection 152-40(4) of the ITAA 1997, as their main use was to derive rent.