Private ruling: CGT - mixed use property
Date of advice: 15 April 2024
Published: 27 May 2024
Ruling period: 30 June 20XX | 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Does the main residence exemption apply in accordance with section 118-100 of the Income Tax Assessment Act 199 7 (ITAA 1997) where the land comprises of both main residence and commercial premises (shops)? | A1: Yes. | Q2: Can the land be deemed to be an active asset in accordance with section 152-35 of the ITAA 1997 where the land has mixed use? | A2: Yes.

Relevant facts and circumstances: You are an Australian resident for tax purposes. You purchased the property in February 20XX. It contains a dwelling and 5 small commercial shop outlets on a single titled allotment (the Property). The Property is situated on less than 2 hectares of land. You have been residing in the dwelling as your main residence since acquisition. You have not used the main residence dwelling to produce income. The dwelling makes up over 80%% of the land by area, with the X shop outlets making up under 20%. From the financial years ended 20XX-20XX, you used Y of the X shop outlets to run your business. The business was carried on through a discretionary trust entity, which your spouse is the trustee of and you are a beneficiary of. During the years that the business operated, you actively worked in the business on a full-time equivalent basis. The other shop outlets have been leased to unrelated entities since acquisition. During this time, more of the land by area was used to conduct your business than was used to derive rent. This meant that more of the commercial area was used for business purposes. On average, your business derived more rent than business income. In 20XX, your business changed and no longer required a physical premises. The shop outlets are now all leased to unrelated entities. You are now preparing to sell the Property.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 118-110 | 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(4)(e) | Income Tax Assessment Act 1997 section 328-125 | Income Tax Assessment Act 1997 section 328-130

Reasons for decision: Detailed Reasoning - Detailed reasoning: The main residence exemption in section 118-110 of the ITAA 1997 applies to disregard a capital gain or capital loss a taxpayer makes from a capital gains tax (CGT) event that happens to a dwelling that is their main residence. The following must apply: • you are an individual; and • the dwelling was your main residence throughout your ownership period; and • the interest did not pass to you as a beneficiary in, and you did not acquire it as a trustee of, the estate of a deceased person. | Detailed Reasoning - Application to your circumstance: You used the dwelling as your main residence during your ownership period and did not use it to produce income at any point during your ownership period. Irrespective of the fact that the adjoining shops are situated on the same block of land as the dwelling, you are entitled to the full main residence exemption on the disposal of the main residence. You will need to determine the proportion of the main residence's floor area using the following calculation: Step 1 - Total hectares or metres on which the dwelling and commercial properties sit (which includes the land under the dwelling and under the commercial buildings) = x hectares or metres Step 2 - Land up to 2 hectares on which the dwelling sits including the land around the dwelling used for private purposes = y hectares or metres (no CGT on sale) Step 3 - Land on which the commercial buildings sit = x - y (subject to CGT on sale). | Detailed Reasoning - Detailed reasoning: The active asset test in section 152-35 of the ITAA 1997 is satisfied where an asset is owned for more than 15 years, and the asset was an active asset for a total of at least 7.5 years in the test period. The test period begins when the asset was acquired and ends at the CGT event. Under subsection 152-40(1) of the ITAA 1997, a CGT asset is an active asset if it is owned and used, or held ready for use, by you, your affiliate or another entity that is connected with you in the course of carrying on a business that is carried on, whether alone or in partnership. An affiliate under section 328-130 of the ITAA 1997 is only applicable to another entity that is an individual or company. As the business operated through a discretionary trust, it cannot be your affiliate and must be connected with you instead. The meaning of 'connected with an entity' is set out in section 328-125 of the ITAA 1997. For a discretionary trust, an entity controls the trust if the trustee acts, or could be reasonably be expected to act in accordance with the directions or wishes of the first entity. Paragraph 152-40(4)(e) of the ITAA 1997 provides that where an asset's main use is to derive rent, it cannot be an active asset. Taxation Determination TD 2006/78 Income tax: capital gains: are there any circumstances in which the premises used in a business of providing accommodation for reward may satisfy the active asset test in section 152-35 of the Income Tax Assessment Act 1997 notwithstanding the exclusion in paragraph 152-40(4)(e) of the Income Tax Assessment Act 1997 for assets whose main use is to derive rent? provides examples on the circumstances to consider in determining whether the main use of an asset is to derive rent. In example 5, factors to consider where property is mixed use are the proportion by area of the land used for business purposes, and the proportion of business income in comparison to the rent income. Subsection 152-40(4A) of the ITAA 1997 provides that when determining main use of an asset and the exclusions under paragraph 152-40(4)(e) of the ITAA 1997, personal use is ignored. | Detailed Reasoning - Application to your circumstance: You acquired the Property in 20XX. The business was operated for over 7.5 years during the financial years ended 20XX-20XX. The Property therefore meets the active asset test as you have owned the asset for more than 15 years and it was an active asset for more than 7.5 years during this time. A discretionary trust was used to operate the business through the Property which is owned by yourself. Your spouse is the trustee and you are a beneficiary of the trust. During the years that the business operated, you worked in the business on a full-time equivalent basis. It could be reasonably expected that your spouse in their capacity as trustee would act in accordance with your directions or wishes. Therefore, it is considered the trust is connected to you. Ignoring personal use of the Property, you used more of the non-residential land by area for business purposes than to to derive rent. On average, your business derived more rent than business income. As the majority of the non-residential land by area used for business purposes, we can consider the main use of the land is not to derive rent. The Property is therefore not excluded from being an active asset. We consider the property owned by you to be an active asset as it meets the active asset test and was used by the trust entity connected with you in the course of carrying on a business. For the purpose of this ruling, it is assumed that the facts of your situation as outlined above will not materially change during the ruling period and will continue until date of settlement of the Property. The Commissioner has not considered your eligibility for the small business concessions in this ruling. You must satisfy the relevant requirements and conditions to claim the small business concessions.