Private ruling: CGT - small business concessions - active asset test
Date of advice: 6 February 2018
Published: June 2018
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Can the property be treated as an active asset? | A1: Yes

Relevant facts and circumstances: You owned a property (the property) for less than 15 years. The property was leased to a related party, the Trust. The Trust operated a business out of the premises for more than half your ownership period including during the income year in which you sold the property. You received at least 40% of the income distributed by the Trust in one of the four income years before you sold the property. The Trust was a small business entity for the income year in which you sold the property.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 152-10 | Income Tax Assessment Act 1997 Section 152-35 | Income Tax Assessment Act 1997 Subdivision 152-A | Income Tax Assessment Act 1997 subsection 152-35(2) | 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) | Income Tax Assessment Act 1997 paragraph 152-40(4A)(b) | Income Tax Assessment Act 1997 Subsection 328-125(4)

Reasons for decision: Summary: In order for a taxpayer to be eligible for the capital gains tax (CGT) small business concessions, the basic conditions under section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997) must be met. | Detailed Reasoning - Basic conditions: The small business 50% active asset reduction can be applied if the following basic conditions are satisfied: ● a CGT event happens in relation to a CGT asset of yours in an income year ● the event resulted in a gain ● the CGT asset satisfied the active asset test in section 152-35 of the ITAA 1997, and ● at least one of the following applies: ● you are a small business entity for the income year ● you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997 ● you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an interest in an asset of the partnership, or ● you do not carry on a business, but your CGT asset is used in a business carried on by a small business entity that is your affiliate or an entity connected with you (section 152-10 of the ITAA 1997). | Detailed Reasoning - Active asset test: A CGT asset satisfies the active asset test if: (a) 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, or (b) 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 7½ years during the test period (subsection 152-35 of the ITAA 1997). The test period begins when you acquired the asset and ends at the earlier of the CGT event and if the relevant business ceased to be carried on in the 12 months before that time – the cessation of the business (subsection 152-35(2) of the ITAA 1997). For a CGT asset to be an active asset it must firstly satisfy one of the requirements 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 in the business 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. In your case the basic conditions contained in Subdivision 152-A of the ITAA 1997 were satisfied because: ● a CGT event occurred when you disposed of the property ● the event resulted in a gain ● an entity connected with you (the Trust) was a small business entity for the income year that the CGT event happened (the Trust is connected with you as you received at least 40% of the income distributed by the Trust in one of the four income years before the CGT event – subsection 328-125(4) of the ITAA 1997) ● you owned the property for 15 years or less and the property was used in the business of the Trust for a total of at lea st half the test period, and ● during the income year that the CGT event happened the Trust used the property in its business. As you satisfied the basic conditions in Subdivision 152-A of the ITAA 1997, you are entitled to apply the small business 50% active asset reduction to the capital gain.