Private ruling: Small business CGT concessions - active asset test - exclusion in paragraph 152-40(4)(e) where the asset's 'main use' is to derive rent - mixed use where the asset is used partly for rent and partly for business
Date of advice: 11 December 2025
Published: 2 February 2026
Ruling period: 1 July XXXX to 30 June YYYY

Ruling: Q1: Was the property an active asset of Unit Trust A for the whole of period 1? | A1: Yes | Q2: Was the property an active asset of Unit Trust A for the whole of period 2? | A2: Yes

Relevant facts and circumstances: 1. Unit Trust A acquired the property in the AAAA income year. 2. Unit Trust A had 120 units, with 80 held by Family Trust B, and 40 held by an unrelated entity. 3. Person C is a director and shareholder of Company D. 4. Company D conducts a business. 5. Business Trust E was established in the BBBB income year, with Unit Trust A holding 50% of the units, and another unrelated entity holding 50% of the units. 6. Business Trust E used the property (as the sole tenant) to conduct another business for period 1. 7. The following things happened at the end of period 1. • Family Trust B acquired the remaining 40 units in Unit Trust A from the other unitholder, becoming the sole unitholder in Unit Trust A (holding 100% of the units). • Unit Trust A disposed of the 50% interest in Business Trust E to the other unitholder. • The area that Unit Trust A leased to Business Trust E to conduct a business was reduced to allow Company D to start running its own business operations from the property. 8. XXXX 9. Company D was incorporated in the CCCC income year, with Person C owning 50% of the issued shares and another person owning the remaining 50%. 10. Since the start of period 2, Company D has run business operations from the property. 11. XXXX 12. Since the start of period 2: • Business Trust E rents 42% of the available area of the property • Company D rents the remaining 58% of the available area of the property. 13. Table 1 compares income of Unit Trust A and Company D, but has been redacted for privacy reasons. <It showed that rent income from the unrelated tenant was less than 30% throughout period 2> Table 1: income from Unit Trust A and Company D <redacted for privacy reasons> 14. XXXX 15. XXXX 16. Table 2 summarised distributions by the Family Trust B. (It has been redacted for privacy reasons, but showed that Person C had received distributions of at least 40% in all but one income year starting with the income year before the start of period 2.) Table 2: Family Trust B distributions (redacted for privacy reasons) 17. Unit Trust A spends minimal time on rental activities for the property.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 152-35 | Section 152-40 | Section 328-125

Reasons for decision: Summary: Question 1: Was the property an active asset of Unit Trust A for the whole of period 1? Answer: Yes Question 2: Was the property an active asset of Unit Trust A for the whole of period 2? Answer: Yes | Detailed Reasoning - Summary explanation for Questions 1 and 2: 18. An asset will qualify as an 'active asset' where you own it and it's used by an entity connected with you in carrying on a business, and no disqualifying exceptions apply. 19. For the purposes of this ruling, the only relevant exception is where the asset's main use was to derive rent. 20. In determining the 'main use' of an asset, a connected entity's use is treated as being your use. 21. The property qualifies as an active asset for both periods 1 and 2. • In period 1, Business Trust E was connected with Unit Trust A, and used the property to carry on a business. • In period 2, Company D was connected with Unit Trust A and used the property to carry on a business. • Since the property was used for both rent and business in period 2, to determine the 'main use' we need to weigh up factors including area of use and income derived from the respective uses. • For period 2, we're satisfied that rent wasn't the 'main use' on these facts because more than half of both area and income reflects business use by a connected entity, not rent. | Detailed Reasoning - Detailed explanation for Questions 1 and 2: 22. One of the conditions for the CGT small business concessions is that the CGT asset passes the 'active asset' test in section 152-35 (see section 152-10). 23. The effect of section 152-35 is that a CGT asset satisfies the active asset test if the asset was an active asset of yours for certain periods. • Where you owned the asset for 15 years or less, the asset must be an active asset of yours for at least half of the specified period. • Where you owned the asset for more than 15 years, the asset must be an active asset of yours for a total of at least 7 ½ years during the specified period. • In either case, the specified period is between a) when you acquired the asset, and b) the earlier of the CGT event, or the cessation of the business (if the business ceased to be carried on in the 12 months before the time of the CGT event, or if the Commissioner allows, a longer period). 24. Relevantly, a CGT asset will be an 'active asset' (under section 152-40) if you own the asset, and the asset is used (or held ready for use) in carrying on a business, where that business is carried on by you, or another entity that's connected with you. 25. A CGT asset will nevertheless be excluded from being an active asset if it meets any exception in subsection 152-40(4), as we explain at paragraph 33. Is a connected entity using the asset in carrying on business? Yes. Business Trust E and Company D used the property to carry on their respective businesses. Business Trust E is connected with Unit Trust A in period 1 and Company D is connected with Unit Trust A in period 2. 26. To determine if the property is an active asset, we first need to determine if the entity owning the property (Unit Trust A) is connected with the entities carrying on businesses at that property (Business Trust E and Company D). 27. Section 328-125 is about the 'connected' concept. • The effect of subsection 328-125(1) is that an entity is connected with another entity if either entity controls the other under section 328-125, or both entities are controlled by the same third entity. • An entity will control an entity (other than a discretionary trust) under subsection 328-125(2) if it owns interests carrying rights to at least 40% of the distributions of income or capital, or in the case of a company, votes. • One way an entity will control a discretionary trust is if, in any of the 4 previous income years, the trustee applied at least 40% of the trust's income or capital for the entity's benefit: see subsection 328-125(4). • The effect of subsection 328-125(7) is that an entity can control indirectly through interposed entities (if a first entity controls a second entity, the first entity is also treated as controlling any entities controlled by the second entity). 28. In period 1, Business Trust E and Unit Trust A are connected. Unit Trust A has 50% of the units in Business Trust E, giving it rights to 50% of distributions of income. 29. In period 2, Business Trust E and Unit Trust A are no longer connected, because Unit Trust A has no units. 30. Company D and Unit Trust A are connected entities in period 2. • Person C controls Company D. Person C has 50% of the shares, giving Person C rights to more than 40% of distributions of income. • Person C controls Family Trust B because Person C received distributions of at least 40% in all but one of the income years starting with the income year before period 2. • Family Trust B controls Unit Trust A. It has 100% of the units in Unit Trust A, giving it rights to receive at least 40% of distributions of income. • Person C controls Unit Trust A indirectly (Person C controls Family Trust B and Family Trust B controls Unit Trust A). • Unit Trust A and Company D are connected under subsection 328-125(1), because both entities are controlled by the same third entity: Person C. 31. The property was used in carrying on a business by a connected entity in both periods. Unit Trust A owned the property. In period 1, Business Trust E was connected with Unit Trust A and used the property to carry on its business. In period 2, Company D was connected with Unit Trust A and used the property to carry on a business. 32. Therefore, the property will be an active asset for both period 1 and period 2, unless an exception applies. Does the exclusion for the main use of the asset being rent apply? No. For both periods, use by a connected entity to carry on business was the main use of the property, not rent. 33. A CGT asset will nevertheless be excluded from being an active asset if it meets any exception in subsection 152-40(4). The relevant exception, in paragraph (e), is for assets whose main use is to derive interest, annuities, rent, royalties, or foreign exchange gains. 34. Subsection 152-40(4A) relevantly says for the purposes of paragraph 152-40(4)(e), in determining the main use of an asset, treat any use by an entity connected with you as your use. 35. The ATO website says that an asset that's leased to a connected entity (or affiliate) for use in the connected entity's business may still be an active asset. It's the use of the asset in that entity's business that determines the active asset status of the asset. If the relevant entity uses the asset in its business, that use is treated as use by the asset owner to run a business. [1] 36. In determining the 'main use', subsection 152-40(4A) will apply to treat Business Trust E's use of the property in period 1, and Company D's use of the property in period 2, as being Unit Trust A's use. 37. In period 2, the property is being used for two purposes: renting to Business Trust E (no longer a related entity) and conducting a business (through Company D, being treated as Unit Trust A's use). 38. TD 2006/78 [2] gives guidance about the exclusion for assets whose main use is to derive rent. • Paragraph 26 says if an asset is used partly for business and partly to derive rent, whether the main use of the asset is to derive rent is a question of fact that depends on the circumstances. • While no factor will necessarily be determinative, resolving the matter may involve a consideration of a range of factors, such as the comparative areas of use of the premises (between deriving rent and other uses), and the comparative levels of income derived from the different uses of the asset. • Example 5 is about mixed use. Mick used 45% of the land to conduct a business, and leases the other 55% to unrelated parties. However, the income from his business contributed 80% of the total income from the land. • The TD concluded that because the vast majority of the total income and a substantial portion of the land was attributable to the business, the main use of the asset wasn't to derive rent, so the exclusion in paragraph 152-40(4)(e) didn't apply. 39. The exception in paragraph 152-40(4)(e) doesn't apply in period 1. Business Trust E is carrying on a business at the property, and Business Trust E is connected with Unit Trust A. Business Trust E's use of the property will be treated as being Unit Trust A's use under subsection 152-40(4)(e), so the 'main use' of the property isn't for Unit Trust A to derive rent. 40. However, period 2 is a case of mixed use. In this period, the property is used for both collecting rent from an unrelated party (as Business Trust E is no longer connected), and in carrying on a business by a connected entity (Company D). 41. Applying TD 2006/78, we don't think the 'main use' of the property is to derive rent. • More than half of the area is used in Company D's business (about 58%), with less than half being used for rent (about 42%). • While the income varies from year to year, the total income from Company D's business has always been at least 70%, and the total income from the rent has never exceeded 30%. • Consistent with example 5 in TD 2006/78, we don't think deriving rent should be characterised as the 'main use' where a significant proportion of the land and most of the income is attributable to business use. 42. Therefore, the exception for the main use of the property being to derive rent won't apply in period 2. 43. It follows that the property will be an active asset for both periods. In each period, the property was used by a connected entity in carrying on a business, and the exception for rent doesn't apply. [1] ATO (2023), Active asset test | Australian Taxation Office, QC 52271, accessed at https://www.ato.gov.au on 10 December 2025. [2] 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?