Private ruling: Capital gains tax - active asset test
Date of advice: 4 November 2015
Published: November 2015
Ruling period: Year ending 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Is your interest in the partnership's property an active asset under section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes


Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 152-10(1). | Income Tax Assessment Act 1997 Paragraph 152-35(1)(a). | Income Tax Assessment Act 1997 Paragraph 152-35(1)(b). | Income Tax Assessment Act 1997 Section 152-35. | Income Tax Assessment Act 1997 Section 152-105. | Income Tax Assessment Act 1997 Paragraph 152-40(1)(a). | Income Tax Assessment Act 1997 Subparagraph 152-40(1)(a)(i).

Reasons for decision: Detailed Reasoning - Active asset test: Subsection 152-35(1) of the ITAA 1997 states that a CGT asset satisfies the active asset test 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 period of ownership, or • 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 and a half years. A CGT asset is an active asset if at a given time, among other things, it is owned and used (or held ready to use) in the course of carrying on a business (paragraph 152-40(1)(a) of the ITAA 1997). Importantly, paragraph 152-40(4)(e) of the ITAA 1997 provides that an asset whose main use is to derive rent cannot be an active asset. In your case the property was purchased in 20XX and disposed of in 2015 triggering CGT event A1, therefore the property has been owned for a period of over 15 years. In considering whether the property was an active asset of the business we need to consider the use of the property over the period of time the property was held. | Detailed Reasoning - The period from 10 December 2000 to July 2015: Taxation Determination TD 2006/78 considers, amongst other issues, the situation where there is part business and part rental use of an asset. It states that an asset owned by the taxpayer and used partly for business purposes and partly to derive rent can be an active asset under subsection 152-40(4) of the ITAA 1997 where it is considered that the main use of the premises is not to derive rent. In deciding if the property was mainly used to earn rent the Commissioner will consider a range of factors such as: • the comparative areas of use of the premises (between rent and business) • the comparative times of use of the premises (between rent and business), and • the comparative levels of income derived from the different uses of the asset. In your case after considering a range of factors noted above such as the comparative times, the area of the premises used and the levels of income we consider that the main use of your part of the property was not to derive rent for the period ownership. Accordingly, the property is considered to be an active asset for the purposes of subparagraph 152-40(1)(a)(i) of the ITAA 1997 for the entire period of ownership. The property therefore meets the active asset contained in section 152-35 of the ITAA 1997.

Relevant facts: You hold a part interest in a commercial property. | You operated a business as a sole trader and utilise XX% of the property. | The other owners operated as sole traders and they each utilise XX% of the floor space to operate their business. | The remaining part of the property is used to derive rent. | Your business earns a large amount of income per year. | Your business also receives a small amount of rent from the commercial leasing of the small area of the property. | You and the other owners of the property sold the property in 2015. | You state you satisfy the other criteria relevant to small business capital gains tax (CGT) relief conditions.