Private ruling: Active asset test
Published: May 2012
Ruling period: Year ended 30 June 2012 | Year ended 30 June 2013 | Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016 | Year ended 30 June 2017
Date scheme commenced: 1 July 2011

Ruling: Q1: Are the properties owned by the company considered active assets under section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Do the properties satisfy the active asset test in section 152-35 of the ITAA 1997? | A2: No.

Relevant facts and circumstances: The company was established in 1984. The company is carrying on a business of leasing properties as determined in the private ruling issued. The company owns three commercial properties. They were subsequently leased to third party tenants.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 152-35 | Income Tax Assessment Act 1997 section 152-40(4)(e).

Reasons for decision: Summary: A CGT asset is an active asset at a given time if, at that time you own it and it is used (or held ready for use) in the course of carrying on a business by you, a small business CGT affiliate of yours or an entity connected with you. Certain assets are, however, excluded from being active assets under subsection 152-40(4) of the ITAA 1997. An asset whose main use is to derive rent (unless such use was only temporary) is excluded from being an active asset. Such assets are excluded even if they are used in the course of carrying on a business. Example 1 in Taxation Determination TD 2006/78 deals with commercial rental properties: Commercial Property Co owns 5 commercial rental properties. The properties have been leased for several years under formal lease agreements to various commercial tenants which have used them for office and warehouse purposes. The terms of the leases have ranged from 1 year to 3 years with a 3 year option and provide for exclusive possession. The company has not engaged a real estate agent to act on its behalf and manages the leasing of the properties itself. In this situation, the company has derived rental income from the leasing of a number of properties. Accordingly, the main (only) use of the properties is to derive rent and they are therefore excluded from being active assets under paragraph 152-40(4)(e) of the ITAA 1997 regardless of whether the activities constitute the carrying on of a business. In this case, the company is carrying on a business of leasing commercial properties. This situation is similar to the example provided in TD 2006/78. The main or only use of the commercial properties is to derive rent. Therefore, the properties are excluded from being active assets under paragraph 152-40(4)(e). This is regardless of the fact that the company's activities amount to the carrying on of a business. As the properties are not considered active assets, they will not satisfy the active asset test in section 152-35 of the ITAA 1997.

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