Private ruling: Small business CGT concessions and the active asset test
Date of advice: 15 December 2015
Published: February 2016
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Question and answer: | Is Property K an active asset for the purposes of section 152-35 of the ITAA 1997? | No.

Relevant facts and circumstances: Entity ABC was incorporated a number of years ago. Entity ABC 's issued capital was wholly owned by entity D and another individual. Entity XYZ commenced trading a number of years ago. Entity ABC held an ownership interest in Entity XYZ. Entity QRS was incorporated a number of years ago. Entity D held an ownership interest in Entity QRS. After a number of years Entity ABC acquired an ownership interest in a Property K. The Property K comprised of a shed covering approximately half of the premises with an office above. The remainder of the premises consisted of an outside area. When the Property K was purchased, Entity XYZ had a fleet of various vehicles. Entity XYZ used the outside area of Property K to park a fleet of vehicles that were instrumental to its operations. Vehicles and their operators would start and end their shift from the Property K. A number of full time and casual employees were employed by Entity XYZ to operate the Entity XYZ's fleet of vehicles. Trucks owned by Entity XYZ compacted and transported a local governments domestic waste to offsite transfer waste stations. Entity QRS utilised the shed that was located at Property K for its recycling activity. Both Entities XYZ and QRS made use of the office facilities located at Property K. For a short period Entity XYZ held a contract with public entity. This was Entity XYZ 's only long-term contracted customer. Business activities from the Entity XYZ public entity contract were used to source Entity QRS's operations. Entity QRS also used materials sourced from other entities. Entity XYZ's fleet of vehicles was also used to source Entity QRS operations. Entity QRS employees used machines located in the shed of Property K to conduct business operations. Entity XYZ's fleet was used to transport the finished products from the Property K to their customers. All Entity QRS employees were casuals. After a number of years, a much larger multinational competitor entered the market and due to their competitiveness, won the public entities contract. As a result of the loss of this contract, all Entity XYZ staff had their employment terminated. After Entity XYZ lost the contract it became difficult for Entity QRS operations to continue. Shortly after, Entity QRS notified the ATO that they had lodged their final income tax return. Shortly after, Entity XYZ notified the ATO that they had lodged their final income tax return. After the loss of the public entity contract, Entity D and another entity attempted to pursue tenders and prospects for new contracts. They unsuccessfully approached and tendered to a number of public entity's for long term contracts. There was no business income included in the income tax returns lodged by Entity ABC. The ownership of the Entity XYZ fleet vehicles was never transferred to Entity ABC and there is no record of their disposal. After a number of years, the owners of Entity ABC became aware of the proposed rezoning. Gazetted rezoning of the Property K occurred shortly afterwards. As a result of the rezoning, no further waste management or recycling activities was permitted at Property K. Shortly after Property K was used to derive income in the form of periodic payments for parking vehicles onsite to independent third parties. A number of years later Property K was disposed of.

Relevant legislative provisions: Section 152-35 of the Income Tax Assessment Act 1997 | Section 152-40 of the Income Tax Assessment Act 1997 | Section 109-5 of the Income Tax Assessment Act 1997

Reasons for decision: Summary: In your private ruling application you have requested that only the question of whether the Property K is an active asset for the purposes of the small business CGT concessions be ruled upon. | Detailed Reasoning - Acquisition of an asset: Generally, a CGT asset is acquired when the taxpayer becomes its owner under subsection 109-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997). CGT event A1 occurs when the disposal contract for the CGT asset is entered into under subsection 109-5(2) of the ITAA 1997. In applying subsection 109-5(1) of the ITAA 1997 and subsection 109-5(2) to the present case, the commencement date for the active asset test of the Property K was August 1994, when acquisition occurred. The 2014 income year, when the asset was disposed of, is the time the active asset test concludes. | Detailed Reasoning - Active asset test: Subsection 152-35(1) of the ITAA 1997 provides that a CGT asset will satisfy 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 ½ years. Entity ABC held an interest in the Property K for a period of greater than 15 years. Therefore, in order to satisfy the requirements under subsection 152-35(1) of the ITAA 1997, it must be established that the property was an active asset for a period of at least 7 ½ years. Section 152-40 of the ITAA 1997 sets out the conditions that must be met for a CGT asset to be an active asset. Under subsection 152-40(1) of the ITAA 1997, a CGT asset is an active asset if it is owned by a small business entity and it is: • used or held ready for use by the small business entity, a small business CGT affiliate, or an entity connected with a small business entity, in the course of carrying on a business ; or • an intangible asset that is inherently connected with a business carried on by the small business entity, for example, goodwill. An ownership interest of Property K was purchased by Entity ABC. From the date of acquisition both Entities XYZ and QRS conducted business activities at Property K. Both these entities were part owned by Entity ABC. After a number of years operation both Entities QRS and XYZ notified the ATO that they had lodged their final income tax returns. At this point no further business activity was conducted by Entities XYZ or QRS. Although Entities XYZ and QRS conducted business activities, at no stage did the Entity ABC engage in these activities. Entity ABC's activities consisted of management services and investment properties. From the information that you have provided and the income tax returns that were lodged by Entity ABC, there is no record that Entity ABC or any associated connected entity commenced, conducted or carried on any business activity at Property K post Entities XYZ and QRS ceasing operations. From this, it can only be concluded that once Entity XYZ lost the public entity contract, there was a cessation of business activities at Property K. After the cessation of these activities there was no commencement of any business activities by Entity ABC or any of its associates or connected entities at Property K. This is highlighted by the subsequent tax returns lodged by Entity ABC which does not disclose any business income post the cessation of business activities of Entities XYZ and QRS. Therefore it can be concluded that Property K was an active asset only for the period that Entities XYZ and QRS conducted business activities at the property. This was a period of less than 7 ½ years. Therefore, as Property K was an active asset for a period of less than 7½, subsection 152-35(1) of the ITAA 1997 has not been satisfied. Accordingly, as the Property K does not satisfy all of the conditions under section 152-35 of the ITAA 1997, it is not an active asset for the purposes of the small business CGT concessions.