Private ruling: Small business concessions – active asset test
Date of advice: 27 February 2018
Published: June 2018
Ruling period: 1 July 20XX to 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is the active asset test in section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997) satisfied in relation to your ownership interests in the property? | A1: Yes

Relevant facts and circumstances: You started a business around 20 years ago. You operate the business as a partnership and split the income in equal shares. Soon after commencing your business you moved your business into the shopfront (the Shop) of the Property. While you were tenants of the Shop, the Property came up for sale. You purchased it along with your relatives in partnership (the Property Partnership) as tenants in common for an amount. The Shop occupied 33% of the lettable area of the property. Two small residential apartments occupied 67%. The business has been run continuously out of the Property. You have paid a notional rent for the use of the Shop in the business, being the rental amount you paid to the previous owner of the Property before you purchased it. The apartments have been rented to unrelated third parties for most of the time you have owned the property. Your relative lived in one of the apartments rent free for a four year period. The rent from the apartments, and rental paid by you for the use of the Shop, has been paid to the Property Partnership. You have received a 50% share of this net rental income. Your business has claimed a deduction in relation to the Shop rental. In a recent year you hired out some of the space in the shop to third parties for a fixed rate. All of the building ownership expenses have been declared as expenses by the Property Partnership and deducted against the gross rent. Your gross business income has been over 80% of your share of the gross income from the Property for at least the last nine years. The average share for the nine year period was 87%. On a date in 201Z the Property was sold for an amount. Prior to the settlement of the sale you signed a three year lease over the Shop. You continue to run the business from the Property. You made a capital gain on the disposal of the Property.

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

Reasons for decision: Summary: The Property has been used in the business from the time it was purchased until the time it was sold, more than 15 years. While the business used less than 50% of the Property by area, it produced the bulk of the income from the Property during the period. The main use of the asset was to derive business income. Accordingly the Property passes the active asset test. | Detailed Reasoning - Active asset test: The active asset test is contained in section 152-35 of the ITAA 1997. The active asset test is satisfied 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 test period detailed below, 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 7.5 years during the test period. The test period is from when the asset is acquired until the CGT event. If the business ceases within the 12 months before the CGT event (or such longer time as the Commissioner allows) the relevant period is from acquisition until the business ceases. A CGT asset is an active asset if it is owned by you and is used or held ready for use in a business carried on (whether alone or in partnership) by you, your affiliate, your spouse or child, or an entity connected with you. | Detailed Reasoning - Main use to derive rent: Paragraph 152-40(4)(e) of the ITAA 1997 states that an asset whose main use in the course of carrying on the business is to derive rent cannot be an active asset unless the main use for deriving rent was only temporary. Taxation Determination TD 2006/78 (TD 20006/78) discusses the circumstances in which premises used for mixed purposes can be active assets notwithstanding the exclusion in paragraph 152-40(4)(e) of the ITAA 1997. Paragraph 26 of Taxation Determination TD 2006/78 states that: If an asset is used partly for business and partly to derive rent at any given time, it will be a question of fact depended on all the circumstances as to whether the main use of the asset at that time is to derive rent. No on single factor will necessarily be determinative, and resolving the matter is likely to 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. TD 2006/78 provides the following example: 15. Mick owns land on which there are a number of industrial sheds. He uses one shed (45% of the land by area) to conduct a motor cycle repair business. He leases the other sheds (55% of the land by area) to unrelated third parties. The income derived from the motor cycle repair business is 80% of the total income (business plus rentals) derived from the use of the land and buildings . 16. In determining if the main use of the land is to derive rent, it is appropriate to consider a range of factors. In this case, a substantial (although nevertheless not a majority) proportion by area of the land is used for business purposes. As well, the business proportion of the land derives the vast majority (80%) of the total income. In all the circumstances, the Tax Office considers the main use of the land in this case is not to derive rent and accordingly the land is not excluded from being an active asset by paragraph 152-40(4)(e) of the ITAA 1997 . | Detailed Reasoning - Application to your circumstances: In this case, you purchased an interest in the Property and it has been used by you in the course of carrying on a business for considerably more than 15 years. A portion of the property has also been rented to unrelated entities. We consider that your circumstances are similar to the example outlined in TD 2006/78. While less than 50% of the total rentable area is used in the business, the income derived by the business is significantly more than the income earned from renting out the property. We do not consider that the exclusion in paragraph 152-40(4)(e) of the ITAA 1997 will apply in the circumstances. Therefore the property satisfies the active asset test.