• Meaning of active asset

    A CGT asset is an active asset if you own it and:

    • you use it or hold it ready for use in the course of carrying on a business (whether alone or in partnership)
    • it is an intangible asset (for example, goodwill) inherently connected with a business you carry on (whether alone or in partnership).

    A CGT asset is also an active asset if you own it and it is used or held ready for use in the course of carrying on a business, or it is an intangible asset inherently connected with a business carried on, (whether alone or in partnership) by any of the following:

    • your affiliate
    • your spouse or child under 18 years
    • an entity connected with you.

    However, certain CGT assets cannot be active assets, even if they are used or held ready for use in the course of carrying on a business – for example, assets whose main use is to derive rent (unless the asset was rented to an affiliate or connected entity for use in their business). Generally a rental property will not be an active asset.

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    When an asset is ‘held ready for use’

    For an asset to be held ready for use in the course of carrying on a business, it needs to be in a state of preparedness for use in the business and functionally operative. As such, premises still under construction, or land upon which it is intended to construct business premises, could not be said to be 'held ready for use' and would, therefore, not be active assets at that time.

    Example

    Margaret carried on business at various customer on-site locations. She acquired some land with the intention of constructing premises in which to carry on her business. Soon after Margaret acquired the land she was approached by another party that was keen to acquire the land. Margaret sold the land and made a capital gain. She was only part way through the construction of the premises at that time.

    In this situation, the land was not held ready for use by Margaret in the course of carrying on her business at any time. It was not in a state of preparedness from which Margaret could carry on her business. Accordingly, the land was not an active asset at any time.

    End of example

    Assets that cannot be active assets

    The following CGT assets cannot be active assets (even if they are used, or held ready for use, in the course of carrying on a business):

    • shares in companies or interests in trusts, other than those that satisfy the 80% test (see When shares and trust interests are active assets)
    • financial instruments, such as bank accounts, loans, debentures, bonds, futures and other contracts and share options (if a financial instrument is inherently connected with the business, it can nevertheless count towards the satisfaction of the 80% test)
    • assets whose main use is to derive interest, an annuity, rent, royalties or foreign exchange gains (unless the main use for deriving rent was only temporary or the asset is an intangible asset that you have substantially developed or improved so that its market value has been substantially enhanced)
    • shares and trust interests in widely-held entities, unless held by a CGT concession stakeholder in the widely-held entity.

    Trade debtors are not considered to be financial instruments for the purposes of the active asset exclusions. Rather, they are a business facilitation mechanism that assists in the conduct of the business and are inherently connected with the business. Accordingly, trade debtors can be included in the value of active assets when calculating the 80% test.

    Where asset's main use is to derive rent

    An asset whose main use is to derive rent (unless that main use is only temporary) cannot be an active asset. This is the case even if the asset is used in the course of carrying on a business.

    Whether an asset's main use is to derive rent will depend on the particular circumstances of each case. A key factor in determining whether an occupant of premises is a lessee paying rent is whether the occupier has a right to exclusive possession.

    If, for example, premises are leased to a tenant under a lease agreement granting exclusive possession, the payments involved are likely to be rent and the premises are not an active asset. On the other hand, if the arrangement allows the person only to enter and use the premises for certain purposes and does not amount to a lease granting exclusive possession, the payments involved are not likely to be rent.

    An asset that is leased to a connected entity or affiliate for use in its business may still be an active asset. It is the use of the asset in that entity’s business that will determine the active asset status of the asset.

    All uses of an asset are considered in determining what the main use of the asset is and, therefore, whether it is an active asset. However, personal use of the asset by the asset owner, or by an individual who is their affiliate, is not considered in determining the main use of the asset.

    Example

    Rachael owns five investment properties which she rents to tenants under lease agreements that grant exclusive possession. The lease terms vary from six months to two years. The properties are not active assets because they are mainly used by Rachael to derive rent. It is irrelevant whether Rachael’s activities constitute a business.

    End of example

     

    Example

    Michael owns a motel (land and buildings) which he uses to carry on a motel business. The motel provides room cleaning, breakfast, in-house movies, laundry and other services as part of the business. Guests staying in the motel do not receive exclusive possession, but simply have a right to occupy a room on certain conditions. The usual length of stay by guests is between one and seven nights. The motel would be an active asset because its main use is not to derive rent.

    End of example

    The following is considered use of the asset to derive rent, where the rent is derived:

    • from an entity that is not an affiliate or connected with the asset owner (third party), or
    • by an entity that is an affiliate or connected with the asset owner (relevant entity).

    The use of the asset to derive rent from a third party will be considered use to derive rent, even if that entity uses the asset in their business. This is because the use of the asset by the asset owner is to derive rent.

    However, use of the asset by a relevant entity is treated as the use by the asset owner, even if the asset owner receives rent from the relevant entity for the use of that asset.

    This means, if the relevant entity uses the asset:

    • in its business, that use is treated as use by the asset owner to carry on business
    • to derive interest, rent, royalties, or foreign exchange gains from an entity that is a third party, that use is treated as use by the asset owner to derive passive income.

    Example

    Kiki owns a property and rents out 90% of the floor area to Lost Dog Pty Ltd that is neither her affiliate nor connected with her (that is, a non-related third party). Kiki earns 90% of the revenue derived from owning the property from renting it to Lost Dog Pty Ltd.

    Beaglehole Pty Ltd, which carries on a dog-grooming business, uses the remaining 10% of the floor area of the property as its business premises and pays Kiki rent for using it – this rent forms 10% of the revenue Kiki earns from owning the property. As Kiki owns 60% of Beaglehole Pty Ltd, Beaglehole is connected with Kiki.

    Beaglehole Pty Ltd’s use of that 10% of the property is treated as Kiki’s use because Beaglehole Pty Ltd is connected with Kiki. Because Beaglehole uses that part of the property as its business premises, Kiki is treated as using that part as business premises. This means that the rent Beaglehole Pty Ltd pays to Kiki is not treated as rent for the purposes of determining Kiki’s main use of the property.

    However, Kiki’s main use of the property is to derive rent, because 90% of the revenue she derives from the property is rent received from Lost Dog Pty Ltd, a non-related third party.

    Kiki’s property is not an active asset in these circumstances.

    End of example

     

    Example: Mixed use

    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.

    In determining if the main use of the land is to derive rent, it's 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, we consider 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.

    End of example

    See also:

    Last modified: 17 Jul 2017QC 52272