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ATO Interpretative Decision

ATO ID 2002/787

Capital Gains Tax

Capital gains tax: Small business relief - active asset - freehold of a hotel
FOI status: may be released

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CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

Will the freehold of a hotel to be acquired by the taxpayer, a hotelier, be an active asset in terms of section 152-40 of the Income Tax Assessment Act 1997 ('ITAA 1997')?

Decision

Yes. The freehold of a hotel to be acquired by the taxpayer, a hotelier, will be an active asset in terms of section 152-40 of the ITAA 1997.

Facts

The taxpayer owns the leasehold of a hotel but not the freehold.

The taxpayer is considering purchasing the freehold of the hotel.

The taxpayer will continue to operate the hotel after purchasing the freehold.

Reasons for Decision

A Capital Gains Tax (CGT) asset is an active asset at any given time according to subsection 152-40(1) of the ITAA 1997, if, at that time, the taxpayer owns it and:

(a)
uses it, or holds it ready for use, in the course of carrying on a business; or
(b)
it is an intangible asset that is inherently connected with a business that the taxpayer carries on (for example, goodwill or the benefit of a restrictive covenant); or
(c)
it is used, or held ready for use, in the course of carrying on a business by:

(i)
the taxpayer's small business CGT affiliate; or
(ii)
another entity that is connected with the taxpayer.

The freehold is the land and building attached. The building, being the hotel, is a CGT asset in accordance with paragraph 108-5(1)(a) of the ITAA 1997.

To be an active asset the CGT asset must be used or held ready for use, in the course of carrying on a business by the taxpayer, the taxpayer's small business affiliate or another entity connected to the taxpayer. The freehold includes the building which is being used as a hotel. Therefore, the freehold is being used, and will continue to be used after purchase, to carry on a hotel business by the taxpayer.

Accordingly, the freehold of a hotel will be an active asset of the taxpayer in terms of paragraph 152-40(1)(a) of the ITAA 1997.

Date of decision:  7 June 2002

Year of income:  Year ending 30 June 2002

Legislative References:
Income Tax Assessment Act 1997
   subsection 108-5(1)
   subsection 152-40(1)
   paragraph 152-40(1)(a)

Related ATO Interpretative Decisions
ATO ID 2002/785
ATO ID 2002/786

Keywords
Active asset test
CGT assets
CGT small business relief
Freehold

Business Line:  Centres of Expertise Capital Gains Tax

Date of publication:  2 August 2002

ISSN: 1445-2782

history
  Date: Version:
You are here 7 June 2002 Original statement
  19 March 2010 Archived

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