Edited version of private ruling

Authorisation Number: 1011836336663

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Ruling

Subject: Capital Gains Tax - Active Asset

Question

Do your premises satisfy the active asset test in section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

1 July 2011 to 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

The company has conducted a business for a number of years. It acquired a property. Although only one title, the property comprises several floors including the company's own business, commercial office suites and a residential unit.

At the time of purchase, an existing tenant had right of occupancy to the ground floor and it was not until that tenant vacated that the company occupied that area as its retail store. Prior to then, it operated its business from rental premises at another location. The remaining area of the building has always been leased to tenants.

You state that the property was acquired for the purpose of conducting the business of the company. Based on floor area, over 40% per cent of the property has been used by the company as its business premises since the relocation. Rental income as a percentage of total business and rental income has been about 10 per cent.

Relevant legislative provisions

Income Tax Assessment Act 1997 152-35 and

Income Tax Assessment Act 1997 152-40.

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

Detailed reasoning

Land and buildings are CGT assets as defined in sub-section 108-5(2) and therefore liable to CGT. There are several concessions which may reduce or eliminate liability to pay tax on capital gains associated with the disposal of CGT assets. Those concessions are available, where certain qualifications are met, in respect of assets which are classified as active assets of a business.

Section 152-40 provides the meaning of an active asset. For a CGT asset of a business to be an active asset for the purposes of Division 152, it must firstly satisfy one of the 'positive tests' in subsection 152-40(1), then not be excluded by one of the exceptions in subsection 152-40(4).

Main use to derive rent

Under paragraph 152-40(1)(a) a CGT asset is an active asset (subject to the exclusions) if it is owned and used or held ready for use in the course of carrying on a business. However, paragraph 152-40(4)(e) provides that an asset whose main use in the course of carrying on the business is to derive rent cannot be an active asset unless that main use was only temporary. That is, even if the asset is used in a business it will not be an active asset if its main use is to derive rent.

In the present case, the property has been used in part to earn rental income. TD 2006/78 discusses the correct classification of an asset where there is mixed rental and non-rental use. It states at paragraph 26:

If an asset is used partly for business and partly to derive rent at any given time, it will be a question of fact dependent on all the circumstances as to whether the main use of the asset at that time is to derive rent. No one 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.

In the period immediately following its acquisition, the property was used exclusively to derive rent. Clearly, during that period it was not an active asset.

In the period since the shop has moved to the site, it has occupied a minority, albeit a substantial minority, of the property but has generated a comfortable majority of the income derived from it. Consequently, following the principles laid down in TD 2006/78, for the period from the commencement of operations of the business at the site, the property was used primarily to carry on a business which does not fall within one of the exclusions under subsection 152-40(4).

As the entire property was owned under one title, the fact that it has a minority use in providing rental income that would fall within the paragraph 152-40(4)(e) exclusion does not affect the property's standing as an active asset during the period in question. As a consequence, the property would pass the definition of an active asset during that period.

Active Asset Test

One of the basic conditions for access to the small business concessions requires that the relevant CGT asset satisfies the active asset test in section 152-35. Under section 152-35, a CGT asset owned for more than fifteen years will satisfy the active asset test if it was an active asset for at least 7½ years.

In the present case, it has been established above that the property became an active asset when the business moved to the site and has continued to be so since that time. As you acquired the property more than fifteen years ago and it has been an active asset for more than 7½ years, the property will satisfy the active asset test.

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