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Ruling

Subject: CGT concessions

Questions:

Does your commercial property satisfy the active asset test for the purposes of section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

Yes.

Does your vacant land satisfy the active asset test for the purposes of section 152-35 of the ITAA 1997?

Answer:

Yes.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

You purchased the original property in 2007.

The original property consisted of a number of premises, which were available for rent, a residential unit, which was used as your principle place of residence, and vacant land.

In 2009, the original property was subdivided into two separately held titles; one a commercial property and the other vacant land.

The original property was purchased with two intentions; one to gain rental income and the other was to provide your spouse with business premises for a number of businesses.

Your spouse operated one business, as a sole trader, from settlement for yyy days.

Your spouse operated a second business, as a sole trader, from settlement for XXX days.

You were an active participant in all of the businesses operated by your spouse, including working in the businesses and making management decisions with your spouse. The business profits were used to fund personal living expenses and personal funds were also used to pay business operating costs, if required. Your original intention was to run these businesses in partnership with your spouse. However, in order to secure finance for the purchase, you needed to show the property was being rented, therefore, the property lease and businesses were put in your spouse's name.

You and your spouse made all business decisions together and in accordance with each others wishes.

Your spouse operated a third business, in partnership with an unrelated individual. Each partner held a 50% interest in the business.

In relation to the third, your spouse, together with you, made the majority of the business decisions and the other partner acted in accordance with those decisions.

Your spouse was a small business entity during the ownership period.

The floor space of the commercial property was RRR square metres.

For the first yyy days, the property was used as follows:

For the remaining QQQ days, the property was used as follows:

Income received from the commercial property was evenly divided between renting premises to both your spouse and unrelated parties.

Both properties were sold in the 2010-11 financial year and a capital gain was made on the sale of both properties.

The commercial property was held for approximately TTT days; approximately NNN of these before the subdivision.

The vacant land was held for approximately PPP days.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Subsection 152-10(1).

Income Tax Assessment Act 1997 - Subsection 152-10(1A)

Income Tax Assessment Act 1997 - Subsection 152-40(1).

Income Tax Assessment Act 1997 - Subsection 152-40(4).

Income Tax Assessment Act 1997 - Paragraph 152-40(1)(a).

Income Tax Assessment Act 1997 - Paragraph 152-40(4)(e).

Income Tax Assessment Act 1997 - Section 152-40.

Income Tax Assessment Act 1997 - Section 152-35.

Reasons for decision

The requirements of an active asset and the active asset test are set out in Subdivision 152-A of the ITAA 1997.

Active asset

For a CGT asset to be an active asset for the purposes of Division 152 of the ITAA 1997, it must firstly satisfy one of the 'positive tests' in subsection 152-40(1) of the ITAA 1997, and then also not be excluded by one of the exceptions in subsection 152-40(4) of the ITAA 1997.

Under paragraph 152-40(1)(a) of the ITAA 1997 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 that is carried on by you or your affiliate.

An affiliate is an individual or company that, in relation to their business affairs, acts or could reasonably be expected to act in accordance with you directions or wishes, or in concert with you.

Whether a person acts, or could reasonably be expected to act, in accordance with the taxpayer's directions or wishes, or in concert with the taxpayer is a question of fact dependent on all the circumstances of the particular case. No one factor will necessarily be determinative.

In your case, your spouse leased a portion of your commercial business premises to carry on various business activities, both as a sole trader and in partnership with an unrelated third party. You have stated that you and your spouse made all business decisions together and in accordance with each others wishes. You were an active participant in all of the businesses operated by your spouse, including working in the businesses and making management decisions with your spouse. It is therefore, accepted that your spouse was your affiliate for the purposes of section 152-40 of the ITAA 1997.

Paragraph 152-40(4)(e) of the ITAA 1997 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. Whether an asset's main use is to derive rent will depend on the particular circumstances of each case.

In your case, your spouse operated three separate business activities in a portion of your commercial premises. While 50% of the revenue you received in relation to the property was rental income from unrelated parties, your spouse occupied more than 50% of the commercial space available for a majority of the ownership period. Based on this, it is accepted that the main use of your commercial business premises was not to derive rent and was therefore, an active asset for the purposes of paragraph 152-40(1)(a) of the ITAA 1997.

Active asset test

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 least 7.5 years during the test period.

The test period begins when you acquired the asset, and ends at the earlier of the CGT event, and when the business ceased, if the business in question ceased in the 12 months before the CGT event.

In your case, the commercial property was owned for a total of TTT days which also makes up the test period. Of this, the commercial property was an active asset for yyy days, or at least half of the test period.

Therefore, the commercial property satisfies the active asset test for the purposes of section 152-35 of the ITAA 1997.

Vacant land

The original property was held for approximately MMM days before being subdivided into a separate commercial property and vacant land and the vacant land was held for an additional SSS days before being sold.

Where a parcel of land is subdivided into two or more assets, the subdivided blocks will be treated as separate assets for CGT purposes and are taken to have been acquired by the owner when the original parcel of land was acquired. Therefore, you are taken to have owned the vacant land for a total of XXX days.

As discussed above, 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.

Prior to the land being subdivided, the original property was an active asset for yyy days. This is more than half the period you are taken to have owned the vacant. Therefore, the vacant land satisfies the active asset test for the purposes of section 152-35 of the ITAA 1997.

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