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Edited version of your written advice
Authorisation Number: 1012782677056
Ruling
Subject: Active asset - mixed business and rental property
Questions and Answers:
1. Do the shares held by the Estate meet the definition of an active asset under section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Yes.
This ruling applies for the following period:
Year ending 30 June 2015
The scheme commences on:
1 July 2014
Relevant facts and circumstances
The company was registered prior to 20 September 1985. The deceased was the sole shareholder.
The company conducts a business from a large property it owns.
The company also rents surplus buildings on the property, which comprise of the minority of the property.
The rent received has never exceeded 5% of the total company income.
The company is a medium sized entity however you believe the deceased would meet the maximum net asset value test despite not having an independent valuation of the relevant assets.
The value of the property is more than 80% of the value of the total assets of the company.
The company has had a significant individual and CGT concession stakeholder since its incorporation.
The disposal of the shares will be a CGT event since more than 75% of the assets of the company, including the property, were purchased after 19 September 1985.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 152-10
Income Tax Assessment Act 1997 Section 152-40
Reasons for decision
Active asset
Subsection 152-40(3) of the ITAA 1997 states a CGT asset is an active asset at a given time if, at that time, you own it and:
(a) it is either a share in a company that is an Australian resident at that time or an interest in a trust that is a resident trust for CGT purposes for the income year in which that time occurs; and
(b) the total of:
(i) the market values of the active assets of the company or trust; and
(ii) the market value of any financial instruments of the company or trust that are inherently connected with a business that the company or trust carries on; and
(iii) any cash of the company or trust that is inherently connected with such a business;
is 80% or more of the market value of all of the assets of the company or trust.
However, paragraph 152-40(4)(e)(ii) of the ITAA 1997 states CGT asset cannot be an active asset whose main use by you is to derive rent unless its main use for deriving rent was only temporary.
Taxation Determination TD 2006/78 is about circumstances in which the premises used in a business of providing accommodation for reward may satisfy the active asset test. Paragraphs 15 and 16 provide the following example:
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 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 .
In your case, your circumstances are similar to those described above in TD 2006/78. It follows your shares meet the definition of an active asset under section 152-40 of the ITAA 1997.
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