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Edited version of your written advice
Authorisation Number: 1012784762612
Ruling
Subject: CGT - small business concessions - active asset
Question 1
Does the property satisfy the active asset test?
Answer
No
This ruling applies for the following period:
Year ended 30 June 2014
The scheme commences on:
1 July 2014
Relevant facts and circumstances
You owned a commercial property (the property).
Your income consists solely of rental income from the property.
The property has been rented to various commercial tenants providing them with exclusive possession.
You have not engaged any third parties in the management of the property.
The property was sold in the 20XX-XX financial year.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 152-35
Income Tax Assessment Act 1997 subsection 152-35(1)
Income Tax Assessment Act 1997 section 152-40
Income Tax Assessment Act 1997 subsection 152-40(4)
Income Tax Assessment Act 1997 paragraph 152-40(4)(e)
Income Tax Assessment Act 1997 section 152-10
Income Tax Assessment Act 1997 section 152-15
Reasons for decision
Subsection 152-35(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states that a CGT asset satisfies the active asset test 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 period of ownership, or
• you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of at least 7 and a half years.
Section 152-40 of the ITAA 1997 provides the meaning of 'active asset'. A CGT asset will be an active asset at a time if, at that time, you own the asset and the asset was used or held ready for use by you, an affiliate of yours, or by another entity that is 'connected with' you, in the course of carrying on a business.
Importantly, subsection 152-40(4) of the ITAA 1997 provides that an asset whose main use is to derive rent cannot be an active asset.
Taxation Determination TD 2006/78 discusses whether there are circumstances in which a premises used in a business of providing accommodation for reward may satisfy the active asset test in section 152-35 of the ITAA 1997, notwithstanding the exclusion in paragraph 152-40(4)(e) of the ITAA 1997. The taxation determination explains that whether an asset's main use is to derive rent will depend on the particular circumstances of each case.
The following example is provided in TD 2006/78:
Commercial Property Co owns 5 commercial rental properties. The properties have been leased for several years under formal lease agreements to various commercial tenants which have used them for office and warehouse purposes. The terms of the leases have ranged from 1 to 3 years with a 3 year option to provide for exclusive possession. The company has not engaged a real estate agent to act on its behalf and manages the leasing of the properties itself.
In this situation, the company has derived rental income from the leasing of a number of properties. Accordingly the main (only) use of the properties is to derive rent and they are therefore excluded from being active assets under paragraph 152-40(4)(e) of the ITAA 1997 regardless of whether the activities constitute the carrying on of a business.
In your case, the property's main (only) use was to derive rent and therefore it is excluded from being an active asset under paragraph 152-40(4)(e) of the ITAA 1997, regardless of whether the activities constitute the carrying on of a business.
As the property is not an active asset, it therefore does not satisfy the active asset test.
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