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Edited version of your written advice
Authorisation Number: 1013032539740
Date of advice: 10 June 2016
Ruling
Subject: Asset mainly used to derive rent
Question
Do the assets pass the active asset test under section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
No
This ruling applies for the following periods
Year ending 30 June 2016
Year ending 30 June 2017
Year ending 30 June 2018
The scheme commenced on
1 July 2015
Relevant facts and circumstances
A number of years ago the entity built a number of assets.
All assets have since been rented out to third parties.
All assets have been leased to various tenants for various lengths of time.
Relevant legislative provisions
Section 153-10 of the Income Tax Assessment Act 1997
Section 153-35 of the Income Tax Assessment Act 1997
Section 153-40 of the Income Tax Assessment Act 1997
Reasons for decision
Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997) provides for capital gains tax concessions to small business. They are:
• the small business 50% reduction
• the small business retirement exemption
• the small business roll-over relief; and
• the small business 15-year exemption
Subdivision 152-A of the ITAA 1997 sets out the basic conditions that an entity must satisfy before being entitled to any of the small business CGT concessions.
As set out under section 152-10 of the ITAA 1997, the basic conditions are as follows:
(a) a CGT event happens in relation to a CGT asset of yours in an income year;
(b) the event would (apart from this Division) have resulted in the gain;
(c) at least one of the following applies:
(i) you are a small business entity for the income year;
(ii) you satisfy the maximum net asset value test
(iii) you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an interest in an asset of the partnership;
(iv) the conditions mentioned in subsection (1A) or (1B) are satisfied in relation to the CGT asset in the income year.
(d) the CGT asset satisfies the active asset test
Section 152-40 outlines the meaning of the term "active asset".
Subsection 152-40(1) of the ITAA states a CGT asset is an active asset at a time if, at that time:
(a) you own the asset (whether the asset is tangible or intangible) and it is used, or held ready for use, in the course of carrying on a business that is carried on (whether alone or in partnership) by:
(i) you; or
(ii) your affiliate; or
(iii) another entity that is connected with you; or
(b) If the asset is an intangible - you own it and it is inherently connected with a business that is carried on (whether alone or in partnership) by you, your affiliate, or another entity that is connected with you.
Section 152-35 of the ITAA 1997 outlines the active asset test.
Subsection 152-35(1) of the ITAA 1997 states a CGT asset satisfies the active asset test if:
(a) 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 specified in subsection (2); or
(b) 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 71/2 during the period specified in subsection (2).
Subsection 152-35(2) of the ITAA 1997 states the period:
(a) begins when you acquired the asset; and
(b) ends at the earlier of:
(i) the CGT event; and
(ii) if the relevant business ceased to be carried on in the 12 months before that time or any longer period that the Commissioner allows - the cessation of the business.
Subsection 152-40(4) of the ITAA 1997 outlines CGT assets which cannot be active assets.
Under paragraph 152-40(4)(e) of the ITAA 1997 an asset whose main use by you is to derive interest, an annuity, rent, royalties, or foreign exchange gains cannot be an active asset unless:
(i) The asset is an intangible asset and has been substantially developed, altered or improved by you so that its market value has been substantially enhanced; or
(ii) Its main use for deriving rent was only temporary.
In this case the entity has leased out assets to various tenants for various terms.
Under section 152-10 of the ITAA 1997 one of the basic conditions that an entity must satisfy before being entitled to any of the small business CGT concessions is that the CGT asset satisfies the active asset test.
As the only use of the assets has been to derive rent and it has been more than on a temporary basis, the assets are 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. As the assets do not pass the active assets test the entity is not entitled to any of the small business CGT concessions.
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