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Edited version of your written advice
Authorisation Number: 1013053575973
Date of advice: 26 July 2016
Ruling
Subject: Commercial property and Active asset
Question
Is the commercial property considered to be an active asset?
Answer
Yes
The scheme commences on:
1 July 2015
Relevant facts and circumstances
The commercial property has been held by the company since 200X. A and B are the directors and the shareholders.
The property was purchased in 200X, of which 1/3 of the floor space was leased out to a third party (tenants) and the balance of the floor space was used by the Trust (for which the company is a trustee company) to carry on the business for which A and B are the primary beneficiaries.
The property has been used for business purposes since 200X.
A and B wish to transfer the commercial property at Market Value into their Self-Managed Super Fund (SMSF).
The market value of the commercial property over $X,000,000.
The business used over half of the property to operate from until 201X when the property was renovated.
The floor space used for business then reduced to less than half of the total floor space.
In the 201X and 201X years the building had rental income less than the Business sales.
A and B are over 55 years of age.
Relevant legislative provisions
Section 152 of the Income Tax Assessment Act (ITAA) 1997
TD 2006/78
Reasons for decision
Summary
The Commercial property is considered to be an active asset (Section 152-35 of the ITAA 1997).
Detailed reasoning
Active Asset
For the sale of the property to qualify for any of the small business CGT concessions, the CGT asset must also satisfy the active asset test in section 152-35 of the ITAA 1997.
In this case, the active asset test is satisfied if:
• You have owned the property for more than 15 years and the asset was an active asset of yours for at least 7.5 years during the test period.
The test period:
• begins when you acquired the asset;
• 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 (or such longer time as the Commissioner allows).
The meaning of an active asset is given in subsection 152-40(1) of the ITAA 1997. Paragraph 152-40(1)(a) states that a CGT asset is an active asset at a given time if at that time, you own it and:
• use it in the course of carrying on a business, or
• hold it ready for use in the course of carrying on a business by:
i. you; or
ii. your affiliate; or
iii. another entity that is connected with you
Subsection 152-40(4) of the ITAA 1997 lists a number of exceptions where CGT assets cannot be active assets. Relevantly, paragraph 152-40(4)(e) of the ITAA 1997 specifically excludes assets whose main use is to derive rent.
Accordingly, for the property in this case to be considered an active asset it must satisfy one of the above conditions and also not fall within the exceptions within subsection 152-40(4) of the ITAA 1997.
Taxation Determination (TD) 2006/78 examines the meaning of rent and describes it as follows:
• the amount payable by a tenant to a landlord for the use of the leased premises;
• a tenants periodical payment to an owner or landlord for the use of land or premises;
• recompense paid by the tenant to the landlord for the exclusive possession or corporeal hereditaments...the modern conception of rent is a payment which a tenant is bound by contract to make his landlord for the use of the property let.
Application to your situation
In your case, you have advised that the commercial property was used in the business with over half of the total floor space used to operate this business activity up until 201X when the property was renovated.
From 201X (after the renovations), the floor space used for business dropped down to less than half of the total floor space. More of the floor space was used to derive rental income from tenants. In the 201X the building had rental income of $X and the business had sales of $X.
Based on the rental income and business sale figures, although the commercial property derives rental income from tenants, the main use of the property is still considered to be that of operating the Crane Hire business. Therefore, the commercial property would satisfy the definition of an active asset as the main use of the property is to operate the business.
Therefore, the small business concessions can be utilised for the commercial property as it is considered to be an active asset under section 152-40 of the ITAA 1997.
Small Business Concessions
You have indicated that you wish to transfer the commercial property into your self- managed superannuation fund (SMSF), the following information is provided to assist you.
There are different implications for the transfer of the property depending on whether you are over 55 or under 55.
Individual over 55
Where an individual aged over 55 who qualifies for the small business capital gains tax (CGT) concessions makes an in-specie contribution of their business real property to their self-managed super fund (SMSF) the individual can reduce or disregard their capital gain made in respect of that property in accordance with the small business CGT concession they have claimed. This is because an individual aged over 55 is not required to make a contribution to their superannuation fund in order to access these concessions.
However, the contribution of the business real property will be treated as a non-concessional (after tax) contribution. The market value substitution rule means the capital proceeds from the in-specie transfer will be the market value of the property at the time of the transfer. The market value is also the contribution amount to the SMSF
You will not be able to exclude the contribution from being a non-concessional contribution. That is, the contribution cannot be a contribution under the CGT cap and is thus treated as a non-concessional contribution. This is because the relevant legislation makes it clear that a contribution made to the SMSF is made after the CGT event happened and/or the capital proceeds are received. The legislation does not contemplate that the CGT event, choice and contribution of the CGT exempt amount can happen simultaneously.
Rather, each of the relevant steps must happen sequentially, therefore, that initial transfer of the property cannot also be the final contribution required.
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