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Edited version of your written advice
Authorisation Number: 1013125535009
Date of advice: 17 November 2016
Ruling
Subject: CGT - SBC - active asset - main use to derive rent
Question 1
Will paragraph 152-40(4)(e) of the Income Tax Assessment Act 1997 (ITAA 1997) apply to exclude the asset from being an active asset on the basis that its main use was to derive rent?
Answer
No.
This ruling applies for the following period:
Year ended 30 June 2016
The scheme commences on:
1 July 2015
Relevant facts and circumstances
The property was purchased by the trust pre-CGT.
The trust originally had two unit holders, AB and an unrelated party. In 198X, post-CGT the unrelated party sold/transferred their shares to AB.
AB ran a business from a suite at the property since the purchase, until their retirement in 201X.
After transfer, the original building was demolished and a new building was constructed.
AB holds more than 40% of the units in the trust; the other unit holder holds less than 40%.
When the building was being re-built AB operated the business from neighbouring premises.
The new building was comprised of a number of suites. AB ran their business from approximately one-third of the property. The remaining two-thirds were commercially rented on an arm's length basis.
AB worked from the premises four days a week. One day week AB worked from another premises in another area.
The business income generated by AB is unable to be easily dissected between the two locations, you have divided the income between the two on a pro-rata basis.
AB operated comparable services at both locations; the same hours, same fees, and same services.
On 30 June 201X, AB retired and ceased trading.
The trust sold the property.
Reasons for decision
Summary
We do not consider that the main use of the property was to derive rent; therefore it will satisfy as an active asset for the purposes of the small business CGT concessions.
Detailed reasoning
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.
However, subsection 152-40(4) explains that an asset whose main use is to derive rent cannot be an active asset. Paragraph 152-40(4A)(b) of the ITAA 1997 provides that to determine the main use of an asset, treat any use by your affiliate, or an entity that is connected with you, as your use.
Subsection 152-35(1) of the 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.
Connected with test
Subsection 328-125(1) of the ITAA 1997 explains that an entity is connected with another entity if:
a) either entity controls the other entity in a way described in this section; or
b) both entities are controlled in a way described in this section by the same third entity.
Subsection 328-125(2) of the ITAA 1997 provides that an entity (the first entity) controls another entity if the first entity, its affiliates, or the first entity together with its affiliates: if the other entity is a trust - beneficially owns, or has the right to acquire beneficial ownership of the right to receive at least 40% of, any distribution of income or capital by the other entity.
AB held more than 40% of the units in the unit trust, therefore the trust is connected with AB.
Main use to derive rent
Taxation Determination TD 2006/78 considers, amongst other issues, the situation where there is part business and part rental use of an asset. It states that an asset owned by the taxpayer and used partly for business purposes and partly to derive rent can be an active asset under section 152-40 of the ITAA 1997 where it is considered that the main use of the premises is not to derive rent. In deciding if the property was mainly used to earn rent the Commissioner will consider a range of factors such as:
● the comparative areas of use of the premises (between rent and business)
● the comparative levels of income derived from the different uses of the asset.
In this case, the trust owned a property that was used in the course of carrying on a business by a connected entity. However, as part of the property has been used to produce rental income, we must consider whether the main use of the asset is to derive rent.
You have provided a comparison of the business income earned by the connected entity and the rental income earned from the property. The majority of the income from the property is business income generated by an entity connected with you. In regards to the floor area, you state that approximately one-third was utilised by your connected entity and the remaining two-thirds was used to produce rental income.
As the vast majority of the income generated form the property is business income, we do not consider that the main use of the property is to derive rent. Therefore it will satisfy as an active asset for the purposes of the small business CGT concessions.
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