Edited version of your written advice

Authorisation Number: 1051340460205

Date of advice: 20 February 2018

Ruling

Subject: Active asset test

Question 1

For each of the years of income ended 30 June 2008 to 30 June 2017, was the property used mainly to derive income other than rent such that paragraph 152-40(4)(e) of the Income Tax Assessment Act 1997 (ITAA 1997) does not apply?

Answer

Yes.

Question 2

Was the property an active asset under section 152-40 of the ITAA 1997 for the 2008-09 to 2016-17 income years?

Answer

Yes.

Question 3

For the prospective transfer of an interest in the property to your spouse, will the property satisfy the active asset test under section 152-35 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2018

Year ended 30 June 2019

The scheme commences on:

1 July 2017

Relevant facts and circumstances

You are the sole owner of a property.

You intend to transfer either the whole or a part interest in the property to your spouse or to a discretionary family trust for the benefit of your family.

The building on the property occupies the whole of the land.

There are 2 tenants of the property – one on the ground level and one on the upper level.

You are not related in any way to the parties who own and operate the business on the ground floor, which has been a tenant of the property for the whole time since it was purchased by you.

Your spouse has continuously occupied the upper floor for the purpose of operating their business since you purchased the property. The area subject to their tenancy has not changed over that time.

Your spouse has paid rent each year to you for their tenancy of the upper level of the property.

The approximate proportionate areas of occupation in the property are:

● Upper level – 33%

● Ground level – 58%

● Internal common areas – 9%

Approximately 60% of the income generated by the property is from your spouse’s business.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152-40

Income Tax Assessment Act 1997 paragraph 152-40(4)(e)

Reasons for decision

Active asset test

The active asset test is contained in section 152-35 of the ITAA 1997. The active asset test is satisfied 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 test period detailed below, 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 7.5 years during the test period.

The test period is from when the asset is acquired until the CGT event. If the business ceases within the 12 months before the CGT event (or such longer time as the Commissioner allows) the relevant period is from acquisition until the business ceases.

A CGT asset is an active asset if it is owned by you and is used or held ready for use in a business carried on (whether alone or in partnership) by you, your affiliate, your spouse or child, or an entity connected with you.

Under section 152-47 of the ITAA 1997 spouses or children may be taken to be affiliates for certain passively held CGT assets. Paragraph 152-47(2)(a) of the ITAA 1997 provides that for the purpose of Subdivision 152-A of the ITAA 1997, in determining whether the business entity is an affiliate of the asset owner a spouse of the individual is taken to be an affiliate of that individual.

Main use to derive rent

Paragraph 152-40(4)(e) of the ITAA 1997 states that an asset whose main use in the course of carrying on the business is to derive rent cannot be an active asset unless the main use for deriving rent was only temporary.

Taxation Determination TD 2006/78 discusses the circumstances in which premises used for mixed purposes can be active assets notwithstanding the exclusion in paragraph 152-40(4)(e) of the ITAA 1997.

TD 2006/78 provides the following example:

15. 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.

16. 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.

Application to your circumstances

In this case, you purchased a property and it has been used by your spouse in the course of carrying on a business since purchase.

A portion of the property has also been rented to unrelated entities. We consider that your circumstances are similar to the example outlined in TD 2006/78. While less than 50% of the total floor area is utilised by the connected entity, the income derived by the business is significantly more than the income earned from renting out the property.

We do not consider that the exclusion in paragraph 152-40(4)(e) of the ITAA 1997 will apply in the circumstances. Therefore the property is an active asset and satisfies the active asset test.

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