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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of your written advice

Authorisation Number: 1051345516251

Date of advice: 2 March 2018

Ruling

Subject: Active asset test

Question 1

Is the shopping centre an active asset in accordance with section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Can the shops which were rented to connected entities be regarded as active assets in accordance with section 152-40 of the ITAA 1997 provided that 7.5 years of business operation is evidenced and the shop title allows separate disposal?

Answer

No.

Question 3

Are you entitled to any of the small business concessions?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2017

The scheme commences on:

1 July 2016

Relevant facts and circumstances

You owned a shopping centre.

The shopping centre was purchased over 20 years ago.

Your principal activities are property management and share investments.

Throughout the ownership period, you have met with prospective lessees, negotiated lease terms, liaised with solicitors, handled repairs and disputes, arranged appropriate finance, collected rent and performed related administrative duties.

During the early periods, a couple of shops were for several years leased to a connected entity for business use.

Major income is, inter alia, rental from leasing of the commercial shops.

The shop tenants were granted the right to exclusive possession.

The shopping centre has been sold.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 Section 152-40

Reasons for decision

Basic conditions

To qualify for the small business CGT concessions, you must satisfy several conditions that are common to all the concessions. These are called the basic conditions.

A capital gain that you make may be reduced or disregarded under Division 152 if the following basic conditions are satisfied:

Active asset test

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 or an entity connected with you (subsection 152-40(1) of the ITAA 1997).

Paragraph 152-40(4)(e) of the ITAA 1997 states, however, 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 in the business of providing accommodation for reward can be active assets notwithstanding the exclusion in paragraph 152-40(4)(e) of the ITAA 1997.

TD 2006/78 states:

Application to your circumstances

In this case, the tenants of the shops were granted exclusive possession to the shops they rented. Accordingly, we consider the main use of the shopping centre is to derive rent. While you have in the past rented out some of the shop space to connected entities, the connected entities only used a small percentage of the shops and they were rented to the connected entities for less than half of the total ownership period. Consequently, the use of the connected entities is not sufficient to change the main use of the property or the relevant shops from deriving rent to running a business.

Therefore, as the main use of the shopping centre is to derive rent, it will be excluded from being an active asset under paragraph 152-40(4)(e) of the ITAA 1997.

Additionally, as the shopping centre does not pass the active asset test, it does not pass the basic conditions for CGT relief. Consequently, none of the small business concessions are available on the sale of the shopping centre.


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