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Edited version of your written advice
Authorisation Number: 1051484477191
Date of advice: 21 February 2019
Ruling
Subject: CGT – small business concessions – active asset
Question
Does the property satisfy the active asset test for the purpose of the capital gains tax small business concessions?
Answer
Yes
This ruling applies for the following periods:
Year ending 30 June 2019
Year ending 30 June 2020
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
You and your sibling were in partnership from XX July 19XX operating business.
On XX December 19XX, you entered into an agreement to acquire a property (the property).
Settlement was effected on XX February 19XX and you commenced using the property in your business.
You used the property in your business until XX March 19XX, when you rented approximately half the property to an unrelated third party.
You continued to use the remaining half of the property in your business until 30 June 20XX.
During the period XX March 19XX to XX June 20XX you received the following income from the use of the property:
● Rental income $X
● Vegetable income $X
After XX June 20XX, you rented the entire property to an unrelated third party.
You continued to operate your business at a different property until XX June 20XX.
You and your sibling are both over 55 years and intend to retire after the disposal of the property.
You and your sibling both satisfy the maximum net value asset test.
Relevant legislative provisions
Income Tax Assessment Act 1997 subsection 152-35(1)
Income Tax Assessment Act 1997 section 152-40
Income Tax Assessment Act 1997 subsection 152-40(4)
Reasons for decision
Subsection 152-35(1) of the Income Tax Assessment Act 1997 (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.
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.
Importantly, subsection 152-40(4) of the ITAA 1997 provides that an asset whose main use is to derive rent cannot be an active asset.
If an asset is used partly for business and partly to derive rent at any given time, it will be a question of fact dependent on all the circumstances as to whether the main use of the asset at that time is to derive rent.
Taxation Determination TD 2006/78 provides guidance on whether an asset’s main use is to derive rent. No one single factor will necessarily be determinative and resolving the matter is likely to involve a consideration of a range of factors such as:
● the comparative areas of use of the premises (between deriving rent and other uses); and
● the comparative levels of income derived from the different uses of the asset.
In your case, the property was being used in its entirety within your business between XX February 19XX and X March 19XX.
Between the period of XX March 19XX and XX June 20XX, you leased a portion of the property to an unrelated third party.
On the basis of land area usage, approximately half of the property continued to be used by you within your business and the other half was leased.
Although half the property was used for the purpose of deriving rental income, the majority of the income earned from the property was from your business activities and therefore during the period of XX March 19XX to XX June 20XX, the property would continue to be considered an active asset.
You have owned the property for more than 15 years and it has been an active asset of yours for more than 7 and a half years, therefore the property satisfies the active asset test and is considered an active asset for the purposes of the capital gains tax small business concessions.
Further issues for you to consider
This ruling has not considered your eligibility for the 15 year exemption. You should ensure that you satisfy the basic conditions and the other conditions relevant for the 15 year exemption. More information is available on our website ato.gov.au by searching quick code QC52266.
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