Edited version of private advice

Authorisation Number: 1051676828442

Date of advice: 12 May 2020

Ruling

Subject: Capital gains tax - active asset

Question

Is plant and equipment owned by a company that carries on the business of owning, hiring and repairing equipment an active asset for the purposes of subparagraph 152-40(3)(b)(i) of the Income Tax Assessment Act 1997?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

20XX

Relevant facts and circumstances

You own equipment that is used in a business consisting of the hiring and repair of equipment.

You have provided information in relation to the hiring out of that equipment.

You also sell the equipment as an ancillary activity to your hiring business after they have been held for a number of years.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 152-40(1)

Income Tax Assessment Act 1997 subsection 152-40(3)

Income Tax Assessment Act 1997 subsection 152-40(4)

Income Tax Assessment Act 1997 section 328-125

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

All references made in these reasons for decision are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.

Summary

The plant and equipment are active assets for the purposes of subparagraph 152-40(3)(b)(i) as it satisfies the requirements of subsection 152-40(1) and it is not excluded because of

subsection 152-40(4).

Detailed reasoning

For the shares to be active assets they must satisfy the requirements of subsection 152-40(3).

A CGT asset is also an active asset at a given time if, at that time, you own it and:

(a) it is either a *share in a company that is an Australian resident at that time or an interest in a trust that is a *resident trust for CGT purposes for the income year in which that time occurs; and

(b) the total of:

(i) the *market values of the active assets of the company or trust; and

(ii) the market value of any financial instruments of the company or trust that are inherently connected with a business that the company or trust carries on; and

(iii) any cash of the company or trust that is inherently connected with such a business;

is 80% or more of the market value of all of the assets of the company or trust.

For the purposes of subparagraph 152-40(3)(b)(i), the plant and equipment are your active assets if one of the tests in paragraph 152-40(1)(a) is satisfied:

A *CGT asset is an active asset at a time if, at that time:

(a) you own the asset (whether the asset is tangible or intangible) and it is used, or held ready for use, in the course of carrying on a *business that is carried on (whether alone or in partnership) by:

(i) you; or

(ii) your *affiliate; or

(iii) another entity that is *connected with you; ...

Paragraph 328-125(1)(b) provides that an entity is connected with another entity if 'both entities are controlled in a way described in this section by the same third party'.

An entity connected to you uses the plant and equipment in the business of providing the plant and equipment for hire.

The CGT asset must also not be excluded by one of the exceptions in subsection 152-40(4). Paragraph 152-40(4)(e) provides that an asset whose main use in the course of carrying on the business is to derive rent cannot be an active asset (unless that main use was only temporary). That is, even if the asset is used in a business it will not be an active asset if its main use is to derive rent.

Taxation Determination TD 2006/78 Income tax: capital gains: are there any circumstances in which the premises used in a business of providing accommodation for reward may satisfy the active asset test in section 152-35 of the Income Tax Assessment Act 1997 notwithstanding the exclusion in paragraph 152-40(4)(e) of the Income Tax Assessment Act 1997 for assets whose main use is to derive rent?, explains that whether an asset's main use is to derive rent will depend on the particular circumstances of each case. A key factor in determining whether an occupant of premises is a lessee or perhaps only a licensee is whether the occupier has a right to exclusive possession.

TD 2006/78 notes that relevant factors to consider, in addition to whether the occupier has a right to exclusive possession, include the degree of control retained by the owner and the extent of any services provided by the owner.

The guidance provided in TD 2006/78 is instructive in determining whether the main use of the plant and equipment is to derive rent.

The facts indicate that you retain a significant degree of control of the plant and equipment.

We do not consider that the hirer has a right to exclusive possession of the plant and equipment therefore the hire fees paid for the use of the plant and equipment is not rent. Therefore the plant and equipment is not excluded from being an active asset by subsection 152-40(4).

Consequently, the plant and equipment are active assets for the purposes of subparagraph 152-40(3)(b)(i) as it satisfies the requirements of subsection 152-40(1) and it is not excluded because of subsection 152-4(4).

Please note, this ruling is limited to the question raised. We have not considered whether the shareholders have met all of the basic conditions in section 152-10 or the requirements of subsection 152-40(3) apart from subparagraph 152-40(3)(b)(i).

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