Edited version of private advice

Authorisation Number: 1052240073792

Date of advice: 24 June 2024

Ruling

Subject: Active asset test

Question

Does your interest in the property satisfy the active asset test under section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

In 19XX, you acquired a X% interest in the property. The company operated a business from the property.

You are the sole director and shareholder of the company.

You are the trustee and a beneficiary of trust A who owns a X% interest in trust B.

The property was leased to trust B. Trust B provides services to and licences use of the property to the company for a fee.

You disposed of the property in the 20XX income year. You continue to carry on your business at the property.

Since the property was acquired, the majority of income generated by the property is from the 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 section 328-125

Reasons for decision

Active asset test

A CGT asset satisfies the active asset test if:

(a)  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, or

(b)  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 7½ years during the test period (subsection 152-35(1) of the ITAA 1997).

Under subsection 152-35(2) of the ITAA 1997, the test period:

(a)  begins when you acquired the asset; and

(b)  ends at the earlier of:

(i)         the CGT event, and

(ii)        if the relevant business ceased to be carried on in the 12 months before that time or any longer period that the Commissioner allows - the cessation of the business.

Subsection 152-40(1) of the ITAA 1997 provides that 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, or

(b)  if the asset is an intangible asset - you own it and it is inherently connected with a business that is carried on (whether alone or in partnership) by you, your affiliate, or another entity that is connected with you

However, an asset whose main use by you is to derive rent cannot be an active asset unless its main use for deriving rent was only temporary (subparagraph 152-40(4)(e)(ii) of the ITAA 1997).

Connected entity

Under subsection 328-125(1) of the ITAA 1997, an entity is connected with another entity if either entity controls the other entity.

Subsection 328-125(2) of the ITAA 1997 provides that an entity controls another entity if it or its affiliate (or all of them together):

(a)   owns, or has the right to acquire ownership of, interests in the other entity that give the right to receive at least 40% (the control percentage) of:

(i)            any distribution of income by the other entity, or

(ii)          if the other entity is a partnership, the net income of the partnership, or

(iii)         any distribution of capital by the other entity

(b)   if the other entity is a company, owns, or has the right to acquire ownership of, equity interests in the company that give at least 40% of the voting power in the company

Application to your circumstances

You have owned a X% interest in the property since 19XX and you sold your interest in the 20XX income year. The property is a CGT asset. The property was used by the company to operate its business. The company is a connected entity of yours. The property is an active asset as it has been used to carry on the medical practice and has not been mainly used to derive rent. Therefore your interest in the property satisfies the active asset test.

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