Edited version of private advice

Authorisation Number: 1052414940740

Date of advice: 30 June 2025

Ruling

Subject:Active Asset

Question 1

Will the shares held by the Taxpayer in the Company for the period 20XX to 20XX be an active asset pursuant to subsection 152-40(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Will the asset be excluded from the Taxpayer's $X million net asset value test under subparagraph 152-20(2)(b)(i) of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Taxpayer is a Trustee of the Trust.

The Person 1 and person 2 (the individuals) are directors of the Taxpayer and beneficiaries of the Trust.

The Company is an Australian resident for Australian tax purposes.

The individuals are directors of the Company.

The Taxpayer is the sole shareholder of the Company since its incorporation.

The Taxpayer has owned the shares in the Company for more than 15 years.

The Company and the person 1 formed a partnership and commenced to carry on a business.

The Partnership operated the business from 20XX to 20XX. During this period, the Company owned an interest in the Partnership.

In 20XX the business of the Partnership was transferred to the Company.

The Company continued to operate the same business from 20XX to date.

The individuals jointly own an asset.

The asset has been solely used for personal use and enjoyment of the individuals.

The individuals have not used the asset to claim any interest expenses or deductions.

The Taxpayer is contemplating a sale of the shares in the Company in the 20XX income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 subparagraph 152-20(2)(b)(i)

Income Tax Assessment Act 1997 section 152-35

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

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

Reasons for decision

Question 1

Summary

The shares held by the Taxpayer in the Company for the period 20XX to 20XX will not be active assets pursuant to subsection 152-40(3) of the ITAA 1997.

Detailed reasoning

One of the basic conditions for small business relief under subsection 152-10(1) of the ITAA 1997 is contained in paragraph 152-10(1)(d) which states:

(d)          The CGT asset satisfies the active assettest(see section 152-35).

Active asset test

Subsection 152-35(1) of the ITAA 1997 states that 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 at least half of the test period specified in subsection (2), or

(b)          you have owned the asset for more than 15 years and the asset was an active asset of yours for at least 7.5 years during the test period specified in subsection (2).

Meaning of active asset

Subsection 152-40(3) states:

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 companythat 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 the assets of the company or trust.

Exceptions

152-40(4)

However, the following CGT assets cannot be active assets:

(a)          interests in an entity that is connected with you, other than shares and interests covered by subsection (3).

Application to your circumstances

Based on the information provided, the shares held by the Taxpayer in the Company during the period 20XX to 20XX are not active assets for the purpose of subsection 152-40(3) of the ITAA 1997.

Question 2

Summary

The asset held by the individuals is disregarded from the Taxpayer's net value of the CGT assets under subparagraph 152-20(2)(b)(i) of the ITAA 1997.

Detailed reasoning

Section 152-10 of the ITAA 1997 lists the basic conditions for accessing capital gains concessions in Division 152. Relevantly, one of the conditions is satisfying the maximum net asset value test (MNAV test).

A taxpayer satisfies the MNAV test if, just before the CGT event, the net value of their CGT assets and those of certain related entities does not exceed $6,000,000, as specified under section 152-15 of the ITAA 1997.

Paragraph 152-20(2)(b) of the ITAA 1997 provides that in working out the net value of the CGT assets of an entity:

         152-20(2)(b)

         ...

b)          if the entity is an individual, disregard:

(i)       assets being used solely for the personal use and enjoyment of the individual, or the individual's affiliate (except a dwelling, or an ownership interest in a dwelling, that is the individual's main residence, including any adjacent land to which the main residence exemption can extend because of section 118-120); and

          ...

Assets being used solely for the personal use and enjoyment of the entity.

If the entity is an individual, assets used solely for the personal use and enjoyment of the individual are disregarded under subparagraph 152-20(2)(b)(i) of the ITAA 1997. Personal use and enjoyment of an asset refers to the sole use of the asset being for the personal use and enjoyment of the individual. Assets used to derive business or rental income are considered not to be for the personal use and enjoyment of the individual.

Personal use and enjoyment assets are distinguished from income producing assets. Income producing assets are not used solely for the personal use and enjoyment of the individual.

In terms of the requirement for the asset to be used solely for the personal use or enjoyment of a taxpayer or their affiliate, the asset must have been so used over its entire ownership period. The "solely" requirement also means that any income producing use of the asset, no matter how trivial, will disqualify it from being excluded from the MNAV test.

Conclusion

The asset held by the individuals was being used solely for personal use and enjoyment and will be a disregarded CGT asset under paragraph 152-20(2)(b)(i) of the ITAA 1997.

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