Edited version of private ruling

Authorisation Number: 1011680958973

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Ruling

Subject: Capital gains tax - active asset

Question 1

Is the property an active asset for capital gains tax purposes under section 132-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

The year ended 30 June 2011.

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You jointly acquired a commercial property. The property was leased to an unrelated third party for a period. The premises remained vacant for a while, then 15% of the building area was leased by an unrelated third party. The lease continued for a few years.

Meanwhile, the remaining 85% of the premises was used to carry on a business by an affiliate/connected entity. The premises were then renovated and the affiliate/connected entity began operating a different business using 100% of the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152.40.

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

Summary

The property was used in the course of carrying on a business by your affiliate or another entity that is connected with you for a period exceeding 7 ½ years.

Therefore, the premises satisfy the active asset test.

Detailed reasoning

The active asset test

According to section 152-35 of the ITAA 1997 the active asset test is satisfied 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 test period outlined below, 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 ½ years during the test period.

The test period:

· begins when you acquired the asset, and

· ends at the earlier of:

· the CGT event, and

· if the business in question ceased in the 12 months before the CGT event (or such longer time as the Commissioner allows) when the business ceased.

Meaning of active asset

Section 152-40 provides that a CGT asset is an active asset if it is owned by you and is:

used or held ready for use by you, your affiliate, your spouse or child under 18 years, or an entity connected with you, in the course of carrying on a business, or

an intangible asset that is inherently connected with a business you, your affiliate, your spouse of child under 18 years, or another entity that is connected with you carries on e.g. goodwill or the benefit of a restrictive covenant. 

Paragraph 152-40(1)(a)(ii) explains that an asset is an active asset if you own the asset and it is used or held ready for use, in the course of carrying on a business by your affiliate or another entity that is connected with you.

Subsection 152-40(4)(e) of the ITAA 1997 advises that:

an asset whose main use in the course of carrying on the business is to derive rent cannot be active asset unless its main use for deriving rent was only temporary.

Application to your circumstances

You acquired the property, and advise the total period of ownership exceeds 15 years. To satisfy the active asset test for capital gains tax purposes, the property must be an active asset for a total of at least 7 ½ years.

An asset whose main use is to derive rental income cannot be an active asset. For a period, only 15% of the property generated rental income and rental income was predominant in only a few years.

The entity conducting business is your connected entity.

The property was used in the course of carrying on a business by your affiliate or another entity that is connected with you for a period exceeding 7 ½ years.

Therefore, the premises satisfy the active asset test.