Edited version of private ruling

Authorisation Number: 1011702430736

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Ruling

Subject: Small business CGT concessions - active asset test

Question

Will paragraph 152-40(4)(e) of the Income Tax Assessment Act 1997 (ITAA 1997) prevent your mixed use asset from satisfying the definition of active asset under section 152-40 of the ITAA 1997?

Answer:

No.

This ruling applies for the following periods:

1 July 2010 to 30 June 2011.

The scheme commences on:

1 July 2010.

Relevant facts and circumstances

Your company operated a business from a retail premises. Your company commenced this business and leased the premises from a third party.

You were approached by the owner of the premises who stated that a competing business was looking to purchase the premises but that it would be his preference to sell the property to you.

The purchase price was in excess of what was ordinarily affordable to you and vendor finance was required to help fund the purchase.

The total land area of the property is quite large with retail shops, car parking spaces, and residential areas.

The company, owned 100% by you, operated a business from one of the retail shops.

The company ceased to operate its business from this premises some years later.

The income earned over the period of the business's operation was in excess of the rental income earned for the same period.

Since ceasing the business you have actively sought to dispose of the property. At the date of seeking the private ruling the property had not been sold.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 152.

Income Tax Assessment Act 1997 Subsection 152-10(1).

Income Tax Assessment Act 1997 Paragraph 152-30(2)(b).

Income Tax Assessment Act 1997 Section 152-35.

Income Tax Assessment Act 1997 Subsection 152-35(1).

Income Tax Assessment Act 1997 Subsection 152-35(2).

Income Tax Assessment Act 1997 Section 152-40.

Income Tax Assessment Act 1997 Subsection 152-40(1).

Income Tax Assessment Act 1997 Subsection 152-40(1)(a).

Income Tax Assessment Act 1997 Subsection 152-40(4).

Income Tax Assessment Act 1997 Paragraph 152-40(4)(e).

Income Tax Assessment Act 1997 Subsection 328-125(1).

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

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

The CGT provisions provide certain concessions for small business. Any capital gain that results from a CGT event may be reduced or disregarded under the small business concessions if you satisfy certain conditions. All of the concessions require that the basic conditions in subsection 152-10(1) of the ITAA 1997 are satisfied.

One of the conditions is that the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997.

Subsection 152-35(1) of the ITAA 1997 provides that 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 the test period, 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

o the CGT event, and

o if the business ceased in the 12 months before the CGT event when the business ceased (subsection 152-35(2) of the ITAA 1997).

The asset does not need to be an active asset just before the CGT event.

For a CGT asset of a business to be an active asset for the purposes of Division 152 of the ITAA 1997 it must firstly satisfy one of the 'positive tests' in subsection 152-40(1) of the ITAA 1997 and then also not be excluded by one of the exceptions in subsection 152-40(4) of the ITAA 1997.

Under paragraph 152-40(1)(a) of the ITAA 1997, a CGT asset is an active asset at that time, you own the asset and it is used, or held ready for use, in the course of carrying on a business that is carried on by you; or your affiliate; or another entity that is connected with you.

Section 328-125(1) of the ITAA 1997 provides the meaning of "connected with" an entity. An entity is connected with another entity if:

· either entity controls the other entity, or

· both entities are controlled by the same third entity.

An entity controls another entity, if the first entity, its affiliates or both of them together beneficially own, or have the right to acquire beneficial ownership of, equity interest in the company that give at least 40% (the control percentage) of the voting power in the company under paragraph 328-125(2)(a) of the ITAA 1997.

However, paragraph 152-40(4)(e) of the ITAA 1997 provides that an asset whose main use is to derive rent cannot be an active asset unless such 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 is an expression of the Commissioner's opinion regarding the application of paragraph 152-40(4)(e) of the ITAA 1997 for an asset whose main use is to derive rent.

Paragraph 26 of TD 2006/78 states:

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. 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.

Application to your circumstances

In this particular case, if you look at this based on leased area only it would appear that the property was used to earn rental income. The area used by your company's business is considerably less than the total area.

Your company's business contributes to the majority of the income generated by the property in a number of the relevant years and there is never a year that the rental income exceeds the business income.

Having regard to the facts that the business uses a proportion of the retail space and car spaces and that proportion of the property produces the majority of the total income, it is considered the main use of the property is not to derive rent and accordingly, the property is not excluded from being an active asset by paragraph 152-40(4)(e) of the ITAA 1997. The property is therefore an active asset, for the period that your 100% owned company carries on a business, under section 152-40 of the ITAA 1997.

Additional information

Subsection 152-10(1) of the ITAA 1997 contains the basic conditions for small business relief in relation to capital gains. The basic conditions to be satisfied for the gain are:

(a) a CGT event happens in relation to a CGT asset of yours in an income year. This condition does not apply in the case of CGT event D1

(b) the event would (apart from Division 152 of the ITAA 1997) have resulted in the gain

(c) at least one of the following applies:

(i) you are a small business entity for the income year

(ii) you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997

(iii) you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an asset of the partnership

(iv) the conditions mentioned in subsection (1A) or (1B) are satisfied in relation to the CGT asset in the income year

(d) the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997.

At the time of applying for a private ruling the property had not been sold. The property will not be excluded from being an active asset under the 'rental' exclusion however, all of the other conditions will need to be satisfied to be eligible to apply the small business CGT concessions.