Edited version of private ruling

Authorisation Number: 1011811698297

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Ruling

Subject: Capital gains tax (CGT) - small business concessions - active asset

Question

Is a particular block of land an active asset according to section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997) and therefore eligible for the small business CGT concessions when sold?

Answer

No.

This ruling applies for the following period:

1 July 2010 to 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You purchased a number of adjoining blocks of land.

You advised that in relation to all but one of the blocks:

§ a related party operates a business from them;

§ the related party pays you market value rent according to the lease agreement; and

§ there is a structure on the property from which the business is operated.

You advised regarding one block that it:

§ was leased to a non-related party who paid you market value rent according to their lease agreement;

§ has a structure on it; and

§ was sold during the relevant financial year.

You have requested advice as to whether this block is an active asset and therefore eligible for the small business CGT concessions.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-35.

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

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 www.ato.gov.au 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

Subdivision 152-A of the ITAA 1997 contains the basic conditions you must satisfy to be eligible for the small business CGT concessions. Section 152-35 of the ITAA 1997 contains the active asset test which requires your CGT asset be an active asset in addition to meeting other conditions. Subsection 152-40(4) of the ITAA 1997 lists CGT assets which cannot be active assets. In particular, paragraph 152-40(4)(e) states that an asset whose main use by you is to derive rent cannot be an active asset unless:

§ it is an intangible asset that has been substantially changed by you so that its market value has been substantially enhanced or

§ its main use for deriving rent was only temporary.

Application to your circumstances

You purchased a number of adjoining blocks of land. Therefore, you purchased separate CGT assets although they were adjoined to each other.

All but one of the blocks were treated the same in that:

§ a related party operates a business from them;

§ the related party pays you market value rent according to the lease agreement; and

§ there is a structure on the property from which the business is operated.

However, the last block was treated differently in that it:

§ was leased to a non-related party who paid you market value rent according to their lease agreement;

§ has a structure on it; and

§ was sold during the relevant financial year.

You have requested advice as to whether the last block is an active asset and therefore eligible for the small business CGT concessions.

The last block is a separate, tangible CGT asset and that asset's main use by you was not temporary and was to derive rent from a non-related party. Therefore, the last block cannot be an active asset according to paragraph 152-40(4)(e) of the ITAA 1997. Therefore, the active asset test in section 152-35 of the ITAA 1997 is not satisfied and you have not met the basic conditions. You are, therefore, not eligible to apply the small business CGT concessions to the sale of the fourth block of land.

Note: The active asset test in respect of the other blocks of land has not been examined in this ruling.