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Authorisation Number: 1012152090969

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Ruling

Subject: CGT - small business concessions - active asset - main use to derive rent

Question:

Will the commercial property qualify as an active asset under the small business capital gains tax (CGT) concessions pursuant to section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997) for the period?

Answer: Yes.

This ruling applies for the following periods:

1 July 2011 to 30 June 2012.

1 July 2012 to 30 June 2013.

The scheme commences on:

1 July 2011.

Relevant facts and circumstances

The property comprises of retail shops and common area.

You entered into a contract to purchase the property after 19 September 1985.

Before purchasing the property you had been leasing one of the retail shops from which you carried on your business.

After purchase, you operated your business form one of the retail shops for a period of greater than 7½ years.

Part of the property was leased.

Excluding common areas, you used more than 20% of the property to carry on your business.

Your gross business income was about 90% of the total gross income from business and rental.

You operated your business from the property for the total period that you are requesting that it be considered an active asset.

At the date of seeking the private binding ruling, the property had not been sold.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 152-40.

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

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

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)

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

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

Subsection 152-10(1) of the ITAA 1997 contains the basic conditions for small business relief in relation to capital gains. One of the basic conditions to be satisfied is the active asset test in section 152-35 of the ITAA 1997.

Active asset test

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

· the CGT event, and

· 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.

Section 152-40 of the ITAA 1997 states in part 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 or an entity connected with you, in the course of carrying on a business, or

Paragraph 152-40(4)(e) of the ITAA 1997 excludes from the definition of an active asset, among other things, assets whose main use is to derive rent (unless such use was only temporary). Such assets are excluded even if they are used in the course of carrying on a business. Whether an asset's main use is to derive rent will depend on the particular circumstances of each case.

Taxation Determination TD 2006/78 considers the case where there is part business and part rental use. It states that an asset owned by the taxpayer and used partly for business purposes and partly to derive rent can be an active asset under section 152-40 of the ITAA 1997 where it is considered the main use of the premises is not to derive rent. In deciding if the property was mainly used to earn rent, the Commissioner will consider a range of factors such as:

· the comparative areas of use of the premises (between rent and business)

· the comparative times of use of the premises (between rent and business), and

· the comparative levels of income derived from the different uses of the asset.

Comparisons of the time spent on rental and business activities is another factor which may be taken into account.

Application to your circumstances

You purchased a property from which to conduct your business. However, you only utilised a portion of the property for your business and then leased the remaining property. You have used the property since purchase to carry on your business and did so for more than 7 ½ years.

As per the guidance contained within TD 2006/78, we must consider the main use of the property with reference to comparisons of area, income and time.

Excluding common areas, you used more than 20% of the property to conduct your business.

On an income comparison basis, your business income has generally represented at least 90% of the total income.

Having regard to time, you used the property from the date of purchase until the business ceased to carry on your business. This is the entire period that you are requesting that the property be considered an active asset.

Although the exclusive area used by you for the business is less than 50%, it is quite obvious that the majority of the income derived in relation to the property is from business income relating to your activity.

This analysis, together with the fact that you were conducting the business prior to purchase and the purchase allowed you to continue to operate the business, indicates that the main use of the property is not to derive rent. It follows that the exceptions contained within subsection 152-40(4) of the ITAA 1997 will not apply in this case, and that the property satisfies the meaning of active asset contained within section 152-40 of the ITAA 1997 for the period that is greater than 7 ½ years.