Edited version of your private ruling

Authorisation Number: 1012448679714

Ruling

Subject: CGT - small business concessions

Question 1

Does your property satisfy the 'active asset' test?

Answer

No

This ruling applies for the following periods

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts and circumstances

The properties A and B were built in year ended 30 June 20XX with an intention to sell both properties following their completion.

After completion, the properties did not attain the reserved price required for you to make a profit. B was then rented out.

A (the property) was retained to run your business, and a portion of this property was also retained for your public officer's private use, and commercial rental rates were charged. This portion could not have been rented to an unrelated entity, as exclusive and private use was not possible with the business being run from the remaining portion of the property.

The property was sold in year ended 30 June 20YY resulting in a capital gain of $XX which was included in your income tax return for year ended 30 June 20YY.

Your business is a small business entity.

Your previous accountant assessed the property as a passive asset that was mainly used to derive rent. You disagree with this assessment.

You use a percentage of the property for business use, and a percentage for private use.

Z bedrooms and part of the living area are retained for private use, while another bedroom, the garage and part of the living area is used by the business.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 subsection 152-35(2)

Income Tax Assessment Act 1997 subsection 152-40(1)

Income Tax Assessment Act 1997 paragraph 152-40(1)(c)

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

Reasons for decision

Detailed reasoning

In order to be eligible for the small business capital gains tax (CGT) concessions, a number of basic conditions must be satisfied. One of these conditions is that the asset must satisfy the active asset test.

Active asset test

Under section 152-35 of the ITAA 1997, 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 a total of at least half of the 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 a total of at least 7½ years during the period specified in subsection (2).

As per subsection 152-35(2) of the ITAA 1997, the period:

(a) begins when you acquired the asset; and

(b) ends at the earlier of:

(i) the CGT event; and

(ii) if the relevant business ceased to be carried on in the 12 months before that time or any longer period that the Commissioner allows - the cessation of the business.

The term 'active asset' is defined in subsection 152-40(1) of the ITAA 1997 as an asset you own and use (or hold ready for use) in the course of carrying on a business; or in the course of carrying on a business by a connected entity under paragraph 152-40(1)(c) of the ITAA 1997.

Paragraph 152-40(4)(e) of the ITAA 1997 states, however, that an asset whose main use in the course of carrying on the business is to derive rent can not be an active asset unless the main use for deriving rent was only temporary.

In your circumstances, you use a percentage of the property for personal/private use and charge commercial rental rates for this portion. The other percentage of the property is used to carry on your business, but the portions are not divided and your business use extends to the private section of your home.

Having regard to all of the above, we consider that at least half of the property is used to produce rental income and therefore, the property is excluded from being an active asset under paragraph 152-40(4)(e) of the ITAA 1997.