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Edited version of your private ruling
Authorisation Number: 1012471864441
Ruling
Subject: CGT - small business concessions - active asset test
Question 1
Does the property satisfy the active asset test under section 152-35 of the Income Tax Assessment Act 1997?
Answer
Yes
This ruling applies for the following periods
Year ended 30 June 2013
Year ended 30 June 2014
The scheme commenced on
1 July 2012
Relevant facts and circumstances
Your property is comprised of approximately X acres with no improvements.
You have used the property since purchasing it for both share cropping and livestock trading.
The share cropping business is carried out by an unrelated party.
The unrelated party pays you a percentage of the net income of the crop harvest.
Initially the share cropping business used around Y acres of the property, but has now expanded to Z acres.
The share cropping business only uses the property for up to V% of the year.
Your livestock trading business is carried on by your spouse.
The livestock trading business involves the purchase, maintenance and sale of livestock.
During the period when the crops are not present, the whole of the property is used for your livestock trading business.
When the crops are present, the balance of the property, not used in the share cropping, is used for the livestock trading business.
Your average annual income derived from the share cropping business is $xx.
Your average annual income derived from your cattle trading business is $xx.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 152-35
Income Tax Assessment Act 1997 paragraph 152-40(4)(e)
Reasons for decision
Detailed reasoning
The active asset test is contained in section 152-35 of the Income Tax Assessment Act 1997 (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 detailed 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 least 7.5 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 when the business ceased, if the business in question ceased in the 12 months before the CGT event (or such longer time as the Commissioner allows).
A CGT asset is an active asset if it is owned by you and is used or held ready for use in a business carried on (whether alone or in partnership) by you, your affiliate, your spouse or child, or an entity connected with you.
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. This exclusion generally does not apply to a CGT asset leased to an affiliate or connected entity.
Taxation Determination TD 2006/78 considers the application of the active asset test in the situation where the asset is used to derive rent. One example considered in TD 2006/78 is relevant to your situation:
15. Mick owns land on which there are a number of industrial sheds. He uses one shed (45% of the land by area) to conduct a motor cycle repair business. He leases the other sheds (55% of the land by area) to unrelated third parties. The income derived from the motor cycle repair business is 80% of the total income (business plus rentals) derived from the use of the land and buildings.
16. In determining if the main use of the land is to derive rent, it is appropriate to consider a range of factors. In this case, a substantial (although nevertheless not a majority) proportion by area of the land is used for business purposes. As well, the business proportion of the land derives the vast majority (80%) of the total income. In all the circumstances, the Tax Office considers the main use of the land in this case is not to derive rent and accordingly the land is not excluded from being an active asset by paragraph 152-40(4)(e) of the ITAA 1997 .
In your circumstances, you use all of the farming land for approximately half of the year in your livestock trading business. During the other half of the year, Z acres of your land is used by an unrelated party to conduct a share cropping business, and you use the remaining acres in your livestock trading business. Therefore, the majority of the land is used in your livestock trading business. Additionally, the percentage of income that is derived from your livestock trading business is considerably higher than the rental income received from the unrelated party in relation to the share cropping. It is therefore accepted that the main use of the property is for business use and the exclusion in paragraph 152-40(4)(e) of the ITAA 1997 will not apply in this case. Accordingly, the property is an active asset.