Edited version of your private ruling

Authorisation Number: 1012601796485

Ruling

Subject: Capital gains tax

Question 1

Does the exclusion contained in paragraph 152-40(4)(e) of the Income Tax Assessment Act 1997 (ITAA 1997) apply to the business assets?

Answer

No.

Question 2

Do the assets of the business pass the active asset test for the purposes of the small business concessions?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 2014

The scheme commences on:

1 July 2013

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are a company (company A).

Company B is a small business entity.

There is a sole director and sole shareholder of both companies.

In the 2004-05 financial year, both companies purchased a business providing short term and long term accommodation. The business continued to operate until 2013.

You purchased the land, buildings and plant and equipment.

Company B purchased the goodwill and stock.

Company B operated the business during the period of ownership.

Company B paid you for the use of the land, buildings and plant and equipment.

You satisfy the maximum net asset test.

The business had the following types of accommodation:

• Units - charged out on a per night basis, less than 20% of total land size

• Stand-alone houses - charged out on a per night basis, less than 5% of total land size

• Transportable accommodation units - owned by the customers who would transport to and from the site. Accommodations were on a weekly basis. Where stay was in excess of 28 days, an agreement was required to be signed by both parties in accordance with the Residential Parks Act. Approximately 10% of total land size.

• Cabins - accommodations were on a weekly basis. Where stay was in excess of 28 days, an agreement was required to be signed by both parties in accordance with the Residential Parks Act. Less than 5% of total land size.

• Caravans - owned by the customers who would transport them to and from the site. Accommodations were on a daily basis. Where stay was in excess of 28 days, an agreement was required to be signed by both parties in accordance with the Residential Parks Act. Approximately 10% of total land size.

• A large building consisting of a conference centre, reception, restaurant and a detached atrium. Less than 5% of total land size.

• Toilets/showers and laundry for the use of customers.

The various areas were connected to each other by sealed roads and the remainder of the block of land was vacant and/or unusable for business purposes.

In 2013, both companies sold their assets.

In consultation with a liaison/field officer from the Australian Taxation Office, you made a provision for 'long term accommodation' in your business activity statements. This provision related to stays over 28 days being GST free.

Over the life of the business, GST free, or long term accommodation, was less than 20% of total revenue collected.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 152-35.

Income Tax Assessment Act 1997 Section 152-40.

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

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

Reasons for decision

The active asset test is contained in section 152-35 of the 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 at least 7.5 years during the test period.

The test period is from when the asset is acquired until the CGT event. If the business ceases within the 12 months before the CGT event (or such longer time as the Commissioner allows) the relevant period is from acquisition until the business ceases.

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.

Entity 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.

In your case, you own the assets of the business but you do not carry on the business. The business is carried on by company B and they pay you for the use of the assets. There is a sole director and shareholder of both you and company B. Therefore, both you and company B are controlled by the same third entity.

Asset deriving rent

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 cannot be an active asset unless the main use for deriving rent was only temporary.

Taxation Determination TD 2006/78 considers, amongst other issues, the situation where there is part business and part rental use of an asset. 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 that 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.

In this case, where the stay was in excess of 28 days, an agreement was required to be signed by both parties. This indicates that the relationship between you and the long term occupants is similar to that of landlord/tenant under a lease agreement, and that payments received from long term occupants was rent.

In addition, you classified stays of over 28 days as being GST free.

While the income received from long term stays is regarded as rent, a significant portion (over 80% over the life of the business) of the business income was earned from short term accommodation. On balance, we consider that the main use of the business assets was short term accommodation.

The business assets were therefore an active asset for the purposes of the small business concessions. Accordingly, the active asset test is be satisfied in relation to the disposal of the assets.