Edited version of private advice

Authorisation Number: 1012632338266

Ruling

Subject: Small business concessions

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 period:

Year ending 30 June 2014

The scheme commences on:

The scheme has commenced

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 in the motor vehicle business.

You purchased a property (the property) in 199X.

The property contains a factory on a large block.

When the property was purchased, there was an existing unrelated tenant using part of the factory. There was no lease in place and you could take over the entire factory at any time.

A small amount of annual rent was received from the tenant. It was not a commercial rate of rent.

The remainder of the factory was used to store vehicles and other trading stock.

The land was used for storage of trading stock and for some repair work.

The business purchased the property to run their business but decided it was too small. Another factory was rented by the business.

25% of business income was received from the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 152-35.

Income Tax Assessment Act 1997 Section 152-40.

Reasons for decision

Summary

The main use of the property is to derive business income and not rent. Accordingly, the property satisfies the active asset test under section 152-35 of the ITAA 1997.

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 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 or an entity connected with you (subsection 152-40(1) of the ITAA 1997).

You purchased the property in 199X. You have decided to sell the property. Accordingly, you have owned the property for more than 15 years. Therefore the property must have been an active asset for at least 7.5 years.

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.

A portion of the factory has been rented to an unrelated, third party tenant. The tenant pays an uncommercial rate of rent. There is no lease in place so the business could take over the entire factory at any time. The remainder of the factory is used by the business to store vehicles and stock.

The factory is on a large block of land. The land is used for storage of trading stock and some repair work.

Therefore, the majority of the property area is used for the business.

You estimate that approx. 25% of the business income comes from repair work completed at these premises. The business receives a small amount of annual rental income.

Therefore, the majority of income from the property is from the repairs business and not from the rental activity.

The floor space of the factory has been rented out continuously since purchase. The remainder of the factory and the land has been used in the business since purchase. Therefore, the property has been used in the business and earned rental income for the whole period of ownership.

Having regard to the above circumstances during the ownership of the property, we consider that as the vast majority of area is used to generate business income and the majority of the income is derived from the business activity. Therefore the main use of the property is to derive business income and not rent. Accordingly, the property satisfies the active asset test under section 152-35 of the ITAA 1997.

Further issues for you to consider

This ruling has not considered your eligibility for the small business concessions. You should ensure that you satisfy the basic conditions and the other conditions relevant for each concession. More information is available in the publication Advanced guide to capital gains tax concessions for small business 2012-13 (NAT 3359), which is available on our website www.ato.gov.au.