Edited version of private advice

Authorisation Number: 1012649423234

Ruling

Subject: CGT - active asset

Question

Is the commercial building an active asset?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2014

The scheme commences on:

1 July 2013

Relevant facts and circumstances

You owned a commercial building

The building is made up of a number of lettable areas.

Over half of the tenancies are rented to unrelated third parties.

One of the tenancies is rented to Company A, which for the relevant period was owned one third by the combination of you and your affiliates.

Rent received from the unrelated parties made up over half of the total rent received.

Rent received from Company A made up approximately a third of the total rent received.

The unrelated parties and Company A occupied approximately three quarters of the total building area.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 152-40

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

Income Tax Assessment Act 1997 Subsection 328-125(2)

Income Tax Assessment Act 1997 Subsection 152-35(1)

Reasons for decision

Summary

Your commercial building is excluded from being an active asset as its main use was to derive rent.

Detailed reasoning

Section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997) provides the meaning of 'active asset'. A CGT asset will be an active asset at a time if, at that time, you own the asset and the asset was used or held ready for use by you, an affiliate of yours, or by another entity that is 'connected with' you, in the course of carrying on a business.

Subsection 152-35(1) of the ITAA 1997 states that a CGT asset satisfies the active asset test 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 period of ownership, 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 and a half years.

Importantly, subsection 152-40(4) of the ITAA 1997 provides that an asset whose main use is to derive rent cannot be an active asset. Paragraph 152-40(4A)(b) of the ITAA 1997 provides that to determine the main use of an asset, treat any use by your affiliate, or an entity that is connected with you, as your use.

Subsection 328-125(1) of the ITAA 1997 explains that an entity is connected with another entity if:

a) either entity controls the other entity in a way described in this section; or

b) both entities are controlled in a way described in this section by the same third entity.

Subsection 328-125(2) of the ITAA 1997 provides that an entity (the first entity) controls another entity if the first entity, its affiliates, or the first entity together with its affiliates: if the other entity is a company - beneficially owns, or has the right to acquire beneficial ownership of, equity interests in the company that give at least 40% of the voting power in the company.

Taxation Determination TD 2006/78 Income tax: capital gains: are there any circumstances in which the premises used in a business of providing accommodation for reward may satisfy the active asset test in section 152-35 of the Income Tax Assessment Act 1997 notwithstanding the exclusion in paragraph 152-40(4)(e) of the Income Tax Assessment Act 1997 for assets whose main use is to derive rent? provides that where there are multiple uses of an asset, including deriving rent, it will be a question of fact dependent on all the circumstances as to whether the main use of the asset at that time is to derive rent. No one single factor will necessarily be determinative and resolving the matter is likely to involve a consideration of a range of factors such as:

• the comparative areas of use of the premises (between deriving rent and other uses); and

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

In your case, you have rented approximately half of the lettable areas at your commercial building to unrelated entities. The rent received from the unrelated entities comprised of over half of the total rent received.

Additionally, you and your affiliates own a one third share in Company A which rents one of the other lettable areas of the building. As you control less than 40% of Company A, you cannot treat Company A's use of the building as your use.

When combining Company A's use of the building with that of the unrelated entities, almost all of the income received and approximately three quarters of the total area of the building was used to derive rent. Therefore it is considered that the main use of the property was to derive rent.

The building was therefore not an active asset for the purposes of the small business concessions in view of the exception in paragraph 152-40(4)(e) of the ITAA 1997. Accordingly, the active asset test will not be satisfied in relation to the disposal of the building.