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Edited version of your written advice
Authorisation Number: 1012763225192
Ruling
Subject: Active asset test
Question
Is the shopping centre considered an active asset for the purposes of the small business capital gains tax (CGT) concessions?
Answer
No.
This ruling applies for the following period
Year ending 30 June 2015
The scheme commences on
1 July 2014
Relevant facts and circumstances
You and your spouse operate a partnership.
The partnership owns commercial premises and lease several separate retail shops to various businesses. The leases grant exclusive possession and the tenants are unrelated entities.
The partnership manages the properties without the assistance of any agents.
The management duties performed by the partners include banking, paying accounts, correspondence with tenants, attending to repairs and maintenance, inspections, preparation and negotiation of leasing arrangements and all general centre management operations.
Relevant legislative provisions
Income Tax Assessment Act 1997 subsection 152-40(4)
Income Tax Assessment Act 1997 paragraph 152-40(4)(e)
Reasons for decision
A CGT asset is an active asset at a given time if, at that time you own it and it is used (or held ready for use) in the course of carrying on a business by you, a small business CGT affiliate of yours or an entity connected with you.
Certain assets are, however, excluded from being active assets under subsection 152-40(4) of the Income Tax Assessment Act 1997 (ITAA 1997). An asset whose main use is to derive rent (unless such use was only temporary) is excluded from being an active asset. Such assets are excluded even if they are used in the course of carrying on a business.
Example 1 in Taxation Determination TD 2006/78 deals with commercial rental properties:
Commercial Property Co owns 5 commercial rental properties. The properties have been leased for several years under formal lease agreements to various commercial tenants which have used them for office and warehouse purposes. The terms of the leases have ranged from 1 year to 3 years with a 3 year option and provide for exclusive possession. The company has not engaged a real estate agent to act on its behalf and manages the leasing of the properties itself.
In this situation, the company has derived rental income from the leasing of a number of properties. Accordingly, the main (only) use of the properties is to derive rent and they are therefore excluded from being active assets under paragraph 152-40(4)(e) of the ITAA 1997 regardless of whether the activities constitute the carrying on of a business.
In this case, the partnership rents the commercial property to unrelated tenants. The tenants are granted exclusive possession. This situation is similar to the example provided in TD 2006/78. The main or only use of the commercial property is to derive rent. Therefore, the properties are excluded from being active assets under paragraph 152-40(4)(e) of the ITAA 1997. This is the case regardless of whether the partnership activities amount to the carrying on of a business.