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Edited version of your written advice
Authorisation Number: 1012844404240
Date of advice: 21 July 2015
Ruling
Subject: Capital gains tax
Question
Does the property satisfy the active asset test in section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
Yes.
This ruling applies for the following period
Year ended 30 June 2015
The scheme commences on
1 July 2014
Relevant facts and circumstances
You operate a business through a company. You own 100% of the shares in this company.
In 199X you purchased a building and began renting it to the company.
You leased a room of the building to an unrelated entity.
As the business continued to grow you also rented another room.
The company uses less than 50% of the floor area.
The business produces income of more than $250,000.
The rent derived from leasing the property is less than $100,000.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 152-35
Income Tax Assessment Act 1997 paragraph 152-40(4)(e)
Reasons for decision
Active asset test
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.
Connected with - control of a company
An entity controls a company if the entity 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.
Main use to derive rent
Paragraph 152-40(4)(e) of the ITAA 1997 states 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 discusses the circumstances in which premises used for mixed purposes can be active assets notwithstanding the exclusion in paragraph 152-40(4)(e) of the ITAA 1997.
TD 2006/78 provides the following example:
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 .
Application to your circumstances
In this case, you purchased a property in 199X and it has been used in the course of carrying on a business by a company. You own 100% of the shares in that company and it is connected with you.
A portion of the property has also been rented to unrelated entities. We consider that your circumstances are similar to the example outlined in TD 2006/78. While less than 50% of the total floor area is utilised by the connected entity, the income derived by the business is significantly more than the income earned from renting out the property.
We do not consider that the exclusion in paragraph 152-40(4)(e) of the ITAA 1997 will apply in the circumstances. Therefore the property satisfies the active asset test.