Edited version of your written advice

Authorisation Number: 1012972108853

Date of advice: 19 February 2016

Ruling

Subject: Active Asset

Question 1

Is the property an active asset pursuant to subsection 152-40(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Does paragraph 152-40(4)(e) of the ITAA 1997 apply to prevent the property being an active asset?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 20YY

The scheme commences on:

1 July 20ZZ

Relevant facts and circumstances

You operate a consultancy business.

You acquired the property in the 20XX income year to satisfy the growing needs of your business.

You purchased the property with the sole intention of it being the headquarters of your business activities and ventures.

The property was never purchased for the primary purpose of a rental property.

You used the property for your own business usage and to derive rent.

You consider your time weighted use of your business usage to be slightly over X for the entire ownership period.

You sold the property in the 20YY income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 152-10

Income Tax Assessment Act 1997 Section 152-40

Income Tax Assessment Act 1997 Section 152-35

Reasons for decision

Summary

The property's main use was to derive rent, consequently the property is not an active asset as defined in subsection 152-40(1) of the ITAA 1997.

Detailed Reasoning

Small business CGT concession eligibility

Subsection 152-10(1) of the (ITAA 1997) contains the basic conditions you must satisfy to be eligible for the small business CGT concessions. These conditions are:

(a) a CGT event happens in relation to a CGT asset in an income year.

(b) the event would have resulted in the gain

(c) at least one of the following applies:

(i) you are a small business entity for the income year;

(ii) you satisfy the maximum net asset value test;

(iii) you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an interest in an asset of the partnership;

(iv) the conditions mentioned in subsection (1A) or (1B) of the ITAA 1997 are satisfied in relation to the CGT asset in the income year.

(a) the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997.

Subsection 152-35(1) of the ITAA 1997 states that a CGT asset satisfies the active asset test if:

(a) 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

(b) 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.

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).

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 (TD 2006/78) considers 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 use of the area of land used in the business and to derive rent; and

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

Application to your circumstances

You provided a breakdown of the property's usage as a percentage of the property's area. The breakdown indicated X% of the area was used to earn business income and X% of the area was used for earning rental income.

You provided your profit and loss statements for the 20XX-20YY income years inclusive.

The rental income provided more than X% of your total income in each income year except for the 20YY income year.

The facts in your case can be compared to and distinguished from those in Example 5 of TD 2006/78. As the comparative areas of use of the land (X% to earn business income and X% to derive rent) are inconclusive as to the main used of the land, it is necessary to consider the comparative levels of income derived from the different uses of the asset. As the rental income provided more than X% of your total income in each income year except for the 20YY income year, it is considered that this was the property's main use. Therefore, the property will be excluded from being an active asset under paragraph 152-40(4)(e) of the ITAA 1997.

Conclusion

Consequently, the property will not be considered an active asset pursuant to subsection 152-40(1) of the ITAA 1997 and will not satisfy the active asset test in section 152-35 of the ITAA 1997.