Edited version of your written advice

Authorisation Number: 1013022131543

Date of advice: 23 May 2016

Ruling

Subject: Capital gains tax - small business concessions - active asset

Question 1

Can the small business 50% active asset reduction be applied to capital gain on the sale of your property?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2015

The scheme commences on:

1 July 2014

Relevant facts and circumstances

You acquired a property in the 200X-0X financial year.

At all times, a significant portion of the property was used in your business from when it was purchased to when it was sold.

You leased a portion of the property, from the 200X-0X financial year to the date of sale of the property.

You sold the property in the relevant financial year.

You owned the property for less than 7.5 years.

You satisfy the maximum net asset value test.

Relevant legislative provisions

Income Tax Assessment Act 1997 subdivision 152-A,

Income Tax Assessment Act 1997 subdivision 152-C,

Income Tax Assessment Act 1997 section 152-10,

Income Tax Assessment Act 1997 section 152-15,

Income Tax Assessment Act 1997 section 152-35 and

Income Tax Assessment Act 1997 section 152-40.

Reasons for decision

Small business CGT concession eligibility

Section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997) contains the basic conditions you must satisfy to be eligible for the small business capital gains tax (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 in section 152-15 of the ITAA 1997

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

Meaning of active asset

Section 152-40 of the 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. However, an asset whose main use is to derive rent, cannot be an active asset.

Active asset test

Section 152-35 of the ITAA 1997 explains that an asset will be an active asset if you have owned the asset for more than 15 years and it was an active asset for a total of at least 7.5 years from the time when you acquired the asset until the CGT event. Or, 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 time from when you acquired the asset until the CGT event. The asset does not need to be an active asset just before the CGT event.

In your case you have sold the property in the relevant financial year, the event resulted in a capital gain and you state that you satisfy the maximum net asset value.

In order for your asset to be considered an active asset, the asset must be used in the course of a business carried on by you.

The property was used in the course of carrying on a business by you, being that it was your business premises. This asset can therefore be considered an active asset.

Although a portion of the property was used to derive rent, the main use of the premises was not to derive rent, and therefore can still be considered an active asset.

Furthermore under section 152-35 of the ITAA 1997 the property satisfies the active asset test because you owned the property for less than 15 years, and it was an active asset for at least half the time you owned it.

Therefore as you satisfy the conditions for the small business 50% active asset reduction, the 50% active asset reduction can be applied to the capital gain.