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Edited version of your written advice
Authorisation Number: 1051345516251
Date of advice: 2 March 2018
Ruling
Subject: Active asset test
Question 1
Is the shopping centre an active asset in accordance with section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
No.
Question 2
Can the shops which were rented to connected entities be regarded as active assets in accordance with section 152-40 of the ITAA 1997 provided that 7.5 years of business operation is evidenced and the shop title allows separate disposal?
Answer
No.
Question 3
Are you entitled to any of the small business concessions?
Answer
No.
This ruling applies for the following period:
Year ended 30 June 2017
The scheme commences on:
1 July 2016
Relevant facts and circumstances
You owned a shopping centre.
The shopping centre was purchased over 20 years ago.
Your principal activities are property management and share investments.
Throughout the ownership period, you have met with prospective lessees, negotiated lease terms, liaised with solicitors, handled repairs and disputes, arranged appropriate finance, collected rent and performed related administrative duties.
During the early periods, a couple of shops were for several years leased to a connected entity for business use.
Major income is, inter alia, rental from leasing of the commercial shops.
The shop tenants were granted the right to exclusive possession.
The shopping centre has been sold.
Relevant legislative provisions
Income Tax Assessment Act 1997 Division 152
Income Tax Assessment Act 1997 Section 152-40
Reasons for decision
Basic conditions
To qualify for the small business CGT concessions, you must satisfy several conditions that are common to all the concessions. These are called the basic conditions.
A capital gain that you make may be reduced or disregarded under Division 152 if the following basic conditions are satisfied:
(a) a CGT event happens in relation to a CGT asset of yours 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) are satisfied in relation to the CGT asset in the income year; and
(d) the CGT asset satisfies the active asset test.
Active asset test
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 discusses the circumstances in which premises used in the business of providing accommodation for reward can be active assets notwithstanding the exclusion in paragraph 152-40(4)(e) of the ITAA 1997.
TD 2006/78 states:
22. Whether an asset's main use is to derive rent will depend on the particular circumstances of each case. The term rent has been described as follows:
● the amount payable by a lessee to a lessor for the use of the leased premises (C.H. Bailey Ltd v. Memorial Enterprises Ltd [1974] 1 All ER 1003; United Scientific Holdings Ltd v. Burnley Borough Council [1977] 2 All ER 62);
● a tenants periodical payment to an owner or landlord for the use of land or premises (Australian Oxford Dictionary, 1999, Oxford University Press, Melbourne); and
● recompense paid by a tenant to a landlord for the exclusive possession of corporeal hereditaments. The modern conception of rent is a payment which a tenant is bound by contract to make to his landlord for the use of the property let (Halsburys Laws of England 4th Edition Reissue, Butterworths, London 1994, Ch 27(1) Landlord and tenant, paragraph 212).
23. A key factor therefore in determining whether an occupant of premises is a lessee is whether the occupier has a right to exclusive possession (Radaich v. Smith (1959) 101 CLR 209). If, for example, premises are leased to a tenant under a lease agreement granting exclusive possession, the payments involved are likely to be rent and the premises not an active asset. On the other hand, if the arrangement allows the person only to enter and use the premises for certain purposes and does not amount to a lease granting exclusive possession, the payments involved are unlikely to be rent.
Application to your circumstances
In this case, the tenants of the shops were granted exclusive possession to the shops they rented. Accordingly, we consider the main use of the shopping centre is to derive rent. While you have in the past rented out some of the shop space to connected entities, the connected entities only used a small percentage of the shops and they were rented to the connected entities for less than half of the total ownership period. Consequently, the use of the connected entities is not sufficient to change the main use of the property or the relevant shops from deriving rent to running a business.
Therefore, as the main use of the shopping centre is to derive rent, it will be excluded from being an active asset under paragraph 152-40(4)(e) of the ITAA 1997.
Additionally, as the shopping centre does not pass the active asset test, it does not pass the basic conditions for CGT relief. Consequently, none of the small business concessions are available on the sale of the shopping centre.