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Edited version of your written advice
Authorisation Number: 1051420511950
Date of advice: 24 August 2018
Ruling
Subject: CGT: Active Asset Test
Question 1
Will the interest held by the taxpayer in two properties satisfy the active asset test?
Answer
Yes
This ruling applies for the following periods
1 July XXXX to 30 June XXXX
The scheme commences on
1 July XXXX
Relevant facts and circumstances
1. You are a partner in the Partnership which at all times had the same partners.
2. The partners owned a property as a partnership asset that is the subject of this ruling request.
3. You were one of the Directors of the Company during the relevant period. You were a shareholder in the Company during this period.
4. Decisions of the company are made by the directors jointly. No other entity had influence or control over the business affairs of the Company.
5. For the relevant period, the controlling directors of the Company, including you, were also the partners in the Partnership. For this period, the Directors were the only shareholders in the Company.
6. The Company operated a business and leased the Property from the Partnership for the relevant period.
7. There was no formal lease agreement between the parties for the entire period.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 152-10
Income Tax Assessment Act 1997 Section 152-35
Income Tax Assessment Act 1997 Subsection 152-40
Income Tax Assessment Act 1997 Section 328-130
Income Tax Assessment Act 1997 Section 995-1
Reasons for decision
Question 1
Summary
The interest held by the taxpayer in the property satisfies the active asset test.
Detailed reasoning
All legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated.
1. Subsection 152-40(4) provides exceptions to what can be active assets. Paragraph (4)(e) provides that an asset whose main use is to derive rent cannot be an active asset. However, subsection (4A) provides that for the purposes of paragraph (4)(e) the use of the asset by your affiliate is treated as your use.
2. Section 152-35 provides 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 relevant period, 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 7½ years during the relevant period.
c. The relevant period begins when you acquired the asset and ends at the earlier of the CGT event and, if the relevant business ceased to be carried on in the 12 months before that time or any longer period that the Commissioner allows the cessation of the business.
3. Section 152-40 provides that a CGT asset is an active asset at a time if, at that time:
a. You own the asset, and
b. The asset is used, or held ready for use, in the course of carrying on a business that is carried on (whether alone or in partnership) by:
i. You
ii. Your affiliate, or
iii. Another entity that is connected with you.
4. Section 995-1 states that ‘affiliate’ has the meaning given by section 328-130.
5. Section 328-130 provides that an individual or a company is an affiliate of yours if the individual or company acts, or could reasonably be expected to act, in accordance with you directions or wishes, or in concert with you, in relation to the affairs of the business of the individual or company.
6. For the relevant period, the period during which the partners in the Partnership, including you, were the only controlling directors and only shareholders in the Company, the Company was your affiliate as the Company could reasonably be expected to act in accordance with your directions or wishes, or in concert with you, in relation to the affairs of the Company’s business.
7. The Company’s main use of the Property is as premises for their business activity and not to derive rent. Therefore, pursuant to subsection 152-40(4A), paragraph 152-40(4)(e) does not exclude the Property from being an active asset.
8. As the partners of the Partnership owned the Property for a total of more than 15 years, the Property needs to have been an active asset for at least 7½ years to satisfy the active asset test.
9. As the Property was used in the Company’s business from XXXX to XXXX and the Company was your affiliate for this period, it was an active asset for a total of more than 7½ years.
10. Thus, the Property satisfies the active asset test in section 152-40.
11. Please note that the basic conditions to be satisfied for the CGT small business concessions are set out in section 152-10. In addition to satisfying the active asset test pursuant to paragraph 152-10(d), paragraphs 152-10(a) to (c) must also be satisfied for each CGT event for the CGT small business concessions to apply.