Edited version of private advice

Authorisation Number: 1051558737584

Date of advice: 7 August 2019

Ruling

Subject: Small business CGT concession, active asset

Question

Is the propertyyou own an active asset under section 152-35 of the ITAA 1997?

Answer

No

This ruling applies for the following period

Year ended 30 June 20XX

The scheme commences on:

1 January 20XX

Relevant facts and circumstances

After 20 September 1985, spouses jointly acquired interests in Entity A. There individual interests equated to less than 20%.

At the time, Entity A owned and operated a business (the business) and part of the property where the business was operated from.

The same year, the spouses acquired additional interests in Entity A and the property bringing their holding to 50%.

In a later year, the spouses acquired the remaining interests in Entity A to jointly own 100% of Entity A.

The spouses then acquired the remaining interests in the property to jointly own 100% of the property.

A number of years later, the spouses sold the property to Entity A. As a result, Entity A owned 100% of the property and the business. Entity A continued to operate the business from the property.

Less than 7.5 years later, Entity A sold the business to Entity Z. Entity A remained the owner of the property. Entity Z is not a connected entity or an affiliate of Entity A.

Entity A has continued to lease the property to Entity Z.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 Section 152-10

Income Tax Assessment Act 1997 Section 152-105

Income Tax Assessment Act 1997 Subsection 152-10(1AA)

Income Tax Assessment Act 1997 Subsection 152-35(1)

Income Tax Assessment Act 1997 Subsection 152-35(2)

Income Tax Assessment Act 1997 Section 152-40

Income Tax Assessment Act 1997 Section 152-40(1)

Income Tax Assessment Act 1997 Section 152-110

Reasons for decision

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).

For a CGT asset to be an active asset for the purposes of Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997) it must firstly satisfy one of the positive tests in subsection 152-40(1) of the ITAA 1997 and then also not be excluded by one of the exceptions in subsection 152-40(4) 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 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

·         an intangible asset that is inherently connected with a business carried on (whether alone or in partnership) by you, your affiliate, your spouse or child, or another entity that is connected with you, carries on; for example, goodwill.

The asset does not need to be an active asset just before the CGT event.

However, paragraph 152-40(4)(e) of the ITAA 1997 provides that an asset whose main use is to derive rent cannot be an active asset unless such use was only temporary. That is, even if the asset is used in a business it will not be an active asset if its main use is to derive rent.

Application to your situation

Entity A acquired the property more than 15 years ago from the spouses. It is at this point that the test period commences. At that date the period was used in the course of carrying on a business by Entity A. Entity A sold the business less than 7.5 years later and as a result the property was no longer used in the course of carrying on a business Entity A, or an affiliate or connected entity. Although Entity A owned the property for more than 15 years, it was only used in the course of carrying on Entity A's business for less than 7.5 years. The property was not an active asset for at least 7.5 years and therefore does not meet the active asset test. Furthermore, it is considered that the property's main use has been to derive rent for a period of time and would not be considered an active asset.

As the property is not considered an active asset, you cannot apply the small business CGT concessions.