Edited version of private advice

Authorisation Number: 1051613489578

Date of advice: 26 November 2019

Ruling

Subject: Capital gains tax and the active asset test

Question

Is the Property an active asset under section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commences on:

September 19XX

Relevant facts and circumstances

You are a resident private company. You are a licensed to conduct a business. Your directors have many years' experience in this business.

You have confirmed that you are a small business entity as per section 328-110 of the ITAA 1997 for the year ended 30 June 20XX.

You propose to sell a property you own (the Property).

The Property is described as a residential property containing a cottage which you purchased in September 19XX.

Since its acquisition, you have undertaken a number of improvements to the Property.

The Property has been used in various ways over the period of your ownership.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152-40

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

Income Tax Assessment Act 1997 paragraph 152-40(1)(a)

Income Tax Assessment Act 1997 subsection 152-40(4)

Income Tax Assessment Act 1997 paragraph152-40(4)(e)

Income Tax Assessment Act 1997 paragraph 152-40(4A)

Income Tax Assessment Act 1997 section 960-275

Fringe Benefits Tax Assessment Act 1986

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 unless specified otherwise.

Summary

The Property is not an active asset under section 152-40.

Detailed reasoning

A capital gain, except a capital gain from capital gains tax (CGT) event K7, which an entity makes may be reduced or disregarded under Division 152 if the following basic conditions are satisfied for the gain:

·         a CGT event happens in relation to a CGT asset of the entity in an income year;

·         the event would (apart from Division 152) have resulted in the gain

·         at least one of the following applies

·         the entity is a CGT small business entity for the income year

·         the entity satisfy the maximum net asset value test

·         the entity is 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

·         the conditions mentioned in subsection (1A) or (1B) are satisfied in relation to the CGT asset in the income year

·         the CGT asset satisfies the active asset test.

In your case, the CGT event is the proposed sale of the Property (which is CGT event A1 under section 104-10) in the income year ended 30 June 202Y.

You are expecting to have a capital gain from the CGT event.

You have confirmed that you are a small business entity.

Therefore, you satisfy the first three conditions. We now look at whether the Property satisfies the active asset test.

The active asset test is satisfied under section 152-35 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; or

·         you have owned the property for more than 15 years and the asset was an active asset of yours for a total of at least 7.5 years during the test period.

The test period:

·         begins when you acquired the asset;

·         ends at the earlier of:

·         the CGT event, and

·         when the business ceased, if the business in question ceased in the 12 months before the CGT event (or such longer time as the Commissioner allows).

In your case, the Property has been owned for more than 15 years therefore the Property had to be an active asset for at least 7.5 years during the test period.

The meaning of an active asset is given in subsection 152-40(1). Paragraph 152-40(1)(a) states that a CGT asset is an active asset at a given time if at that time, you own it and it used or held ready for use in the course of carrying on a business that is carried on (whether alone or in partnership) by you, or your affiliate or another entity that is connected with you.

In addition, it must not fall within the exceptions detailed in subsection 152-40(4).

Paragraph 152-40(4)(e) states that the a CGT asset cannot be an active asset if the main use by you is to derive interest, an annuity, rent, royalties or foreign exchange gains unless:

·         the asset is an intangible asset and has been substantially developed, altered or improved by the entity so that the market value is substantially enhanced; or

·         its main use for deriving rent was only temporary.

In determining the main use of the asset under 152-40(4)(e), personal use and enjoyment of the asset by the owner of the asset or an entity affiliated or connected with the owner is disregarded.

In this case, on the facts the Property cannot be considered an active asset.