Edited version of private advice

Authorisation Number: 1051720047231

Date of advice: 16 July 2020

Ruling

Subject: Small business concessions - active asset

Question 1

Will the Property satisfy the active asset test as set out in section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Is the date for determining when the Property was acquired for the purpose of applying paragraph 152-110(1)(b) of the ITAA 1997 based on the dates on which the original properties were acquired?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 2021

Year ending 30 June 2022

The scheme commences on:

1 July 2020

Relevant facts and circumstances

The Company owns a property (the Property) on which a related entity conducts a business.

The Company and the related entity are connected entities as defined in subsection 328-125(1) of the ITAA 1997.

The Property is comprised of separate titles, properties A, B, C and D.

Properties A and B were acquired in the same year just over 15 years ago, property C in the year after that and property D in the year after that.

The titles to properties A and B were amalgamated after acquisition and a business premises was constructed on the merged property which commenced operation approximately 15 years ago.

Property C was acquired later in the same year the business commenced and was developed as a car park for the business some years later. The car park was completed at around the same time as the four titles were amalgamated.

Property D was the last to be acquired and the house on the property was used to derive rental income for several years.

The titles to properties A, B, C and D were amalgamated into a single title 5 to 10 years ago.

After the four titles were amalgamated into a single title, the dwelling on property D was demolished and an extension to the business premises was constructed.

The Company satisfies the maximum net asset test as defined in section 152-15 of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 109-5

Income Tax Assessment Act 1997 Section 112-25

Income Tax Assessment Act 1997 Section 152-35

Income Tax Assessment Act 1997 Section 152-40

Income Tax Assessment Act 1997 Paragraph 152-40(4)(e)

Income Tax Assessment Act 1997 Section 152-110

Income Tax Assessment Act 1997 Paragraph 152-110(1)(b)

Reasons for decision

Active asset test

Section 152-35 of the ITAA 1997 provides that a CGT asset will satisfy the active asset test 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:

·        begins when you acquired the asset, and

·        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.

Section 152-40 of the ITAA 1997 provides that a CGT asset is an active asset at a time if, at that time you own the asset and it 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 you, your affiliate or another entity connected with you.

However, a CGT asset cannot be an active asset if its main use is to derive passive investment income such as rent, unless the use was only temporary (paragraph 152-40(4)(e) of the ITAA 1997).

In determining whether a CGT asset has been 'used in the course of carrying on a business', the courts have stated that it must be established that the whole, or predominately the whole, of the asset has been so used (Rus v FC of T [2018] AATA 1854 and FC of T v Eichmann [2019] FCA 2155).

15-year exemption for companies

Under section 152-110 of the ITAA 1997, a company can disregard a capital gain arising from a CGT event if it meets the conditions laid out in the section which include having continuously owned the CGT asset for the 15-year period ending just before the CGT event (paragraph 152-110(1)(b) of the ITAA 1997).

Split or merged assets

You acquire an asset when you become its owner. Specifically, a CGT asset is acquired when you enter into a contract to purchase the asset (section 109-5 of the ITAA 1997).

Section 112-25 of the ITAA 1997 states that where a CGT asset is split into two or more assets, or if two or more assets are merged into a single asset (and there is no change of ownership) there is no CGT event.

Taxation Determination TD 97/3 explains that the disposal of a subdivided block is treated as the disposal of an asset in its own right, and not as a disposal of part of the original land parcel. The subdivided blocks are treated as separate assets under the CGT provisions but are taken to have been acquired when the original parcel was acquired.

This treatment recognises that the owner has assets after the subdivision which can be dealt with separately. Also, title to the original land parcel will often cease to exist. Similarly, with a merged asset there is only one new asset and the original blocks can no longer be dealt with separately.

Application to your circumstances

In this case, when the new lot was created from the merged lots 5 to 10 years ago, the new lot (the Property) is treated as the one asset and the original lots could no longer be dealt with separately. Further, the Company will have multiple interests in the new lot that retain the same acquisition dates as the original lots.

Consequently, for the purposes of the active asset test, it is appropriate to examine the use of the Property from when the titles were amalgamated to ascertain if the whole, or predominately the whole, of the Property was used in the course of carrying on a business. We note that:

·        the business commenced operation on the original properties A and B approximately 15 years ago

·        the carpark on the original property C has been used in the business from around the time the titles were amalgamated 5 to 10 years ago

·        the extension to the business constructed on property D has been used in the business for several years

·        the dwelling on property D was used to derive rental income for a period of time before it was demolished

From the above, it is evident that the Property has been owned by the Company for 5 to 10 years, the Company has operated a business on the majority of the property for the same period of time, and only a minor part of the Property was used to derive rent for a minor part of the ownership period.

Therefore, the Property is an active asset for the purposes of section 152-40 of the ITAA 1997 and meets the active asset test as set out in section 152-35 of the ITAA 1997.

Further, the date for determining when the Property was acquired for the purpose of applying section 152-110(b) of the ITAA 1997 is based on the dates on which the original properties were acquired.