Edited version of private advice

Authorisation Number: 1051907670123

Date of advice: 24 December 2021

Ruling

Subject: Active asset - use by connected entity in a business

Question 1

Does the property located (The Property) held by the Trustee satisfy the active asset under subdivision 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following period

1 July 20XX to 30 June 20XX

The scheme commences on:

XX XXXX 19XX

Relevant facts and circumstances

In the 1990s the trustee of the Trust purchased a residential property (The Property) located at X for $X.

The Trust was settled on 19XX with a company appointed as trustee. The specified beneficiaries of the Trust are A and B. A and B hold half each of the issued shares in the trustee company and are directors of the trustee company.

C Pty Ltd as trustee of D Trust restructured their business in 19XX, relocating from X. (A was the sole director and shareholder of C Pty Ltd.)

From 19XX C Pty Ltd occupied rooms at the front of The Property, repurposed to function as the office, for their business activities until 20XX.

Dividing doors were installed between the front part of the house and the back section to provide a divided between office and private use.

The Trustee of the Trust and C Pty Ltd entered into an agreement in terms of which the company paid the Trust for the use of the Property for more than 15 years.

In 20XX C Pty Ltd and F formed a joint venture establishing a new company, and they concurrently occupied part of The Property to conduct their business activities.

Later F relocated to another premises.

In 20XX the arrangement between the Trust and C Pty Ltd for business use of the residence was terminated as The Property was being prepared for sale.

C Pty Ltd relocated their business premises.

The trustee of the Trust refurbished The Property, including converting the remaining office space back into residential use and refurbishing the downstairs bathroom to ensure it was presented as residential accommodation.

On XX 20XX the Trustee accepted an offer and entered into a contract for the sale of The Property. On XX 20XX the sale of The Property was settled.

Relevant legislative provisions

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 152-35

Income Tax Assessment Act 1997 section 152-40

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

Income Tax Assessment Act 1997 section 152-50

Income Tax Assessment Act 1997 section 152-110

Income Tax Assessment Act 1997 Subdivision 152-B

Income Tax Assessment Act 1997 section 328-125

Reasons for Decision

These reasons for decision accompany the Notice of private ruling for XXX XXX XXXX.

Subsection 152-35(1) of the ITAA 1997 states that a CGT asset satisfies 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 period of ownership, or

·                    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 7 and a half years.

Section 152-40 of the ITAA 1997 provides the meaning of 'active asset. A CGT asset will be an active asset at a time if, at that time, you own the asset and the asset was used or held ready for use by you, an affiliate of yours, or by another entity that is 'connected with' you, in the course of carrying on a business.

However, subsection 152-40(4)(e) explains that an asset whose main use is to derive rent cannot be an active asset. Paragraph 152-40(4A)(b) of the ITAA 1997 provides that to determine the main use of an asset, treat any use by your affiliate, or an entity that is connected with you, as your use.

Connected with test

Subsection 328-125(1) of the ITAA 1997 explains that an entity is connected with another entity if:

a)            either entity controls the other entity; or

b)            both entities are controlled by the same third entity.

Subsection 328-125(2) of the ITAA 1997 provides that an entity (the first entity) controls another entity if the first entity, its affiliates, or the first entity together with its affiliates: if the other entity is a company - owns, or has the right to acquire ownership of, equity interests in the company that give at least 40% of the voting power in the company.

Having regard to the circumstances and subsection 328-125 of the ITAA 1997, the Trust and the other entity are connected.

Main use to derive rent

Taxation Determination TD 2006/78 considers, amongst other issues, the situation where there is part business and part rental use of an asset. It states that an asset owned by the taxpayer and used partly for business purposes and partly to derive rent can be an active asset under section 152-40 of the ITAA 1997 where it is considered that the main use of the premises is not to derive rent. In deciding if the property was mainly used to earn rent the Commissioner will consider a range of factors such as:

·                    the comparative areas of use of the premises (between rent and business)

·                    the comparative levels of income derived from the different uses of the asset.

In this case, the Trust owned a CGT asset that was used in the course of carrying on a business by a connected entity. However, as part of the property has been used to produce rental income, we must consider whether the main use of the asset is to derive rent.

You have provided a comparison of the business income earned by the connected entity and the rental income earned from the property. The majority of the income from the property is business income generated by the connected entity.

As the vast majority of the income generated from the property was business income, we do not consider that the main use of the property was to derive rent.

As the Trust owned the property for more than 15 years, and it was an active asset for more than 7 and a half years, the property satisfies the active asset test in section 152-35 of the ITAA 1997.