Edited version of private advice

Authorisation Number: 1051944072712

Date of advice: 2 February 2022

Ruling

Subject: CGT -active asset

Question

Is the property considered an active asset for the purposes of utilising the small business 50% reduction, under section 152-205 of the Income Tax Assessment Act 1997?

Answer

Yes.

This ruling applies for the following period:

30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

On XX May 20XX, you commenced a business as a sole trader.

You purchased a property after 20 September 1985.

The property is XXX hectares in size.

You resided on the property and utilised the adjacent X hectares of land for your own private use.

The remaining land was utilised in the running of your business of repairing, buying, and selling freight trucks.

Structures including two gable sheds, an internal workshop shed, Ford cargo trucks, trailers and security gates were kept on the property. These structures had direct functional relevance with carrying on normal day-to-day activities of the business.

On XX month 20XX, the property was sold.

You were a small business entity in the year the CGT event occurred.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 104-10(5)

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 Subsection 152-40(1)

Income Tax Assessment Act 1997 Section 152-205

Reasons for decision

Basic conditions

Section 152-10 of the Income tax Assessment Act 1997 (ITAA 1997) contains the basic conditions that must be satisfied to be eligible to apply the CGT small business concessions. These conditions are:

a)    a CGT event happens in relation to a CGT asset in an income year

b)    the event would (apart from this Division) 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 in section 152-15 of the ITAA 1997

                                    iii.        you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an asset of the partnership or

                                   iv.        you do not carry on a business, but your CGT asset is used in a business carried on by a small business entity that is your affiliate or an entity connected with you.

d)    the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997.

To be eligible to apply the small business CGT concessions all four of the basic conditions must be satisfied.

Active asset test

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 test 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 7.5 years during the test period (subsection 152-35 of the ITAA 1997).

Subsection 152-40(1) of the ITAA 1997 details that a CGT asset is an active asset at a time if it is used, or held ready for use, in the course of carrying on a business that is carried on by you, or your affiliate, or another entity that is connected with you.

It is acknowledged that the definition of an active asset does not require exclusive use of the asset for business purposes, only that the asset is required to be used "in the course of carrying on a business". This phrase was discussed in Eichmann v FC of T 2020 ATC 20-762; [2020] FCAFC 155 (Eichmann's case), where it was established that "in" the course of carrying on a business means the asset has direct functional relevance to the carrying on of the normal day-to-day activities of the business, directed to the gaining or production of assessable income.

Application to you circumstances

You acquired the property after 20 September 1985 and have owned the asset for more than 15 years. As you used the whole of the CGT asset (XXX hectares of land) in the course of carrying on your business, it can be said that land has been active in normal day-to-day activities for at least 7.5 years during the test period. This means that the principles of Eichmann's case can be applied to your circumstances.

As a CGT event happened in relation to the disposal of the property, per subsection 104-10(5) of the ITAA 1997, you have met the basic conditions under section 152-10 of the ITAA 1997. Therefore, the property is considered an active asset for the purposes of utilising the small business 50% reduction, under section 152-205 of the ITAA 1997.