Edited version of private advice

Authorisation Number: 1051990903382

Date of advice: 17 June 2022

Ruling

Subject: Active asset

Question 1

Will the Property satisfy the active asset test under section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997) to apply the small business retirement exemption?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 19XX

Relevant facts and circumstances

Person A (you) is the sole director and sole shareholder of Company XYZ Pty Ltd (Company XYZ), a contracting business.

In 19XX, you established your contracting business.

You are the significant individual of Company XYZ.

You do not have any other entities carrying on a business that you are affiliated or connected with.

You are over the age of 55.

In 19XX, Company XYZ acquired the property (the Property).

The Property was chosen because of its central location to work sites, its design suited the business, and it afforded the space the business required.

From 19XX to 20XX, Company XYZ utilised 56% of the floor area as its business premises.

From 19XX until 19XX, through a written agreement, you leased 44% of the floor area to tenant Person J (J).

From 19XX to 20XX, you and J tenanted 22% each of the floor area without a written agreement.

Company XYZ used the Property as an office, workshop for fabrication of items, storage facility for stock and as a client meeting premises.

The combined total square metres of the business portion used by Company XYZ was over 100 square metres, which equates to 56%, calculated by:

•         Garage and workshop: 34.4 square metres

•         Meeting Room: 19.9 square metres

•         Outer Office: 19.6 square metres

•         Office: 9.8 square metres

•         Bathroom: 7.5 square metres

•         2 Storage Sheds: 18 square metres

The combined total square metres of the domestic use portion, used by you was under 100 square metres, which equates to 44% of the entire property, calculated by:

•         Living space: 19.78 square metres

•         Bedroom 1: 13.2 square metres

•         Bathroom/ WIR: 7 square metres

•         Bed 2/ Dining: 10.5 square metres

•         Bed 3: 9.8 square metres

•         Kitchen: 12.04 square metres

•         Laundry: 4.13 square metres

•         Bed 4: 9.8 square metres

In 20XX income year, you started to downsize Company XYZ.

In 20XX income year, you only finalised previous projects and completed work on a limited basis.

In December 20XX, you damaged your knee on a job and have not been able to return to work.

From 20XX until 20XX, the entire property was 100% rented for domestic purposes only, to Tenant M with Real Estate as property management.

In 20XX, you sold the Property for more than you paid.

The company turnover has been below $X million since 20XX, when you commenced the wind down of Company XYZ.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152-40

Income Tax Assessment Act 1997 section 152-50

Income Tax Assessment Act 1997 section 152-55

Income Tax Assessment Act 1997 section 152-60

Income Tax Assessment Act 1997 section 152-65

Reasons for decision

Detailed reasoning

Active Asset Test

Subsection 152-35(1) of the Income Tax Assessment Act 1997 (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 owned; 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 7.5 years.

Subsection 152-40(1) of the ITAA 1997 explains the meaning of an active asset is when you own the asset and it is used, ready to use in the course of carrying on a business that is carried on by you, your affiliate, or another connected entity.

Subsection 152-40(4) of the ITAA 1997 explains that not all CGT assets are active assets. In particular paragraph 152-40(4)(e) of the ITAA 1997 explains an asset whose main use by you is to derive rent (unless that main use is only temporary) cannot be an active asset. This is the case even if the asset is used in the course of carrying on a business.

Whether an asset's main use is to derive rent will depend on the particular circumstances of each case. An asset that is leased to a connected entity or affiliate for use in its business may still be an active asset. It is the use of the asset in that entity's business that will determine the active asset status of the asset.

All uses of an asset are considered in determining what the main use of the asset is and therefore whether it is an active asset. However, personal use of the asset by the asset owner, or by an individual who is their affiliate, is not considered in determining the main use of the asset.

Application to your circumstances

In your case, Company XYZ acquired the property in 19XX. From 19XX until 19XX, 56% of the Property was used by Company XYZ and 44% of the floor area was leased to J for domestic use. From 19XX to 20XX, 56% of the Property continued to be used by Company XYZ, 22% of the floor area was rented to J and 22% of the floor area was used by you for personal use. When determining the main use of the asset, you can ignore your personal use and adjust the proportions of the asset to exclude the personal use.

To remove your personal use, the adjustment is made by multiplying 56% and 22% each by 100/78. Following the adjustment, Company XYZ utilised 72% of the floor area and J utilised 28% of the floor area.

Subsequently, the main use of the property between 19XX to 20XX was that the property was used in Company XYZ's business carried on by the you, as the director. The property was used predominately in your contracting business. The property derived rental income from 20XX to 20XX temporarily.

Therefore, the property was acquired more than 15 years ago and used predominately in your contracting business, for at least 7.5 of those years. Accordingly, the property satisfies the active asset test under section 152-35 of the ITAA 1997.

Further issues for consideration

This ruling has not fully considered your eligibility for the small business CGT concessions. You should ensure that you satisfy the relevant basic conditions for the concessions. More information is available on our website www.ato.gov.au using keywords 'concessions for small business' to search.