Edited version of private advice

Authorisation Number: 1052030814609

Date of advice: 7 September 2022

Ruling

Subject: Active asset

Question

Does the Property satisfy the active asset test pursuant to section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997) and the meaning of active asset test pursuant to section 152-40 of the ITAA 1997?

Answer

Yes.

AB and CD acquired the Property in 20XX and it has been used in the course of carrying on a business by a connected entity for a least half of the ownership period. We do not consider that the exceptions in subsection 152-40(4) of the ITAA 1997 have any application in the circumstances. Therefore, the Property will satisfy the active asset test in section 152-35 of the ITAA 1997 and the meaning of active asset in section 152-40 of the ITAA 1997.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

In July 20XX, Person AB (AB) and Person CD (CD) acquired property (the Property) as tenants in common.

AB acquired XX% and CD acquired XX% of the Property.

The Property compromises of four sections including:

•         a dwelling with garden, approximately X hectare (Dwelling),

•         an upper grazing paddock, approximately X hectare (Upper Paddock),

•         a lower grazing paddock, approximately X hectares (Lower Paddock), and

•         primary production equipment and range areas, approximately X hectare (Farming Area).

From July 20XX until January 20XX, Company XYZ (the Company) carried on a farming business on the Property (the Business).

AB and CD are the directors and shareholders of the Company. AB held XX% of ordinary shares and CD held XX% of ordinary shares.

In July 20XX, AB became a member of the Farming Federation. At all times, AB was the farm manager of the Business.

In July 20XX, AB and CD, as landlords, entered into a lease agreement with the Company, as tenant, for the Company to use the Property in the Business (LMNO Lease Agreement).

The LMNO Lease Agreement executed in 20XX provides:

11.1 the term of the lease is for X years, with an option for a further X year term

11.2 the rent is $X per month, payable quarterly in arrears and,

11.3 the contract manager is permitted to use the residential dwelling.

The Company carried on the Business by providing facilities to providers to grow meat.

The Company did not own the animals and were responsible for maintaining and cleaning the equipment and preparing for the next batch.

The Company derived income of approximately $X per year from the Business.

During this time, the Upper Paddock and the Lower Paddock were used as buffer zones for the Business and for grazing livestock. AB as manager of the Business occupied the Dwelling at all times.

In July 20XX, AB and CD, as landlords, entered into a new lease agreement with the Company, as tenant, for the Company to renovate and use the Property for short stay accommodation and livestock farming (PQRS Lease Agreement).

The PQRS Lease Agreement executed in 20XX provides:

23.1 the term of the lease if for X years with an option for a further X year term,

23.2 the rent is $X per month, payable monthly in arrears,

23.3 the Company is permitted to update the residential dwelling, grounds and garden to make the Property suitable for providing short-stay accommodations and,

23.4 the Property may be used for livestock farming and short stay accommodation.

The Dwelling was renovated into multiple self-contained suites with their own entrances, dedicated outside areas and included office space for accommodation management.

The Renovations were completed prior to August 20XX.

AB and CD live in part of the new extension of the Dwelling as their private residence, which is approximately XX% of the total floor space.

The Company, trading as the UVW (UVW), offers guests suites for short-stay accommodation that are furnished.

The Company offers the entire Property to the guests apart from the Private Residence. Guests are invited to interact with and feed the livestock.

The Property has a dedicated covered BBQ and dining area.

During the COVID-19 pandemic, the Company was forced to temporarily pause operations due to state restrictions.

Prior to the pandemic, the Company derived income of approximately $X per year from the UVW business and projects future revenue to be approximately $X from the 20XX income year.

The Upper Paddock and the Lower Paddocks have always been used for grazing livestock.

AB and CD expect to sell the Property on or before 30 June 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152-40

Further issues for you to consider

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 or Quick Code 'QC 22655".