Edited version of private advice

Authorisation Number: 1052235484709

Date of advice: 28 March 2024

Ruling

Subject: CGT - Small business concessions

Issue 1: Capital Gains Tax (CGT) - Small business concessions - Active asset test

Question

Does Property A satisfy the active asset test in section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Issue 2: GST-free - Sale of going concern

Question

Will the disposal of Property A that is partly used in your business, partly for leasing, and consists of partly vacant unusable land, be a GST-free supply of a going concern under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

With respect to the part of pad one of the Useable Section of the Property that is used in your leasing enterprise (identified in the 'relevant facts and circumstances' section below) - yes, the sale will be GST-free provided all of the following requirements are satisfied at the time of settlement:

•        on the day of settlement there is a lease in place with respect to the identified part of the Property, and both the Property title and the lease are supplied to the purchaser

•        the sale of the Property with the lease is for consideration, being the purchase price of the Property

•        the purchaser is registered for GST, or required to be registered for GST, and

•        you and the purchaser agree in writing that the sale of the Property with the lease in place is a supply of a going concern.

With respect to the rest of the Property - no, the supply is not a GST-free going concern.

This ruling applies for the following periods:

Year ending 30 June 20YY

Year ending 30 June 20YY

Year ending 30 June 20YY

Year ending 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

This private ruling is based on the facts and circumstances set out below. If your facts and circumstances are different from those set out below, this private ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You commenced Business A in 19XX.

You carried on Business A from a residential property located at Property B and parked your Business A machinery on the roads adjacent to this property.

The local council changed the rules whereby you could no longer park this machinery at Property B.

You acquired Property A in 19XX to store your Business A machinery in between its use at jobsites.

The Property is a XX square metre industrial property with 3 easements running through it. The council will not allow any buildings to be built over these easements.

Of the XX square metres, approximately XX square metres is useable (the Useable Section) - the remainder of the land is flood impacted, vacant, and unusable (the Unusable Section).

Property A was used solely to store the machinery and equipment used in Business A until 20XX when part of Property A was leased to an unrelated party.

There are two distinct built-up pad sites on the Useable Section.

On pad one, approximately XX square metres is currently used to store and maintain farm equipment and machinery used in Business B that you have carried on since 20XX.

Business B is carried on at Property C (the Farm).

Business A has been wound down since you acquired the Farm.

Some of the Business A equipment has been kept and is used at the Farm. The equipment is also occasionally hired out to other businesses.

The balance of land on pad one (approximately XX square metres) is leased to an unrelated third party for a one-year term. The commencement date of this lease was XX and it ends on XX. The lease agreement details the rent for this lease is $XX per month plus GST plus other power and water usage.

Approximately XX square metres of land on pad two is currently vacant but you are looking to rent this to another third party to help cover the costs of holding the land. This land has been rented at various stages in the past.

One of your beneficiaries lives only a few minutes away from Property A. They bring any farm equipment requiring maintenance back to Property A to work on as this saves travelling time to and from the Farm to undertake this maintenance. Equipment is often kept at Property A until it is required again at the Farm.

You have been registered for GST since 1 July 2000.

The only enterprise you propose to sell with respect to Property A is your leasing enterprise being conducted on part of pad one of the Useable Section. You are not selling anything to do with Business B or prior Business A. The activities relating to these businesses being conducted on Property A will be moved exclusively to the Farm. No sale contract has been entered into and no additional leases exist at this stage.

You intend to carry on the leasing enterprise of commercial property until the day of the supply.

You also intend to enter into a written agreement with the purchaser that the supply is of a going concern at the time of the sale, that the sale of Property A is for consideration and the purchaser to whom you sell the property to is registered or required to be registered for GST.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152-40

A New Tax System (Goods and Services Tax) Act 1999 section 9-10

A New Tax System (Goods and Services Tax) Act 1999 section 9-20

A New Tax System (Goods and Services Tax) Act 1999 section 9-40

A New Tax System (Goods and Services Tax) Act 1999 section 38-325

A New Tax System (Goods and Services Tax) Act 1999 Division 40

Reasons for decision

Issue 1

Summary

The Property is an active asset. As you have owned the Property for more than 15 years and it has been an active asset of yours for at least 7½ years of your ownership period it satisfies the active asset test in section 152-35 of the ITAA 1997.

Detailed reasoning

Active Asset

For a CGT asset to be an active asset for the purposes of Division 152 of the ITAA 1997, it must firstly satisfy one of the positive tests in subsection 152-40(1) of the ITAA 1997, and then also not be excluded by one of the exceptions in subsection 152-40(4) of the ITAA 1997.

A CGT asset is an active asset at a time if, at that time you own the asset (whether the asset is tangible or intangible) 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 (paragraph 152-40(1)(a) of the ITAA 1997).

However, an asset whose main use is to derive rent cannot be an active asset (unless that main use was only temporary) (paragraph 152-40(4)(e) of the ITAA 1997). That is, even if the asset is used in a business it will not be an active asset if its main use is to derive rent.

If an asset is used partly for business and partly to derive rent at any given time, it is a question of fact dependent on all the circumstances as to whether the main use of the asset at that time is to derive rent. No one single factor is necessarily determinative and consideration is given to a range of factors such as:

•        the comparative areas of use of the property (between deriving rent and other uses), and

•        the comparative levels of income derived from the different uses of the property.

In your case, throughout the first 10 years of your ownership of Property A you used it for the sole purpose of storing equipment and machinery. As such, the Property was an active asset for this entire period.

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 period specified in subsection 152-35(2) of the ITAA 1997, 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 7½ years during the period specified in subsection 152-35(2) of the ITAA 1997 (subsection 152-35(1) of the ITAA 1997).

The period:

(a)  begins when you acquired the asset, and

(b)  ends at the earlier of:

(i)            the CGT event, and

(ii)           if the relevant business ceased to be carried on in the 12 months before that time or any longer period that the Commissioner allows - the cessation of the business (subsection 152-35(2) of the ITAA 1997).

In your case, you have owned the Property for more than 15 years and it was used in a business carried on by you for at least 7½ years during the period specified in subsection 152-35(2) of the ITAA 1997. As such, it satisfies the active asset test for the purposes of section 152-35 of the ITAA 1997. Even if Property A's main use during a later period was to derive rent it will still satisfy the active asset test.

Issue 2

Summary

With respect to the part of pad one of the Useable Section of Property A that is used in your leasing enterprise - yes, the sale will be GST-free under section 38-325 of the GST Act provided all of the following requirements are satisfied at the time of settlement:

•        on the day of settlement there is a lease in place with respect to the identified part of Property A, and both the property title and the lease are supplied to the purchaser

•        the sale of Property A with the lease is for consideration, being the purchase price of the property

•        the purchaser is registered for GST, or required to be registered for GST, and

•        you and the purchaser have agreed in writing that the sale of Property A with the lease in place is a supply of a going concern.

With respect to the rest of Property A - no, the supply is not a GST-free going concern under section 38-325.

Detailed reasoning

A supply will be a GST-free supply of a going concern where the requirements of section 38-325 of the GST Act are met. This section provides:

(1)  The supply of a going concern is GST-free if:

(a)          the supply is for consideration

(b)          the recipient is registered or required to be registered, and

(c)           the supplier and the recipient have agreed in writing that the supply is of a going concern.

(2)  A supply of a going concern is a supply under an arrangement under which:

(a)          the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise, and

(b)          the supplier carries on, or will carry on, the enterprise until the day of the supply (whether or not as a part of a larger enterprise carried on by the supplier).

Applying the requirements of subsection 38-325(1) of the GST Act to your situation first, subsection 38-325(1) will be satisfied in your case if, at the time you sell Property A, the sale will be for consideration (that is, the purchase price of the property), the purchaser is either registered or required to be registered for GST, and you and the Purchaser have agreed in writing that the supply is of a going concern.

We now need to examine whether subsection 38-325(2) of the GST Act will be satisfied in your case.

Goods and Services Tax Ruling GSTR 2002/5 Goods and services tax: when is a 'supply of a going concern' GST free? (GSTR 2002/5) explains what a 'supply of a going concern' is for the purposes of subsection 38-325(2) of the GST Act.

A supply is defined in section 9-10 of the GST Act. The term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement. However, the things supplied under the arrangement must relate to the same enterprise, that is, the enterprise referred to in paragraphs 38-325(2)(a) and (b) of the GST Act (the identified enterprise).

In addition, paragraph 29 of GSTR 2002/5 notes that subsection 38-325(2) of the GST Act requires the identification of an enterprise that is being carried on by the supplier (the identified enterprise). This is the enterprise for which the supplier must supply all of the things that are necessary for its continued operation. Also, the supplier must carry on this enterprise until the day of the supply, whether or not as part of a larger enterprise.

The term 'enterprise' is defined in section 9-20 of the GST Act and includes an activity, or series of activities, done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

Paragraphs 72 and 73 of GSTR 2002/5 explain that the things that are 'necessary' for the continued operation of an enterprise will depend on the nature of the enterprise carried on and the core attributes of that enterprise. A 'thing' is necessary for the continued operation of an 'identified enterprise' if the enterprise could not be operated by the recipient in the absence of the thing.

Paragraph 80 of GSTR 2002/5 provides that the supplier supplies all of the things that are necessary for the continued operation of an enterprise when the supplier supplies those things which will put the recipient in a position to carry on the enterprise, if it chooses.

Paragraph 107A of GSTR 2002/5 also provides that an identified enterprise may consist solely of the leasing of a property to a tenant or tenants. Such an activity is an enterprise under paragraph 9-20(1)(c) of the GST Act. This is the case even though the leasing of the property may be carried on as part of the supplier's broader enterprise. Where the identified enterprise is one of leasing, the supply of the property subject to the existing leases to the tenants is all that is required to satisfy paragraph 38-325(2)(a) of the GST Act.

Paragraph 151 of GSTR 2002/5 explains that the activity of leasing a building which has previously been leased to a tenant remains an 'enterprise' of leasing for the purposes of section 9-20 of the GST Act during the period of temporary vacancy when a new tenant is being actively sought by the building owner. However, where a building has not previously been leased to a tenant, but is being actively marketed, an 'enterprise of leasing' is not operating until the activity of leasing actually commences. The activity of leasing commences when at least one tenant enters into an agreement to lease or occupy the building.

Application to your situation

As stated in the facts, it is accepted that the only enterprise that is proposed to be sold along with Property A is the leasing enterprise currently conducted on pad one of the Useable Section. Subsection 38-325(2) of the GST Act will be satisfied with respect to the part of the property that is used for this leasing enterprise - provided that, on the day of settlement for the sale of the property, a lease is still in place and it is supplied to the purchaser of Property A.

With respect to the rest of Property A - that is, the remainder of pad one of the Useable Section that is not used in conducting the aforementioned leasing enterprise, pad two of the Useable Section, and the Unusable Section, there are either no enterprises being conducted or the enterprises are not being sold to the purchaser along with the property. Subsection 38-325(2) of the GST Act is therefore not satisfied because there is no enterprise being supplied with respect to these parts of Property A.

Conclusion

The sale of Property A will only partly be a GST-free supply of a going concern under section 38-325 of the GST Act with respect to the land where the leasing enterprise is being conducted on pad one of the Useable Section. The sale of the remainder of the property is not a GST-free supply of a going concern.

As the sale of Property A is only partly a GST-free going concern, you will need to apportion the GST-free and non-GST-free parts. Further information on apportionment can be found in Goods and Services Tax Ruling GSTR 2001/8 Goods and services tax: Apportioning the consideration for a supply that includes taxable and non-taxable parts.