Edited version of private advice

Authorisation Number: 1052244278731

Date of advice: 24 April 2024

Ruling

Subject: CGT - 15-year exemption - active asset

Question

Does the asset located at X (the property) satisfy the active asset test under section 152-35 of the Income Tax Assessment Act (ITAA) 1997 for the purposes of using the small-business CGT concessions?

Answer

Yes. The property was owned by person 1 and person 2 and used by the partnership between person 1 and person 2 (the partnership) in the course of running the business (the business). The property was also used to derive rent throughout various periods that the partnership was not running the business. Typically, an asset whose main use is to derive rent is excluded from being an active asset. However, the partnership has used the property to run their business for a greater period than it was used to derive rent. Therefore, the main use of the property was to run the business and can therefore be classified as an active asset under section 152-40 of the ITAA 1997. Furthermore, the property satisfies the active asset test under section 152-35 ITAA 1997 because it was owned for more than 15 years and during that time, was used as an active asset for at least 7½ years of that period.

This ruling applies for the following period:

Year ending X of XX 20XX

The scheme commenced on:

X of XX 20XX

Relevant facts and circumstances

Person 1 and person 2 own the property.

The partnership used the property to run the business.

The property has been used to both run the business and also has been leased to other parties for various periods that the partnership was not running the business.

The partnership sold the business, and the new owner of the business became a tenant.

The property was then sold.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-40

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152-10

Reasons for decision

In order to satisfy the basic conditions to be eligible for CGT small business concessions, among other conditions, you must satisfy the active asset test under paragraph 152-10(1)(d) of the ITAA 1997.

Before an asset can satisfy the active asset test, it must first meet the definition of an active asset. The definition of a CGT active asset under subsection 152-40(1) of the ITAA 1997 is an asset that, at that time:

a)    You own, and it is used, or held ready for use, in the course of carrying on a business that is carried on by:

a.    You; or

b.    Your affiliate; or

c.     Another entity that is connected with you.

Person 1 and person 2 had owned the property and the partnership has operated the business from the property for various periods.

The partnership has also used the property to derive rent.

Typically, an asset whose main use is to derive rent is excluded from being an active asset under paragraph 152-40(4)(e) of the ITAA 1997. However, since the total amount of time that the property has been used to carry on a business is greater than the time the property had been used to derive rent, it can be concluded that the main use of the property was to carry on a business. Therefore, the exclusions in paragraph 152-40(4)(e) of the ITAA 1997 do not apply and the property is an active asset.

Under subsection 152-35(1) of the ITAA 1997, a CGT asset satisfies the active asset test if 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 between when the asset was acquired and when the asset was sold.

Person 1 and person 2 had owned the property for more than 15 years and the property was an active asset for at least 7½ years. Therefore, the property satisfies the active asset test.