Edited version of private advice

Authorisation Number: 1052324327740

Date of advice: 06 November 2024

Ruling

Subject: Capital gains tax - active asset

Question 1

Does the property at xxx (the Property), an asset of xxx (the Partnership), qualify as an active asset for xxx (the Trust) under subsection 152-40(1) and meet the requirements of the active asset test under section 152-35?

Answer 1

Yes

This ruling applies for the following period:

DD MM YYYY to DD MM YYYY

The scheme commenced on:

DD MM YYYY

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.

Background information

The property

1.              On DD MM YYYY, Person A and Person B inherited the Property as tenants-in-common in equal shares.

2.              The Property is xxx hectares consisting of a house.

3.              On DD MM YYYY, xxx (the Trust) acquired Person B's share in the Property for $xxx.

Use of property

4.              From DD MM YYYY to DD MM YYYY, the Property was used by the Trust in the course of carrying on operations.

5.              During the same period of DD MM YYYY to DD MM YYYY, the Trust paid rent to the Partnership for use of the Property.

6.              From DD MM YYYY to DD MM YYYY, the Property was used for agistment by an unrelated entity.

7.              The Property was vacant from DD MM YYYY until its sale.

8.              The Property was sold on DD MM YYYY for $xxx to an unrelated party. Settlement of the Property occurred on DD MM YYYY.

9.              The Trust is considered to be a CGT small business entity under subsection 152-10(1AA) as its aggregated turnover was less than $XX in the YYYY income year.

10.          Person A is considered to be a significant individual as defined in section 152-55.

The partnership

11.          The Partnership consisting of Person A and the Trust was formed on DD MM YYYY. No formal deed of partnership was executed.

12.          The partners each have a X% interest in the assets of the Partnership.

Farming operations

13.          The whole of the Property was used for operations.

14.          Person A spent around xxx hours per day on the operations when they worked part-time from DD MM YYYY to DD MM YYYY as they were employed elsewhere. From DD MM YYYY, they managed the operation full-time and worked around xxx hours per day.

15.          Person A undertook all aspects of the farming operations, including financial and administration requirements, contractor management, repairs and maintenance on the Property.

16.          Contractors were engaged on average xxx hours per week to manage and conduct property maintenance as required.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152-40

Further issues for you to consider

This private ruling has not considered your eligibility for the small business CGT concessions, particularly whether you are a small business entity for the relevant income year under section 328-110. We have limited our private ruling to the question raised in your application in respect of the requirements under sections 152-35 and 152-40. Before claiming any of the small business CGT concessions, you need to ensure that all other basic conditions and other relevant requirements of Division 152 are satisfied.

You may apply for another private ruling on this or any other matter.

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated.

Question 1:

Does the property at xxx (the Property), an asset of xxx (the Partnership), qualify as an active asset for xxx (the Trust) under subsection 152-40(1) and meet the requirements of the active asset test under section 152-35?

Summary:

The Property qualifies as an active asset under subsection 152-40(1) and satisfies the active asset test in subsection 152-35(1) because it was actively used in the Trust's business for more than half the period of ownership.

Detailed reasoning

Active asset test

17.          Subdivision 152-A sets out numerous 'basic conditions' that small business entities must satisfy before the CGT small business concessions can apply under Division 152.

18.          Relevantly, the fourth condition set out in subsection 152-10(1) requires the CGT asset in question to satisfy the active asset test in section 152-35. Subsection 152-35(1) provides that the active asset test is satisfied for a CGT asset if:

a)             the taxpayer has owned the asset for X years or less and the asset was an active asset of the taxpayer for a total of at least half of the period specified in subsection 152-35(2), or

b)             the taxpayer has owned the asset for more than X years and the asset was an active asset of the taxpayer for a total of at least X years during the period specified in subsection 152-35(2).

19.          Under subsection 152-35(2), the test period:

a)             begins when you acquired the asset, and

b)             ends at the earlier of:

(i)             the CGT event, and

(ii)            if the business ceased to be carried on in the X months before that time or any longer period that the Commissioner allows - the cessation of the business.

20.          Therefore, for the Property to satisfy the active asset test, it will be necessary that it meets the following requirements:

a)      qualify as an active asset under section 152-40, and

b)      be used as an active asset for the requisite period of time specified in subsection 152-35(1).

21.          Each of these requirements are discussed below.

Meaning of active asset

22.          An asset is an active asset under subsection 152-40(1) if it is owned by the taxpayer and is used or held ready for use in a business that is carried on (whether alone or in partnership) by the taxpayer, its affiliate, or an entity connected with the taxpayer.

23.          In this matter, the Property is jointly owned by Person A who inherited his X% share in the Property on DD MM YYY and the remaining X% share was acquired by the Trust on DD MM YYY. A partnership between the Trust and Person A was formed on DD MM YYY. The whole of the Property (except for the residence) was used by one of the partners in the Partnership, being the Trust, in the course of conducting its business.

24.          However, paragraph 152-40(4)(e) provides that an asset whose main use by a taxpayer to derive rent cannot be an active asset, unless its main use for deriving rent was only temporary.

25.          In determining the main use of an asset, personal use of the asset by a taxpayer is ignored in determining its main use under paragraph 152-40(4A)(a).

26.          For the purposes of determining the active asset status of an asset used in a partnership, the business of the partnership is taken to be run by the partners.

27.          Although the Trust paid rent to the Partnership for operating the Property, the predominant use of the Property since the Trust acquired its X% share on DD MM YYY until DD MM YYY was for farming activities. As a result, the Property will not be excluded from being an active asset under paragraph 152-40(4)(e).

28.          Consequently, the Property qualifies as an active asset under subsection 152-40(1) as it was used in the business carried on by the Trust in its capacity as an equal partner in the Partnership.

Test period

29.          Paragraph 152-35(1)(b) requires that where the Property has been owned for more than X years, it must have been an active asset of the Trust for at least X years in the test period.

30.          In relation to the second requirement about the time period the asset is used as an active asset, the period for determining if the Property satisfies the active asset test commenced from DD MM YYY, when the Trust acquired its X% ownership in the Property under paragraph 152-35(2)(a).

31.          As the Trust ceased its business more than X months before the sale of the Property, the test period ends at the time of the CGT event, being the date that a contract was entered into to sell the Property on DD MM YYY pursuant to subparagraph 152-35(2)(b)(i). Therefore, the relevant test period is xxx years and xxx months.

32.          The Trust's predominant use of the Property at all material times from DD MM YYY to DD MM YYY was for activities. The Property was used then as agistment by an unrelated entity for xxx years before its sale.

33.          It was concluded above that the Property is an active asset as it was used in a business carried on by the Trust in its capacity as a partner in the Partnership. Consequently, it is considered that the Property is an active asset of the Trust during the time that the Trust conducted its business, being a period in excess of xxx years.

34.          This is more than the maximum required active asset period of X years as the Property has been owned for more than X years pursuant to paragraph 152-35(1)(b). Therefore, as all the requirements in subsection 152-35(1) are met, the Property satisfies the active asset test for the purposes of Division 152.