Edited version of private advice

Authorisation Number: 1052333854254

Date of advice: 02 December 2024

Ruling

Subject: CGT - small business concessions

Question 1

Is the Property passively held by Individual A and Individual B (collectively, the Individuals) an active asset of the Business as outlined in section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

Yes, the property is an active asset of the business.

This ruling applies for the following period:

year ending 20XX.

The scheme commenced on:

20XX

Relevant facts and circumstances

The Individuals are spouses.

The Business was registered with ASIC on 20XX. It was established with XX ordinary shares, XX held by Individual A, XX held by Individual B and XX held by another party. The other party redeemed their XX shares in 20XX leaving Individual A and Individual B as shareholders.

The Business began manufacturing in 20XX. The business initially commenced under a different entity.

The Business operated from the Rental Site from 20XX until 20XX.

Since 20XX the Business has expanded and grown, acquiring more equipment. The Rental Site no longer had enough storage for their equipment and raw materials used in the manufacturing process.

The Property was acquired as tenants in common on 20XX. Individual A owns a share in the property and Individual B owns a share in the Property.

The Property is situated in an industrially zoned area. It is affected by restrictions. A portion of the land is unusable.

The Business began storing older equipment on the Property that was still viable but could not be used at the Rental Site.

The Business also began storing raw materials on the Property after acquisition. New shipments of raw materials were also stored on the Property.

The Business paid rent to the Individuals for use of the Property from 20XX, however there is no formal lease arrangement in place.

The materials were transported by the Business's vehicles.

The Property was accessed to transport raw materials back to the Rental Site.

The Individuals planned to construct a building to relocate the Business from the Rental Site to the Property on or around 20XX.

There were issues with development applications for the construction. Development approval was lodged 20XX to construct buildings. This process was delayed as the application was opposed and an amendment was made, whereby approval was granted in 20XX.

Construction was completed on or around 20XX and the Business relocated operations from the Rental Site.

They then commenced in 20XX from the Property.

The Individuals intend to sell the property in the 20XX income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152-40

Income Tax Assessment Act 1997 section 328-125

Income Tax Assessment Act 1997 section 328-130

Reasons for decision

An entity may be able to reduce its capital gains using the small business concessions if the basic conditions in subdivision 152-A of the ITAA 1997 are satisfied.[1]

To meet the basic conditions for relief the following must be satisfied:

•                A CGT event happens in relation to a CGT asset of yours in an income year.

•                The event would have resulted in the gain.

•                You are a CGT small business entity for the income year.

•                The CGT asset satisfies the active asset test. [2]

An asset that is passively held can use the small business concessions if some additional conditions to the basic conditions are satisfied. The additional conditions will be met where:

•                your affiliate or entity connected with you is a small business entity for the same income year that the CGT event happens to you CGT asset; and

•                you do not carry on a business; and

•                in the income year that the CGT event happens to your asset, the same affiliate or entity connected with you must:

o        be using the asset in their business,

o        be a small business entity, and

o        the asset must meet the active asset test. [3]

Active Asset

The CGT asset must satisfy the active asset test in order to satisfy the basic conditions.[4] The active asset test will be met if:

•                you have owned the CGT 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 from when you acquired it to the time of the CGT event or the cessation fo the business; or

•                you have owned the CGT asset for more than 15 years and the asset was an active asset of yours for a total of at least 7.5 years during the period specified in section 152-35(2).[5]

A CGT asset is an active asset at a time if, at that time the asset is used, or held ready for use, in the course of carrying on a business that is carried on whether by you or your affiliate or another entity that is connected with you.[6]

Exceptions - Rent

However, an asset whose main use by you is to derive rent cannot be an active asset (unless that main use was only temporary). 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.[7]

Use by a connected entity

If a CGT asset such as a building is leased by a taxpayer to a connected entity or affiliate for use in other entity's business, then in determining the main use of the asset any use of the asset by a connected or affiliate entity is treated as the taxpayer's use and will not fail the test for that reason alone.[8]

Connected entity and affiliates

Where the other entity is a company, you will control it if you, your affiliates, or you together with your affiliates have either:

•                shares and other equity interests (or the right to acquire them) in the company that give you and/or your affiliates at least 40% of the voting power in the company; or

•                interests (or the right to acquire them) with the right to receive at least 40% of any income or capital the company distributes. [9]

An individual is an affiliate of yours where they act, or could be reasonably expected to act, in accordance with your directions or wishes, or in concert with you, in relation to the affairs of the business.[10]

Application to your circumstances

The Individuals are affiliates of each other. Individually, they each hold XX of the ordinary shares of the Business. Individually both of the Individuals hold a more than a XX% interest in the Business and are therefore directly connected to the Business. As affiliates, they hold XX% of the shares of the Business.

The Business has rented the Property from the Individuals since 20XX.The Business used the Property as additional storage. The Business' raw materials and new shipments of materials that arrived were also stored ready for use on the Property until transported to the Rental Site as the need arose.

The Property was accessed by Business vehicles to transport the raw materials back to the Rental Site from acquisition until the factory and office block were constructed. Once completed, the Business relocated activities to the Property from 20XX.

The Property has a direct functional relevance to the carrying on of the normal day to day activities of the Business.

The Individuals are connected to the Business and therefore the Business' use of the Property is their main use and not the derivation of rent. As the Property has been used indirectly and directly by the Business for the whole period of the Individuals' ownership, the Commissioner considers that it is an active asset of theirs for the purposes of the small business concessions.

[1] ITAA 1997 section 152-10.

[2] ITAA 1996 subsection 152-10(1).

[3] ITAA 1997 subsection 152-10(1A).

[4] ITAA 1997 paragraph 152-10(1)(d).

[5] ITAA 1997 section 152-35.

[6] ITAA 1997 subsection 152-40(1).

[7] ITAA 1997 paragraph 152-40(4)(e).

[8] ITAA 1997 subsection 152-40(4A).

[9] ITAA 1997 subsection 328-125(2).

[10] ITAA 1997 section 328-130.