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Will the freehold of a hotel to be acquired by the taxpayer, a hotelier, be an active asset in terms of section 152-40 of the Income Tax Assessment Act 1997 ('ITAA 1997')?

Yes. The freehold of a hotel to be acquired by the taxpayer, a hotelier, will be an active asset in terms of section 152-40 of the ITAA 1997.

The taxpayer owns the leasehold of a hotel but not the freehold.

The taxpayer is considering purchasing the freehold of the hotel.

The taxpayer will continue to operate the hotel after purchasing the freehold.

A Capital Gains Tax (CGT) asset is an active asset at any given time according to subsection 152-40(1) of the ITAA 1997, if, at that time, the taxpayer owns it and: (a) uses it, or holds it ready for use, in the course of carrying on a business; or (b) it is an intangible asset that is inherently connected with a business that the taxpayer carries on (for example, goodwill or the benefit of a restrictive covenant); or (c) it is used, or held ready for use, in the course of carrying on a business by: (i) the taxpayer's small business CGT affiliate; or (ii) another entity that is connected with the taxpayer.

The freehold is the land and building attached. The building, being the hotel, is a CGT asset in accordance with paragraph 108-5(1)(a) of the ITAA 1997.

To be an active asset the CGT asset must be used or held ready for use, in the course of carrying on a business by the taxpayer, the taxpayer's small business affiliate or another entity connected to the taxpayer. The freehold includes the building which is being used as a hotel. Therefore, the freehold is being used, and will continue to be used after purchase, to carry on a hotel business by the taxpayer.

Accordingly, the freehold of a hotel will be an active asset of the taxpayer in terms of paragraph 152-40(1)(a) of the ITAA 1997.