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Is an intangible asset owned by a taxpayer that is used in a connected entity's business, an active asset of the taxpayer under paragraph 152-40(1)(c) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. An intangible asset owned by a taxpayer that is used in a connected entity's business is an active asset of the taxpayer under paragraph 152-40(1)(c) of the ITAA 1997 (subject to any exclusion).

The taxpayer acquired an existing business by purchasing all the business assets including the goodwill. The taxpayer then leased the assets, including the goodwill, to a company connected with the taxpayer, and the connected company then operated the business.

Several years later, the taxpayer sold the business and made a capital gain on the goodwill.

To qualify for the small business CGT concessions in Division 152 of the ITAA 1997 the goodwill must satisfy the active asset test, and accordingly, must be an active asset at certain times.

Under subsection 152-40(1) of the ITAA 1997 a CGT asset is an active asset if a 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 the taxpayer carries on; or (c) it is used, or held ready for use, in the course of carrying on a business by: i. a small business CGT affiliate of the taxpayer; or ii. an entity connected with the taxpayer.

The purpose and effect of paragraph 152-40(1)(b) of the ITAA 1997, which specifically refers to intangible assets, is to extend (not impliedly limit) paragraph 152-40(1)(a) of the ITAA 1997. Paragraph 152-40(1)(c) of the ITAA 1997 in turn supplements both paragraphs 152-40(1)(a) and 152-40(1)(b). As such, it is not intended that intangible assets can only qualify as active assets under paragraph 152-40(1)(b) of the ITAA 1997.

If an intangible asset owned by a taxpayer is used, or held ready for use, in the course of carrying on a business by a small business CGT affiliate of the taxpayer or an entity connected with the taxpayer it may qualify as an active asset under 152-40(1)(c) of the ITAA 1997.