Issue
Are premises owned by two individuals, but leased to and used by a company in the course of carrying on a business, an active asset under section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997), where the company is an entity connected to the individuals?
Decision
Yes. The premises will be an active asset within the meaning of paragraph 152-40(1)(c) of the ITAA 1997 where they are used in the course of carrying on a business by an entity connected with the owners.
Facts
Two individuals each own 50% of the share capital of a company which operates a business. They also own, in joint names, the business premises from which the company operates its business.
The individuals treat the premises as a commercial rental property and charge the company market value rent for its use. The premises are to be sold and the owners will acquire other premises from which the company will carry on its business.
Reasons for Decision
Subsection 152-40(1) of the ITAA 1997 provides that for a CGT asset to be an active asset the small business entity must own it and use it, or hold it ready for use: • in the course of carrying on its business (paragraph 152-40(1)(a) of the ITAA 1997); or • in the course of carrying on a business by a connected entity (paragraph 152-40(1)(c) of the ITAA 1997).
An entity is connected with another entity if either entity controls the other in the way described in section 152-30 of the ITAA 1997.
Where one entity is a company, paragraph 152-30(2)(b) of the ITAA 1997 states that an entity (in this case an individual) will control the company if the entity beneficially owns shares in the company carrying the right to exercise, or control the exercise of, at least 40% of the voting power in the company. As each individual owns 50% of the company's shares, the company is considered to be connected with each of them.
Paragraph 152-40(4)(e) of the ITAA 1997 provides an exception to the definition of an active asset where an asset whose main use in carrying on the business referred to in subsection 152-40(1) of the ITAA 1997 is to derive rent. Such an asset cannot be an active asset. However as the premises are used to derive business income by the company which is connected to the owners the exception in paragraph 152-40(4)(e) of the ITAA 1997 will not apply, notwithstanding that the individuals' main use is to derive rent from the property.