Capital gains tax: small business roll-over/ replacement active asset/ main residence

Can an interest in a property from which the taxpayer will carry on a business satisfy the meaning of an active asset under section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997) for the purpose of choosing the small business roll-over under section 152-410 of the ITAA 1997?

Yes. An interest in a property from which the taxpayer will carry on a business will satisfy the meaning of an active asset under section 152-40 of the ITAA 1997.

The taxpayer is a company which anticipates making a capital gain from the sale of a business.

The taxpayer intends to use the capital gains tax (CGT) small business roll-over by buying a replacement active asset, being a 30% interest in a property from which it will run a new business.

The property will include a house, and the taxpayer estimates it will use approximately 30% of the house for business purposes. The remaining interest in the property will be held by several individuals who intend to use the house as their main residence.

For the interest in the property to be a replacement asset for the CGT small business roll-over relief under Subdivision 152-E of the ITAA 1997 the property must be an active asset when it is acquired or within 2 years of the relevant CGT event (subsection 152-420(4) of the ITAA 1997).

Active asset is defined in section 152-40 of the ITAA 1997. Essentially an asset is an active asset if it is owned by a taxpayer and used or held ready for use in the course of carrying on a business and does not fall within one of the exclusions contained in subsection 152-40(4) of the ITAA 1997.

The property will be used to carry on the business by the taxpayer and does not fall within one of the exclusions under subsection 152-40(4) of the ITAA therefore it will be an active asset. The fact that other persons will use the property for private purposes does not affect the property's standing as an active asset in the hands of the taxpayer. The taxpayer may therefore choose to use the CGT small business roll-over and treat the property as a replacement asset. Note: Even if the taxpayer's interest in the property were to be greater than the business use of the property, the taxpayer may still use all of its interest in the property as a replacement asset. The definition of 'active asset' does not require exclusive use of the asset for business purposes. For example, if the taxpayer's interest in the property is 30%, and the business use is 20%, the taxpayer may still use its entire interest in the property as a replacement asset. Note: Subsection 152-420(4) was repealed by the Tax Laws Amendment (2006 Measures No. 7) Act 2007 (55 of 2007). CGT event J5 happens under section 104-197 if, by the end of the replacement asset period, a replacement asset is not acquired or the replacement asset is not an active asset. The replacement asset period is specified in paragraph 104-185(1)(a).