Issue
Is an asset owned by the taxpayer and used partly for business purposes and partly to derive rent an active asset under section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
Yes. In the particular circumstances described, an asset owned by the taxpayer and used partly for business purposes and partly to derive rent is an active asset under section 152-40 of the ITAA 1997.
Facts
The taxpayer owns land on which a number of industrial sheds are situated. One shed is used to conduct a panel beating business. The other sheds are rented out to third parties.
Approximately 45% of the land and buildings by area is used in the conduct of the panel beating business. The remaining 55% of the land and buildings is rented by the taxpayer to other parties. The income derived from the panel beating business represents 80% of the total income (business plus rentals) derived from the use of the land.
Reasons for Decision
For a CGT asset of a business to be an active asset for the purposes of Division 152 of the ITAA 1997 it must firstly satisfy one of the 'positive tests' in subsection 152-40(1) of the ITAA 1997 and then also not be excluded by one of the exceptions in subsection 152-40(4) of the ITAA 1997.
Under paragraph 152-40(1)(a) of the ITAA 1997 a CGT asset is an active asset (subject to the exclusions) if it is owned and used or held ready for use in the course of carrying on a business.
However, paragraph 152-40(4)(e) of the ITAA 1997 provides that an asset whose main use in the course of carrying on the business 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.
Where an asset is used partly for business and partly to derive rent, it will be a question of fact dependent on all the circumstances of the case as to whether the main use of the premises is to derive rent. No one single factor will necessarily be determinative, and resolving the matter is likely to involve a consideration of a range of factors such as: • the comparative areas of use of the premises (between rent and business), • the comparative times of use of the premises (between rent and business), and • the comparative levels of income derived from the different uses of the asset.
In this particular case, a substantial (although nevertheless not a majority) proportion by area of the land is used for business purposes. However, the income derived from the business conducted on this part of the land represents 80% of the total income (business plus rentals) derived from the use of the land.
Having regard to the fact that it is appropriate to consider a range of factors to determine the main use of an asset and to the fact that the business proportion of the land derives 80% of the total income, it is considered the main use of the land is not to derive rent and accordingly, the land is not excluded from being an active asset by paragraph 152-40(4)(e) of the ITAA 1997. The land is therefore an active asset under section 152-40 of the ITAA 1997.