Does the property satisfy the active asset test under subsection 152-35(1) of the Income Tax Assessment Act 1997 (ITAA 1997) for the purpose of the capital gains tax small business concessions?
Yes. This ruling applies for the following period Year ending 30 June 20XX The scheme commences on: 1 July 20XX
Your spouse acquired the property after 20 September 1985. Initially the property was boarded up as it was uninhabitable and needed repairs. In 20XX you separated from your spouse and the property became both your primary place of residence and was used by your two companies to carry on their business. You are the sole director of two companies that conduct business activities in the property. You acquired the property on X February 20XX, through an approved court order as result of your marriage breakdown. The property consists of three separate shop/office spaces. Each unit takes up the percentage of floor space of the property for the following periods: From the 20XX year: • Unit 1 was used by your companies. (29.9%) • Primary place of residence (PPR) (3.85%) • Remainer of property vacant/unused. From the 20XX year: • Unit 1 continued to be used by your companies 29.9% • Unit 3 tenanted 19.2%. • PPR 3.85% • Remainer of property vacant/unused. From the 20XX year onward, changes were made to floor space of each unit: • Unit 1: tenanted: 25.2% • Unit 2: 50.4% used by your companies, PPR 5.3%
• Unit 3: tenanted 18.9% From 20XX year your companies continue to use Unit 2, however you no longer reside in the property. The rental income from the Unit 1 and Unit 3 makes up approximately 6% of the of the turnover of the companies. You transferred the property to a trust in the 20XX-XX income year. Your companies have an aggregated turnover of less than $X million.
Income Tax Assessment Act 1997 subdivision 126-A Income Tax Assessment Act 1997 section 152-40 Income Tax Assessment Act 1997 subsection 103-25(1) Income Tax Assessment Act 1997 subsection 152-35(1) Income Tax Assessment Act 1997 subsection 152-40(4) Income Tax Assessment Act 1997 subsection 152-42(2) Income Tax Assessment Act 1997 subsection 152-115(2)
Detailed reasoning Subsection 152-35(1) of the ITAA 1997 states that a CGT asset satisfies the active asset test if: • you have owned the asset for 15 years or less and the asset was an active asset of yours for a total of at least half of the period of ownership, or • you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of at least 7 and a half years. Section 152-40 of the ITAA 1997 provides the meaning of 'active asset'. A CGT asset will be an active asset at a time if, at that time, you own the asset and the asset was used or held ready for use by you, an affiliate of yours, or by another entity that is 'connected with' you, in the course of carrying on a business. Importantly, subsection 152-40(4) of the ITAA 1997 provides that an asset whose main use is to derive rent cannot be an active asset. If an asset is used partly for business and partly to derive rent at any given time, it will be a question of fact dependent on all the circumstances as to whether the main use of the asset at that time is to derive rent.
Taxation Determination TD 2006/78 provides guidance on whether an asset's main use 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 deriving rent and other uses); and • the comparative levels of income derived from the different uses of the asset. Subsection 152-45(2) of ITAA 1997, provides that if you acquired the asset due to a marriage or relationship breakdown and the rollover was available, you may choose that the active asset test applies as if: a) you had acquired the asset when the transferor acquired the asset; and b) the asset had been an active asset of yours at all times when the asset was an active asset of the transferor and; c) the asset had not been an active asset of yours at all times when the asset was not an active asset of the transferor. Section 103-25 (1) ITAA 1997 explains that the choice must be made by either: a) by the day you lodge your income tax return for the income year in which the relevant CGT event happened; or
b) within a further time allowed by the Commissioner. In your case you acquired the property from your spouse by way of a court order as a result of marriage or relationship breakdown on XX February 20XX. You may choose that the active asset test applies from the date of the court order (less than 15 years), alternatively you may choose instead that the active asset test applies from when your spouse acquired the property, XX February 20XX (more than 15 years). When comparing the floor space, approximately half of the property was used by your companies in their business and the other half was tenanted. When comparing the level of income from the different uses, approximately 94% of the income is from your two companies carrying on business in your property and approximately 6% is from rental income. Taking both of these factors into account, it is considered that the dominant purpose of the property is for use by your two companies to carry on their business and therefore the property will be considered an active asset for the period that your companies have been using the property to carry on their business.
If you don't make the choice, you will have owned the property for less than 15 years and the property was used by an entity connected with you (your two companies) in the course of carrying on a business for more than half the period owned. If you make the choice, you will be taken to have owned the property for more than 15 years and the property was used by your two companies (a connected entity) in the course of carrying on a business for more than 7 and a half years. Please note that if a choice is not made, the acquisition date that will automatically apply will be the date of the court order. Therefore, both choices will satisfy the active asset test in subsection 152-35(1) of the ITAA 97.