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Australian Lawyers and Consultants

Capital Gains Tax Savings and "Active Assets"

November 2003

The concept of an "active asset" is important as the sale proceeds can attract various tax breaks under the capital gains "small business" concessions. The Commissioner of Taxation has recently issued several "ATO Interpretive Decisions" to provide guidance as to when properties can be treated as "active assets" for capital gains tax purposes. By definition, an active asset is one used by the taxpayer in carrying on a business or one held ready for use in that business or the business of a CGT affiliate or related entity. However, a property developer’s trading stock falls outside the CGT concessional regime.

In ATO ID 2003/656, the Commissioner has ruled that commercial rental properties are not "active assets" under section 152-40 of the Income Tax Assessment Act 1997 if their main use is to derive rent. However, special-purpose business real estate may be able to attract the benefits of the "active asset" concessions. For example, in ATO ID 2003/657, the Commissioner ruled that premises used as a boarding house could be an "active asset" if the relationship between the taxpayer and those staying at the boarding house was not that of a landlord receiving rental under a lease, but rather as payments to the managing owner of an ongoing boarding house business. Similarly, in ATO ID 2003/655, the Commissioner ruled that holiday apartments owned and operated by the taxpayer can be "active assets" if their use is related to the carrying on of an ‘active’ business by the taxpayer. Contact Baldwins for tax advice and supporting documentation.

For further information, contact Joe Lederman at BALDWINS, Australian Lawyers & Consultants.

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