Private ruling: Small Business Concessions
Date of advice: 8 May 2017
Published: September 2017
Ruling period: Year ended 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Can you apply any of the small business capital gains tax (CGT) concessions to disregard the capital gain made on the sale of your rental property? | A1: No.

Relevant facts and circumstances: You own a number of properties. You have managed the leasing and maintenance of these properties since you acquired them. You employ a real estate agent to collect rental income from the tenants to maintain professionalism and integrity. All of the properties have consistently been used to provide rental income; the properties provide your only source of income. You attempt to resolve any issues that arise with the tenants together with your real estate agent. You regularly visit the properties and ensure that you are getting the correct amount of rent compared to other properties in the area. Should a tenant default on their rent you will follow it up with the help of a lawyer. You consult your account regarding any tax related issued pertaining to the properties. You aggregated turnover is less than $2 million. You sold one of your properties and made a capital gain.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 152-A | Income Tax Assessment Act 1997 section 152-10 | Income Tax Assessment Act 1997 section 152-35 | Income Tax Assessment Act 1997 subsection 152-40(1) | Income Tax Assessment Act 1997 paragraph 152-40(4)(e) | Note: that all subsequent legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated.

Reasons for decision: Summary: For the small business concessions in Division 152 to apply to reduce or disregard a capital gain, the basic conditions in Subdivision 152-A must be satisfied. One of these conditions is that the relevant CGT asset is required to satisfy the active asset test in section 152-35. Subsection 152-40(1) provides the meaning of an active asset and states that a CGT asset is an active asset at a time if, at that time, you own it and: (a) use it, or hold it ready for use, in the course of carrying on a business; or (b) it is used, or held ready for use, in the course of carrying on a business by: (i) your small business CGT affiliate; or (ii) another entity that is connected with you. However, paragraph 152-40(4)(e) excludes assets whose main use is to derive rent (unless such use was only temporary). Such assets are excluded even if they are used in the course of carrying on a business. | Detailed Reasoning - Application to your circumstances: In your case, you acquired commercial properties that have consistently been used to provide you with rental income. As the main use of the properties has been to derive rental income, they are excluded from being active assets under paragraph 152-40(4)(e). Therefore, as you do not satisfy the basic conditions for relief, you are not entitled to apply any of the small business concessions to disregard the capital gain made on the sale of your rental property. | Detailed Reasoning - Additional information: In your request you have indicated that you believe that your rental property activities constitute that of carrying on a business. Whether or not you were carrying on a business in relation to the rental properties is irrelevant due to the specific exception at paragraph 152-40(4)(e) for assets whose main use is to derive rent. As such the Commissioner has not considered whether or not your rental property activities satisfy the requirements of carrying on a business. Our view that your rental properties are not active assets and that whether or not you are carrying on a business is immaterial is confirmed by the following example that is provided in our guide C apital gains tax concessions for small business 2016 that is available on our website ato.gov.au: Rachael owns five investment properties which she rents to tenants under lease agreements that grant exclusive possession. The lease terms vary from six months to two years. The properties are not active assets because they are mainly (only) used by Rachael to derive rent. It is irrelevant whether Rachael's activities constitute a business.