Private ruling: Small business capital gains tax concessions
Published: July 2013
Ruling period: Year ended 30 June 2011 | Year ended 30 June 2012
Date scheme commenced: 1 July 2010

Ruling: Q1: Can you apply the small business capital gains tax (CGT) concessions contained in Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997) to the sale of your CGT assets? | A1: No

Relevant facts and circumstances: You acquired a number of CGT assets. The CGT assets were leased to third parties for the entire period of ownership. You actively and regularly reviewed the leases. You also regularly researched the relevant industry to keep up to date with issues affecting the industry. You had intended to purchase additional CGT assets of the same kind, however you were not able to do so due to unavailability. Recently, you have disposed of the CGT assets.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 152 | 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)

Reasons for decision: Summary: To qualify for the small business CGT concessions contained in Division 152 of the ITAA 1997, you must satisfy several conditions that are common to all the concessions. These are called the 'basic conditions' and are contained in section 152-10 of the ITAA 1997. One of the basic conditions is that the asset must satisfy the active asset test. Active asset test The active asset test is contained in section 152-35 of the ITAA 1997. The active asset test is satisfied 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 test period detailed below, 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 7.5 years during the test period. The test period is from when the asset is acquired until the CGT event. If the business ceases within the 12 months before the CGT event (or such longer time as the Commissioner allows) the relevant period is from acquisition until the business ceases. A CGT asset is an active asset if it is owned by you and is used or held ready for use in a business carried on (whether alone or in partnership) by you, your affiliate or an entity connected with you (subsection 152-40(1) of the ITAA 1997). Paragraph 152-40(4)(e) of the ITAA 1997 states, however, that an asset whose main use in the course of carrying on the business is to derive rent can not be an active asset unless the main use for deriving rent was only temporary. Application to your circumstances In your case, you owned CGT assets. For that entire period, you leased the assets to another entity. The CGT asset is not considered an active asset during the period it was leased in accordance with paragraph 152-40(4)(e) of the ITAA 1997. The leasing of an asset on its own does not ordinarily constitute the carrying on of a business. Even if it did, paragraph 152-40(4)(e) of the ITAA 1997 prevents assets whose main use is to derive rent from being an active asset. In the Federal Commissioner of Taxation v. Murry (1998) 193 CLR 605; 98 ATC 4585; (1998) 39 ATR 129 ( Murry's Case ), a taxpayer and her husband, operating in partnership, leased a taxi licence to an operator who owned the vehicle which had the benefit of the partnership's licence. The partners subsequently sold the licence and shares in the taxi co-operative company to a purchaser. The operator also sold the vehicle to the purchaser. The taxpayer and her husband simply sold a licence to use a taxi together with shares in a taxi co-operative company. Before the sale, the licence was leased to the operator who owned the vehicle. Insofar as the licence gave a right to conduct a taxi business, the business was conducted by the operator. It was held that the lease of the taxi licence does not constitute the carrying on of a taxi business by the lessor. Your circumstances are similar to that in Murry's Case in that your CGT assets were mainly used to derive rent. However, as stated above, even if the activity did constitute carrying on a business, paragraph 152-40(4)(e) of the ITAA 1997 prevents assets whose main use is to derive rent from being an active asset. Your CGT assets do not satisfy the active asset test in section 152-35 of the ITAA 1997. Accordingly, you do not satisfy the basic conditions and you will not be able to apply any of the small business concessions to the sale of your CGT assets.