Private ruling: Capital gains tax
Date of advice: 27 June 2016
Published: August 2016
Ruling period: Year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Are you eligible for the small business capital gains tax concessions under Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No.

Relevant facts and circumstances: You are an investment company that buys and sells properties. You intend to sell the property that you have held since XX/XX/XXXX. You satisfy the small business entity test. The property is a residential property that has been leased out since acquisition.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 152 | Income Tax Assessment Act 1997 Subdivision 152-C | Income Tax Assessment Act 1997 Section 152-40 | Income Tax Assessment Act 1997 Subsection 152-40(1) | Income Tax Assessment Act 1997 Subsection 152-40(4)

Reasons for decision: Summary: A capital gain that you make may be reduced or disregarded under Division 152 of the ITAA 1997 if the following basic conditions are satisfied: • A CGT event happens in relation to a CGT asset of yours in an income year, • The event would have resulted in a gain, • The CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997, and • At least one of the following applies; • you are a small business entity for the income year, • you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997, • you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an interest in an asset of the partnership, or • you do not carry on a business, but your CGT asset is used in a business carried on by a small business entity that is your affiliate or an entity connected with you. Active asset test A capital gains tax (CGT) asset will satisfy the active asset test if: a) 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, or b) 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 7½ years during the test period. The test period begins when you acquired the asset and ends at the earlier of the CGT event and if the relevant business ceased to be carried on in the 12 months before that time - the cessation of the business. Subsection 152-40(1) of the ITAA 1997 details that a CGT asset is an active asset at a time if it is used, or held ready for use, in the course of carrying on a business that is carried on by you, or your affiliate, or another entity that is connected with you. Certain assets are, however, excluded from being active assets under subsection 152-40(4) of the ITAA 1997. An asset whose main use is to derive rent (unless such use was only temporary) is excluded from being an active asset. Such assets are excluded even if they are used in the course of carrying on a business. Taxation Determination TD 2006/78 states (paragraph 22) that whether an asset's main use is to derive rent will depend on the particular circumstances surrounding the derivation of income. The term rent has been described as the amount payable by a tenant to a landlord for the use of the leased premises ( C.H. Bailey LTD v Memorial Enterprises Ltd 1 All ER 1003, United Scientific Holdings Ltd v Burnley Borough Council 2 All ER 62). In this case, the property's main use has been to derive rent. Therefore, it is excluded from being an active asset as per subsection 152-40(4) of the ITAA 1997. Accordingly, you are not eligible for the small business capital gains tax concessions on the sale of the property as you do not satisfy the basic conditions.