Private ruling: Capital gains tax - small business concessions - 15-year exemption - rental exemption
Date of advice: 13 August 2025
Published: 13 October 2025
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Can you apply the 15-year exemption under section 152-105 of the Income Tax Assessment Act 1997 (ITAA 1997) to disregard the capital gain made on the sale of the Property? | A1: No.

Relevant facts and circumstances: You purchased the Property in September 20XX. You sold the Property in November 20XX. You did not carry on a business on the Property. The Property comprises of X shops. You rented out the Property to unrelated third parties. You entered individual lease agreements with the tenants of all the shops. You were over 55 years old when the property sold. Before the sale you spent time checking with the tenants weekly, issuing invoices regarding outgoings, water rates, maintaining the grounds and meeting with tradespeople when repairs needed to be done. You prepared and sent invoices for the outgoings, CPI adjustments, renewal or extensions of the leases in cooperation with a solicitor for execution. You stopped working after the sale of the property.

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 section 152-40 | Income Tax Assessment Act 1997 section 152-105

Reasons for decision: Summary: Basic Conditions A capital gain that you make may be reduced or disregarded under Division 152-A of the ITAA 1997 if the following basic conditions are satisfied: • a capital gains tax event (CGT) 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 CGT 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 The active asset test outlined in section 152-35 of the ITAA 1997. The active asset test is satisfied 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 period specified in subsection (2); 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 7 ½ years during the period specified in subsection (2). The test period beings 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. Section 152-40 of the ITAA 1997 explains that 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, your spouse or child, or an entity connected with you. Rental exemption However, subsection 152-40(4) of the ITAA 1997 lists CGT assets that cannot be active assets that need to be considered. Under paragraph 152-40(4)(e) of the ITAA 1997, an asset whose main use is to derive rent cannot be an active asset unless the main use for deriving rent was only temporary. Taxation Determination TD 2006/78 - Income Tax: capital gains: are there any circumstances in which the premises used in a business of providing accommodation for reward may satisfy the active asset test in section 152-35 of the Income Tax Assessment Act 1997 notwithstanding the exclusion in paragraph 152-40(4)(e) of the Income Tax Assessment Act 1997 for assets whose main use is to derive rent? (TD 2006/78) considers the active asset test and the main use to derive rent concept. Whether an asset's main use is to derive rent will depend upon the particular circumstances of each case. In accordance with paragraph 22 of TD 2006/78, the term 'rent' has been described as follows: • the amount payable by a tenant to a landlord for the use of the leased premises ( C.H. Bailey Ltd v. Memorial Enterprises Ltd [1974] 1 All ER 1003 at 1010, United Scientific Holdings Ltd v. Burnley Borough Council [1977] 2 All ER 62 at 76, 86, 93, 99); • a tenant's periodical payment to an owner or landlord for the use of land or premises ( The Australian Oxford Dictionary , 1999, Oxford University Press, Melbourne); and • recompense paid by the tenant to the landlord for the exclusive possession of corporeal hereditaments ... The modern conception of rent is a payment which a tenant is bound by contract to make to his landlord for the use of the property let (Halsbury's Laws of England 4th Edition Reissue, Butterworths, London 1994, Vol 27(1) 'Landlord and Tenant', paragraph 212). Example 1 in TD 2006/78 considers if the main use is to derive rent and states: Commercial Property Co owns 5 commercial rental properties. The properties have been leased for several years under formal lease agreements to various commercial tenants which have used them for office and warehouse purposes. The terms of the leases have ranged from 1 year to 3 years with a 3-year option and provide for exclusive possession. The company has not engaged a real estate agent to act on its behalf and manages the leasing of the properties itself. In this situation, the company has derived rental income from the leasing of a number of properties. Accordingly, the main (only) use of the properties is to derive rent and they are therefore excluded from being active assets under paragraph 152-40(4)(e) of the ITAA 1997 regardless of whether the activities constitute the carrying on of a business. The issue of whether a taxpayer's rental properties can be active assets when they are carrying on a business of letting rental properties was considered in Jakjoy Pty Ltd v FC of T [2013] AATA 526, (Jakjoy) . In Jakjoy the taxpayer was carrying on a business of leasing commercial properties. It was held that despite the fact the taxpayer was carrying on a business of leasing properties that the properties were not considered 'active assets' under section 152-40 of the ITAA 1997 and did not satisfy the 'active asset test' in section 152-35 of the ITAA 1997. Given the main or only use of the properties was to derive rent, the properties were excluded from being active assets under section 152-40(4)(e). This was regardless of the fact that the taxpayer's activities amounted to the carrying on of a business. It was affirmed that '....although it was common ground that the taxpayer was carrying on a business of renting properties, it did not automatically follow based on a clear reading of the text in section 152-40 of the ITAA 1997, that the properties the taxpayer used in carrying on its business were 'active assets' Indeed, those properties were expressly excluded from being 'active assets' by the exception in section 152-40(4)(e) of the ITAA 1997. 15 year exemption Section 152-105 of the ITAA 1997 says that for an individual to be eligible for the small business 15-year exemption it must satisfy the basic conditions and two further conditions: • you continuously owned the CGT asset for the 15-year period ending just before the CGT event; • either: ˗ you are 55 or over at the time of the CGT event and the event happens in connection with their retirement; or ˗ you are permanently incapacitated at the time of the CGT event. Whether a CGT event happens in connection with an individual's retirement depends on the particular circumstances of each case. A CGT event may be in connection with your retirement even if it occurs at some time before retirement. Application to your circumstances The sale of the Property resulted in a capital gain. You owned the Property continuously for over 15 years. You were over 55 years old at the time the property sold, and the sale was in connection with your retirement. However, the only use of the property by you was to derive rental income. Your circumstances can be likened to example 1 of TD 2006/78. Therefore, the Property is excluded from being an active asset under paragraph 152-40(4)(e) of the ITAA 1997. As the property doesn't satisfy the active asset test, you do not satisfy the basic conditions under Subdivision 152-A. Therefore, you are not eligible for the 15-year exemption under section 152-105 as you do not meet all the relevant conditions.