Private ruling: Small business CGT concessions
Date of advice: 1 August 2025
Published: 7 October 2025
Ruling period: 1 July 2024 to 30 June 2025
Date scheme commenced: 1 July 2024

Ruling: Q1: Is the capital gain arising from the sale of the Property disregarded under the 15-year exemption as set out in Section 152-105 of the ITAA 1997? | A1: No | Q2: Alternatively, do you qualify for the small business 50% reduction under section 152-205 of the ITAA 1997 so as to reduce any capital gain in respect of the sale of your share of the Property by 50% ? | A2: No

Relevant facts and circumstances: You are a co-owner of the Property, which you hold in equal share as a tenant-in-common with another individual taxpayer. You have advised that, together with the co-owner, you operated a rental property business, actively managing a large rental property portfolio held to generate rental income, including sharing of income and profits equally. In 2025 the Property was sold due to difficulty in securing a stable tenant. The previous tenant vacated with arrears, making the property financially unsustainable within the business. Between the tenant vacating in 2023 and the sale of the Property in 2025, the Property was neither marketed for lease nor re-let. From early 2024 until the sale, the Property was used 'operationally' for certain activities, and has been used as a registered office for a business with which you are associated since 2015.

Relevant legislative provisions: Subdivision 152A of the ITAA 1997 | Subsection 152-10(1) of the ITAA 1997 | Section 152-35 of the ITAA 1997 | Section152-40 of the ITAA 1997 | Subsection 152-40(1) of the ITAA 1997 | Subsection 152-40(4) of the ITAA 1997 | Subparagraph 152-40(4)(e) of the ITAA 1997 | Section 152-105 of the ITAA 1997 | Subparagraph 152-105(a) of the ITAA 1997 | Section 152-205 of the ITAA 1997

Reasons for decision: Summary: Section 152-105 Section 152-105 sets out the conditions which need to be satisfied for an individual to disregard any capital gain from a CGT event occurring pursuant to the 15 year exemption: 'If you are an individual, you can disregard any capital gain arising from a CGT event if all of the following conditions are satisfied: • the basic conditions in Subdivision 152-A are satisfied for the gain; • you continuously owned the CGT asset for the 15-year period ending just before the CGT event; Note: Section 152 - 115 allows for continuation of the period if there is an involuntary disposal of the asset. • if the CGT asset is a share in a company or an interest in a trust--the company or trust had a significant individual for a total of at least 15 years (even if the 15 years was not continuous and it was not always the same significant individual) during which you owned the CGT asset; • either: - you are 55 or over at the time of the CGT event and the event happens in connection with your retirement; or - you are permanently incapacitated at the time of the CGT event. Paragraph 152-105(a) specifies that the basic conditions in Subdivision 152-A must be satisfied in relation to the gain. Basic Conditions in Subdivision 152A The basic conditions for relief under Subdivision 152-A are contained in subsection 152-10(1) which provides as follows: (a) a CGT event happens in relation to a CGT asset of yours in an income year; (b) the event would (apart from this Division) have resulted in the gain; (c) at least one of the following applies: (i) you are a CGT small business entity for the income year; (ii) you satisfy the maximum net asset value test (see section 152 - 15); (iii) you are a partner in a partnership that is a CGT small business entity for the income year and the CGT asset is an interest in an asset of the partnership; (iv) the conditions mentioned in subsection (1A) or (1B) are satisfied in relation to the CGT asset in the income year; (d) the CGT asset satisfies the active asset test (see section 152 - 35). Note: This condition does not apply in the case of CGT event D1: see section 152 - 12. Active Asset Test The Property does not satisfy condition (d), being the active asset test. The active asset test is set out sections 152-35 and 152-40. Generally, pursuant to subsection 152-40(1) a CGT asset is an active asset if it is used, or held ready for use, in the course of carrying on a business (whether alone or in partnership) by you. TR 2019/1 Income tax: when does a company carry on a business? gives examples of when one can be found to be carrying on a business, which includes Example 3, being a property investment company. However, there are specific exceptions to a CGT asset being an active asset, including where an asset whose main use by you is to derive rent, as set out in subsection 152-40(4) as follows: 'However, the following CGT assets cannot be active assets : (e) an asset whose main use by you is to derive interest, an annuity, rent, royalties or foreign exchange gains unless: (i) the asset is an intangible asset and has been substantially developed, altered or improved by you so that its market value has been substantially enhanced; or (ii) its main use for deriving rent was only temporary. Example: A company uses a house purely as an investment property and rents it out. The house is not an active asset because the company is not using the house in the course of carrying on a business. If, on the other hand, the company ran the house as a guest house the house would be an active asset because the company would be using it to carry on a business and not to derive rent. FurtherTD 2021/2, Income tax: can a company that carries on a business in a general sense as described in Taxation Ruling TR 2019/1 Income tax: when does a company carry on a business? but whose only activity is renting out an investment property claim the capital gains tax small business concessions in relation to that investment property, states at paragraph 1: "A company that carries on a business in a general sense as described in Taxation Ruling TR 2019/1 Income tax: when does a company carry on a business? but whose only activity is renting out an investment property cannot claim the capital gains tax (CGT) small business concessions in Division 152 of the Income Tax Assessment Act 19971 in relation to that investment property. This is because an asset whose main use is to derive rent (unless such use was only temporary) is subject to an exclusion from those concessions, even if it is used in the course of carrying on a business " (emphasis added). 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?, further confirms an asset, whose main use by you is to derive rent, is not an active asset, with Example 1 in TD 2006/78 providing as follows: Example 1: rental properties • 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. (emphasis added). That is, irrespective of whether your activities with regard to the Property constitute the carrying on of a business, the Property does not satisfy the ' active asset ' test because its main use is to derive rent. For the reasons expressed above, the basic conditions for relief under Subdivision 152-A are not met, and you cannot disregard any capital gain in relation to the sale of the Property pursuant to the 15-year exemption under section 152-105. It is clearly established that the Property was leased continuously for over 15 years since its purchase in 2003. Therefore, notwithstanding that you may have also used the Property for other purposes since December 2023, and as a registered office since 2015, during your co-ownership of the Property, its main use was to derive rental income. The legislative requirement looks towards the ' main ' use of the asset, and in this regard it is clear that the main use of the Property was to derive rent. It cannot be said on the facts of this case that the appropriation of the Property for the derivation of rent was merely ' temporary '. Therefore, it is the Commissioner's view that subparagraph 152-40(4)(e) is not satisfied. In respect of the application of the small business 50% reduction, section 152-205 states the following: You get the small business 50% reduction The amount of a capital gain remaining after applying step 3 of the method statement in subsection 102-5(1) is reduced by 50%, if the basic conditions in Subdivision 152-A are satisfied for the gain. The basic conditions in Subdivision 152-A also need to be met to qualify for small business reduction under 152-205, including the ' active asset ' test in paragraph (d). For the reasons expressed in relation to question 1 of this application, the Property does not satisfy the ' active asset ' test. Therefore you do not qualify for the small business 50% reduction.