Private ruling: Small business concessions - basic conditions - subsection (1A)
Published: April 2015
Ruling period: Year ending 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Questions and Answers: | 1. Is the rental income received by you and the co-owners of your rental (investment) properties included in the small business entity turnover test under Subdivision 328-C of the Income Tax Assessment Act 1997 (ITAA 1997)? | No. | 2. Do you satisfy the basic conditions for small business relief under section 152-10 of the ITAA 1997 in relation to your sale of your Property? | Yes.

Relevant facts and circumstances: You are individual taxpayers, earning income from salary, interest, dividends and rent, who are not carrying on a business and who are not registered with an Australian Business Number. In 200X, you purchased your Property, a warehouse. From the time of its purchase to its sale, your warehouse Property was rented to your private company, a small business entity, of which you were/are the joint shareholders. The main company business (retailing) was and continues to be conducted from another premises. For the years ended 30 June 20XX and 20YY, the gross income of the business for each year was less than $2 million. The private company is the only entity connected to you that earns business income. You hold passive property investments yourselves, in a family trust, in a private company and in partnerships. Your (warehouse) Property was sold during the year ended 30 June 20ZZ.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 152-10 | Income Tax Assessment Act 1997 Section 152-15 | Income Tax Assessment Act 1997 Section 152-20 | Income Tax Assessment Act 1997 Section 152-35 | Income Tax Assessment Act 1997 Section 152-40 | Income Tax Assessment Act 1997 Section 152-105 | Income Tax Assessment Act 1997 Section 328-110 | Income Tax Assessment Act 1997 Section 328-115 | Income Tax Assessment Act 1997 Section 328-120 | Income Tax Assessment Act 1997 Section 328-125 | Income Tax Assessment Act 1997 Section 328-130

Reasons for decision: Detailed Reasoning - Small business entity: Section 328-110 if the ITAA 1997 provides you are a small business entity for an income year (the current year) if you carry on a business in the current year and you carried on a business in the income year (the previous year) before the current year and your aggregated turnover for the previous year was less than $2 million. Section 328-115 of the ITAA 1997 provides your aggregated turnover for an income year is: • the sum of the annual turnovers for the income year of you, of any entity (a relevant entity) that is connected with you and of any entity (a relevant entity) that is an affiliate of yours at any time during the income year, less (minus) • amounts derived in the income year from dealings between you and the above relevant entities. In general, section 328-120 of the ITAA 1997 provides an entity's annual turnover for an income year is the total ordinary income that the entity derives in the income year in the ordinary course of carrying on a business. In your case, the rental income received by you and the co-owners of your rental (investment) properties is not included in the small business entity turnover test of relevant entities. This is because these are passive investments and thus do not derive income in the course of carrying on a business. | Detailed Reasoning - Basic conditions for relief: Section 152-10 of the ITAA 1997 provides the basic conditions for small business relief are: (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 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 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). Subsection 152-10(1A) states the conditions in this subsection are satisfied in relation to the CGT asset in the income year if: (a) your affiliate, or an entity that is connected with you, is a small business entity for the income year; and (b) you do not carry on a business in the income year (other than in partnership); and (c) if you carry on a business in partnership - the CGT asset is not an interest in an asset of the partnership; and (d) in any case - the small business entity referred to in paragraph (a) is the entity that, at a time in the income year, carries on the business (as referred to in subparagraph 152-40(1)(a)(ii) or (iii) or paragraph 152-40(1)(b)) in relation to the CGT asset. In brief, section 328-125 of the ITAA 1997provides an entity 'controls' another entity if it, its affiliates, or it together with its affiliates owns, or has the right to acquire the ownership of, interests in the other entity that carry between them the right to receive at least 40% of any distribution of income or capital by the other entity . The term 'affiliate' is defined in section 328-130 of the ITAA 1997. An individual or a company is an affiliate of yours if the individual or company acts, or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you, in relation to the affairs of the business of the individual or company. Section 152-35 of the ITAA 1997 provides a CGT asset satisfies the active asset test 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 period beginning when you acquired the asset and ending with the CGT event. Section 152-40 of the ITAA 1997 provides a CGT asset is an active asset at a time if, at that time, you own the asset and it is used or held ready for use in the course of carrying on a business that is carried on by you, your affiliate or another entity that is connected with you. In your case, you satisfy the conditions for small business relief because your private company was a small business entity connected with you (thus satisfying subsection (1A)) that used your Property in connection with its business at least 50% of your ownership period (thus satisfying the active asset test).