Private ruling: 15-year exemption
Date of advice: 22 December 2015
Published: March 2016
Ruling period: Year ending 30 June 20YY
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are you eligible for the small business 15-year exemption under section 152-105 of the ITAA 1997? | A1: No.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You and your spouse purchased an investment property during the 19VV-WW financial year. The property sold during the 20XX-YY financial year. The property has been available for rent for the entire period of ownership.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 152-A. | Income Tax Assessment Act 1997 Section 152-40.

Reasons for decision: Summary: Your rental property activity is not considered to be a business and the property does not satisfy the active assets test. Therefore, you do not meet the basic requirements for the small business capital gains tax (CGT) concessions and you are not eligible to apply the 15-year exemption. | Detailed Reasoning - Detailed reasoning: To qualify for the small business CGT concessions, you must satisfy several conditions that are common to all the concessions. These are called the 'basic conditions'. The basic conditions are contained in subdivision 152-A - Income Tax Assessment Act 1997 (ITAA 1997). STEP 1 You must first satisfy one of the following: • you are a small business entity • you do not carry on business (other than as a partner) but your asset is used in a business carried on by a small business entity that is your affiliate or an entity connected with you (passively-held assets) • you are a partner in a partnership that is a small business entity, and the CGT asset is • an interest in a partnership asset (partnership assets), or • an asset you own that is not an interest in a partnership asset (partner's assets) • you satisfy the maximum net asset value test. STEP 2 The asset in question must satisfy the active asset test | Detailed Reasoning - STEP 1 - Carrying on a business: A person who simply co-owns investment properties is usually regarded as an investor and not carrying on a rental property business. This is because of the limited scope of the rental property activities and the limited degree to which a co-owner actively participates in rental property activities. The Rental properties 2014 guide provides the following example (at page 5): | Detailed Reasoning - Example 3: Co-owners who are not carrying on a rental property business: The Tobins own, as joint tenants, two units and a house from which they derive rental income. The Tobins occasionally inspect the properties and also interview prospective tenants. Mr Tobin performs most repairs and maintenance on the properties himself, although he generally relies on the tenants to let him know what is required. The Tobins do any cleaning or maintenance that is required when tenants move out. Arrangements have been made with the tenants for the weekly rent to be paid into an account at their local bank. Although the Tobins devote some of their time to rental income activities, their main sources of income are their respective full-time jobs. The Tobins are not partners carrying on a rental property business, they are only co-owners of several rental properties. Your situation is similar to that outlined in the example above and you would not be considered to be carrying on a rental property business. | Detailed Reasoning - STEP 2 - Active asset: The requirements of an active asset and the active asset test are set out in Subdivision 152-A of the ITAA 1997. A CGT asset is an active asset (subject to the exclusions) if it is owned and used or held ready for use in the course of carrying on a business. However, an asset whose main use in the course of carrying on the business is to derive rent cannot be an active asset (unless that main use was only temporary). That is, even if the asset is used in a business it will not be an active asset if its main use is to derive rent. In your situation, your property was solely used to derive rent and would not be considered to be an active asset. | Detailed Reasoning - 15-year exemption: You can disregard a capital gain from a CGT event happening to a CGT asset you have owned for at least 15 years if you: • satisfy the basic conditions for the small business CGT concessions; • continuously owned the CGT asset for the 15-year period ending just before the CGT event happened; and • when the CGT event happened • you were permanently incapacitated, or • you were 55 years old or older, and the event happened in connection with your retirement. In this case, as you don't satisfy the basic conditions, you are unable to apply to the 15-year exemption. | Detailed Reasoning - Conclusion: Your rental property activity is not considered to be a business and the property does not satisfy the active assets test under subdivision 152-A of the ITAA 1997. Therefore, you do not meet the basic requirements for the small business CGT concessions and you are not eligible to apply the 15-year exemption.