Private ruling: Capital gains tax implications associated with entering a rental agreement
Published: February 2014
Ruling period: Year ending 30 June 2014 | Year ending 30 June 2015
Date scheme commenced: 1 July 2013

Ruling: Q1: Will renting out a professional practice have any capital gains tax (CGT) implications? | A1: No.

Relevant facts and circumstances: You established a professional practice several years ago. You wish to sell your practice to Entity X. You have concerns regarding Entity X's ability to maintain the practice at its' current level. You will enter into a rental agreement with Entity X for a period. Under the rental agreement: · Entity X will pay you a set amount per month (monthly rent) · the practice's assets remain yours but are utilised by Entity X · you will provide professional services, and · Entity X will control all revenues and pay all expenses of the practice. You will declare the monthly rent as revenue on your tax return. A financial incentive will not be paid to, or by, you to enter the rental agreement. You will be paid a salary for any work performed by you. At the end of the rental period, if you are satisfied with Entity X's performance you will enter into negotiations to sell the practice to them. The monthly rent will not be used to reduce the sale price.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 102-20 | Income Tax Assessment Act 1997 Section 104-5 | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 104-110

Reasons for decision: Summary: A taxpayer makes a capital gain or capital loss if and only if a CGT event happens. If a transaction or event is not a CGT event, a capital gain or loss cannot be made. Section 104-5 of the Income Tax Assessment Act 1997 provides a summary of the different CGT events which can occur. Common CGT events include: · CGT event A1 - disposal of a CGT asset, and · CGT event F1 - granting a lease You are entering into a rental agreement prior to selling your professional practice. It is considered that entering into the rental agreement does not have any CGT implications as: · you are not disposing of a CGT asset as you retain the practice's assets for the term of the agreement · you are not paying, nor will you receive, a financial incentive for entering the rental agreement, and · the other CGT events have not occurred.