Private ruling: CGT - small business concessions
Published: September 2013
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Is the partnership a small business entity? | A1: No. | Q2: Are the individual partners eligible for the small business retirement exemption on the disposal of the property? | A2: No.

Relevant facts and circumstances: The partnership owns commercial property. The partnership has a turnover of less than $2 million. The partnership originally self-managed the leasing of the commercial property. Due to the health of the partners the leasing of the premises is now managed by an agent. The partners are contemplating retirement. The leasing of the property is the only income derived by the partnership.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 152. | Income Tax Assessment Act 1997 Section 152-10. | Income Tax Assessment Act 1997 Section 152-35. | Income Tax Assessment Act 1997 Paragraph 152-40(4)(e). | Income Tax Assessment Act 1997 Section 328-110. | Income Tax Assessment Act 1997 Section 995-1.

Reasons for decision: Detailed Reasoning - Basic Conditions: A capital gain that you make may be reduced or disregarded under Division 152 Income Tax Assessment Act 1997 (ITAA 1997) if the following basic conditions are satisfied: · a CGT event 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; o you are a small business entity for the income year o you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997 o 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 o 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. · the CGT asset satisfies the active asset test | Detailed Reasoning - Small business entity: Section 328-110 of the ITAA1997 provides that you will be a small business entity if you are an individual, partnership, company or trust that: · is carrying on a business, and · has less than $2 million aggregated turnover. Aggregated turnover is your annual turnover plus the annual turnovers of any businesses that are connected with you or that are your affiliates. Section 995-1 of the ITAA 1997 defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'. Normally the receipt of income from the letting of property to a tenant does not amount to the carrying on of a business ( Wertman v. Minister of National Revenue (1964) 64 DTC 5158; Federal Commissioner of Taxation v. McDonald (1987) 15 FCR 172; 87 ATC 4541; 18 ATR 957; Cripps v. FC of T 99 ATC 2428; Case X48 90 ATC 384; (1990) 21 ATR 3389). A person, who simply owns an investment property or several investment properties, either alone or with other co-owners, is usually regarded as an investor who is 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. A conclusion that an individual is carrying on a business of letting property would depend largely upon the scale of operations. Taxation Ruling TR 97/11 incorporates the general factors that are considered important in determining the question of whether a business activity is being carried on: · whether the activity has a significant commercial purpose or character · whether the taxpayer has more than just an intention to engage in business · whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity · whether there is regularity and repetition of the activity · whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business · whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit · the size, scale and permanency of the activity, and · whether the activity is better described as a hobby, a form of recreation or sporting activity. TR 97/11 states the indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the large or general impression gained from looking at all the indicators, and whether these factors provide the operations with a commercial flavour. However, the weighting to be given to each indicator may vary from case to case. In your case, the leasing of one commercial property, that is currently managed by an agent is not considered to be carrying on a business. The activity would be better described as leasing property to receive passive income from a stream of rental income. The income is not derived from the services provided; it is derived from the letting of the properties and is considered to be passive income. We do not consider that the partnership was carrying on a rental property business. | Detailed Reasoning - Active Asset: A CGT asset is an active asset at a given time if, at that time you own it and it is used (or held ready for use) in the course of carrying on a business by you, a small business CGT affiliate of yours or an entity connected with you. Certain assets are, however, excluded from being active assets under subsection 152-40(4) of the ITAA 1997. An asset whose main use is to derive rent (unless such use was only temporary) is excluded from being an active asset. Such assets are excluded even if they are used in the course of carrying on a business. Example 1 in Taxation Determination TD 2006/78 deals with commercial 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. In this case, even if the partnership were carrying on a business of leasing commercial property the main or only use of the commercial property is to derive rent. Therefore, the property is excluded from being an active asset under paragraph 152-40(4)(e) of the ITAA 1997. As the partnership does not meet the basic conditions set out in section 152-10 of the ITAA 1997 the partners are not entitled to the small business retirement exemption.