Private ruling: Capital gains tax concessions for small business
Published: August 2012
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2011

Ruling: Q1: Can the company apply the 15 year exemption in Subdivision 152-B of the Income Tax Assessment Act 1997 (ITAA 1997) to any capital gain made on the sale of the residential property? | A1: No. | Q2: Can the company apply the retirement exemption in Subdivision 152-D of the ITAA 1997 to any capital gain made on the sale of the residential property? | A2: No. | Q3: If an amount disregarded under the retirement exemption is rolled into the relevant individual's superannuation funds, does income tax apply when the amount is paid into the fund? | A3: As the company does not qualify for the small business concessions, this question has not been considered.

Relevant facts and circumstances: The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are: · the private ruling application · the floor plan and photographs of the property, and · the information provided in response to a request for further information. The company is owned by 2 individuals. The individuals have an equal shareholding in the company. The company owns a residential property. The company uses the house both to run the business and earn rental income. Market rent has always been paid for the part of the home that is rented out. Parts of the property are used exclusively for rental purposes. Parts of the property are used exclusively for business purposes. Other parts of the property are used for both purposes. Clients visit the property at times. The company earns less money per annum from rent than from its business activities. The company has an office at a separate location. The individuals also work at the alternate office. This is variable and relative to workloads or client requests. The company is a small business entity for the purpose of the small business capital gains tax concessions.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 152-A, | Income Tax Assessment Act 1997 section 152-35, | Income Tax Assessment Act 1997 subsection 152-40(1), and | Income Tax Assessment Act 1997 paragraph 152-40(4)(e).

Reasons for decision: Summary: To access the small business capital gains tax (CGT) concessions in Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997), an entity must first satisfy the basic conditions in Subdivision 152-A of the ITAA 1997. One of the basic conditions requires the relevant CGT asset to satisfy the active asset test in section 152-35 of the ITAA 1997. The meaning of an active asset is provided in subsection 152-40(1) of the ITAA 1997, which states: (1) A CGT asset is an active asset at a time if, at that time: (a) you own the asset (whether the asset is tangible or intangible) and it is used, or held ready for use, in the course of carrying on a business that is carried on (whether alone or in partnership) by: (i) you; or (ii) your affiliate; or (iii) another entity that is connected with you; or (b) if the asset is an intangible asset - you own it and it is inherently connected with a business that is carried on (whether alone or in partnership) by you, your affiliate, or another entity that is connected with you. However, paragraph 152-40(4)(e) of the ITAA 1997 states that an asset whose main use is to derive rent is specifically excluded from being an active asset, unless deriving rent was only temporarily the main use of the asset. Whether an asset's main use is to derive rent will depend upon the particular circumstances of each case. The question of main use can incorporate a number of different factors, such as: · The comparative times of use of the property (between rental and business); · The comparative areas of use of the property (between rental and business); and · The comparative income/revenue derived from the different uses of the property. | Detailed Reasoning - The comparative times of use of the property: The property was rented out from the time of purchase. The residential property has been used in the business for the same period that it was rented out. Therefore it is considered that this factor will not be determinative in deciding if the property was mainly used for rental or business. | Detailed Reasoning - The comparative income/revenue derived from the different uses of the property: While the rental income earned on the rental area of the residential property can be determined, the same cannot be said for the area of the property used in the business. This is because the company has other premises that it operates from. The income earned by the business relates to two properties used by the company. As the properties were used in a single business the individual amounts cannot be separated into the amounts applicable to each property. Therefore, this method would not provide a proper comparison as to the income/revenue generated by the different uses of the property. | Detailed Reasoning - The comparative areas of use of the property: Having regard to all the parts of the property and whether they are used for rental, business or both purposes, we consider that more than half of the property is used to produce rental income. Therefore, the main use of the property is in respect to the rental income and not the business income. | Detailed Reasoning - Application to your circumstances: In this instance neither the comparative times of use of the property nor the comparative income/revenue derived from the different uses provides a definitive answer to the question of whether the property was excluded from being an active asset because the main use was to derive rent. However, the comparative areas of use of the property indicate that the main use of the property is to derive rental income. As the main use of the property was to derive rental income, the property is excluded from being an active asset under paragraph 152-40(4)(e) of the ITAA 1997. As the property does not satisfy the active asset test, the company does not satisfy the basic conditions and is therefore not eligible to access the small business 15 year exemption. | Detailed Reasoning - Question 2: As the company does not satisfy the basic conditions, it is not entitled to apply the retirement exemption. | Detailed Reasoning - Question 3: As the company does not satisfy the basic conditions and is not entitled to the retirement exemption, this question has not been considered.

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