Private ruling: CGT - small business concessions
Published: October 2013
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Is your property an active asset? | A1: Yes. | Q2: Are you eligible for the 50% active asset small business concession? | A2: Yes.

Relevant facts and circumstances: You purchased units on the Month 20XX which are all on the same title deed. The original intention was to use all of the units in the course of running the business. Half of the units are rented through a local real estate agent. The remaining units are held ready to use as accommodation for workers in the business. These units were used solely in the business and were not available for external rent. These units have been used in the business since the Month 20XX when they were purchased. The property was sold on the Month 20XX. You are a small business entity.

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).

Reasons for decision: Detailed Reasoning - Basic Conditions: A capital gain that you make may be reduced or disregarded under Division 152 of the 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. | Detailed Reasoning - Active Asset: The active asset test is contained in section 152-35 of the ITAA 1997. Where you have owned the asset for less than 15 years, the active asset test is satisfied if the asset was an active asset of yours for at least half of the test period detailed below. The test period: · begins when you acquired the asset, and · ends at the earlier of o the CGT event, and o when the business ceased, if the business in question ceased in the 12 months before the CGT event (or such longer time as the Commissioner allows). 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. Taxation Determination TD 2006/78 states (paragraph 22) that whether an assets main use is to derive rent will depend on the particular circumstances surrounding the derivation of income. Example 5 in Taxation Determination 2006/78 deals with assets with mixed use: Mick owns land on which there are a number of industrial sheds. He uses one shed (45% of the land by area) to conduct a motor cycle repair business. He leases the other sheds (55% of the land by area) to unrelated third parties. The income derived from the motor cycle repair business is 80% of the total income (business plus rentals) derived from the use of the land and buildings. 16. In determining if the main use of the land is to derive rent, it is appropriate to consider a range of factors. In this case, a substantial (although nevertheless not a majority) proportion by area of the land is used for business purposes. As well, the business proportion of the land derives the vast majority (80%) of the total income. In all the circumstances, the Tax Office considers the main use of the land in this case is not to derive rent and accordingly the land is not excluded from being an active asset by paragraph 152-40(4)(e) of the ITAA 1997 . In your case, we accept that the main use of the property was to be used in the course of carrying on a business and not to derive rent. Therefore, the exclusion under subsection 152-40(4) of the ITAA 1997 does not apply. As the property was also an active asset of yours for more than half of the test period the property is considered to be an active asset. | Detailed Reasoning - Small business 50% active asset reduction: To apply the small business 50% active asset reduction, you only need to satisfy the basic conditions. There are no further requirements. As you are a small business entity, a CGT event occurred when you sold the property, the event resulted in a capital gain and the asset is active you satisfy the basic conditions. Therefore, any capital gain from the sale of the property that remains after applying any current year capital losses, any unapplied prior year net capital losses, and the CGT discount (if applicable), is reduced by 50%.