Private ruling: Small Business Rent and Depreciation
Date of advice: 18 November 2016
Published: March 2017

Ruling: Q1: Is the rent received on leasing of the farm land declared at Item 21 of the Individual Income Tax Return? | A1: Yes | Q2: Is the rent received on leasing of the farm land declared at Item 15, business income, on the individual Income Tax Return? | A2: No | Q3: Can you continue to use small business depreciation methods (ie pre-existing general pool) to calculate your depreciation claim? | A3: Yes

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 purchased farm land in 20XX and 20YY. The land was used for cattle grazing business as a sole trader. You have a current plant pool that you depreciated under the small business taxation measures. You no longer use the land for cattle grazing business. You rent the farm land to a related party at market rent. You do not have any rental agreement in place. The plant pool is not being leased out separately. It is on the farm land that is being leased

Relevant legislative provisions: Income Tax Assessment Act 1997 section 328-170 | Income Tax Assessment Act 1997 section 328-175 | Income Tax Assessment Act 1997 section 328-220 | Income Tax Assessment Act 1997 section 328-205 | Income Tax Assessment Act 1997 section 40-25

Reasons for decision: Summary: Taxation Ruling IT 2423 explains whether rental income constitutes proceeds of a business. Paragraph 5 of IT 2423 states that an individual who derives income from the rent of one or two properties would not normally constitute carrying on a business. In your case you are leasing out the farm land that you own. As you are only leasing out farm land and there are no other activities associated with running a business of leasing properties, your rental income will be passive rent income declared under Item 21 of the individual Income tax Return. Section 328-170 of the Income Tax Assessment Act 1997 (ITAA 1997) states that if you are a small business entity, you can choose to deduct amounts for most of your depreciating assets on a diminishing value basis using a pool that is treated as a single depreciating asset. You were a small business entity for the 20XX-20ZZ financial years. You are no longer using the farm land for cattle grazing business. You used the small business simplified depreciation rules for your general small business asset pool. Section 328-175 of the ITAA 1997 states for certain depreciating assets you must use the normal depreciation rules rather than the simplified depreciation rules. You cannot use the simpler depreciation rules for: ● assets you rent or lease, or are expected to be leased out, to others for more than 50% of the time on a depreciating asset lease ● assets allocated to a low-value pool ● horticultural plants, including grapevines ● in-house software where development expenditure is allocated to a software development pool ● capital works ● research and development. Section 328-220 of the ITAA 1997 states that if you are not a small business entity for an income year, you can continue to use the small business deprecation rules for your general small business pool for that year and later income years. However you cannot add depreciating assets, to the general pool, that you started to use or have installed ready to use for taxable purpose during an income year for which you are not a small business entity. You have a pre-existing asset pool under the small business depreciation rules. You are no longer in business however you are leasing the land that holds the pre-existing asset pool. Hence it is still being used for a taxable purpose. The definition of taxable purpose is set out in section 40-25 of the ITAA 1997 and is for the purpose of producing assessable income. It is not only for the purpose of producing business income. So when you lease the farm land, it is still being used for a taxable purpose (section 328-205 of the ITAA 1997). You are therefore able to keep using the small business general pool for depreciation of the plant.