Private ruling: Capital gains tax (CGT) - small business concessions - active asset
Published: October 2011
Ruling period: 1 July 2008 to 30 June 2010
Date scheme commenced: 1 July 2008

Ruling: Q1: Were your company's houses active assets according to the meaning in section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Does each of these assets satisfy the active asset test according to section 152-35 of the ITAA 1997? | A2: Yes. | Q3: Do you satisfy the basic conditions in section 152-10 of the ITAA 1997 to be eligible for the small business CGT concessions? | A3: Yes.

Relevant facts and circumstances: You operate your business in a remote area. You have a multi-faceted business with a gross turnover of less than $2 million. You commenced your business in late 20XX. You owned houses which were primarily used for your employees to stay in when they worked in the remote area. You did not charge your employees any rent because of the unique nature of the town where accommodation costs are too high. You had to bear the accommodation costs if you wanted to retain employees as most of the employers follow this practice in that remote area. You provided the details of the houses you owned - their addresses, dates of acquisition and sale, purchase and sale prices, and their dates of first use in your business. According to your understanding from the information on the ATO website, these assets are active assets but you are seeking a ruling to clarify the issue. You lodged this ruling request in September 2011. Over the telephone, you clarified that the business the houses were used in was still a continuing business. You also clarified that your houses were used 100% in your business for the time that you owned them. In a later telephone conversation, you advised or confirmed that: · you only have two directors · you did not deduct any amounts of any description from the wages/salary of your employees for their accommodation in your houses as the accommodation was free to your employees · if you didn't give your employees free accommodation in the remote area, then you didn't get anybody to go there to work for you · all the employers in the area did the same thing · neither director used any of the houses when and if they were in that remote area. You were asked what type of employee/s was/were accommodated in these houses and for how long for each employee. You responded that: · you had different types of businesses in the remote area · the employees of these businesses used the houses · it was not the situation of one employee and his family in a house but several employees shared a house at the one time · there was quite a turnover of employees so that there was considerable movement of people in and out of the houses but always several employees there at once with varying lengths of stays for each one.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 152-40. | Income Tax Assessment Act 1997 section 152-35. | Income Tax Assessment Act 1997 section 152-10.

Reasons for decision: Detailed Reasoning - Question 1 - Active asset: Subparagraph 152-40(1)(a)(i) of the ITAA 1997 states that a CGT asset is an active asset if you own the asset and it is used, or held ready for use, in the course of carrying on a business that is carried on by you. Paragraph 152-40(4)(e) of the ITAA 1997 states that a CGT asset whose main use by you is to derive interest, an annuity, rent, royalties or foreign exchange gains cannot be an active asset unless certain conditions are met. | Detailed Reasoning - Application to your circumstances: You operate businesses in a remote area where you owned houses which you used in your businesses to provide accommodation for your employees. This accommodation was free to your employees as you neither deducted any amounts of any description from the wages/salary of your employees nor charged your employees any rent for staying in these assets. You had to bear these accommodation costs if you wanted to retain employees as most of the employers in that remote area follow this practice and if you didn't give your employees free accommodation then you didn't get anybody to go there to work for you. As the houses were used in your businesses and were not used to derive any rent, then the houses were active assets for you according to section 152-40 of the ITAA 1997. | Detailed Reasoning - Question 2 - Active asset test: Section 152-35 of the ITAA 1997 states that a CGT asset satisfies the active asset test if you owned the asset for 15 years or less and the asset was an active asset of yours for a total of at least half of the period from when you acquired the asset until, in the case of a continuing business, the CGT event. | Detailed Reasoning - Application to your circumstances: You provided acquisition and sale details for each of your houses in the remote area which showed each house was owned by you for less than 15 years. You commenced business use of each of these assets on the day you acquired each one of them. You used the houses 100% in your business until you sold them. Therefore, each house satisfies the active asset test in section 152-35 of the ITAA 1997. | Detailed Reasoning - Question 3 - Small business CGT concessions basic conditions: Section 152-10 of the ITAA 1997 contains the basic conditions you must satisfy to be eligible for the small business CGT concessions. According to this section, you satisfy the basic conditions if you are a small business entity for the income year in which a gain producing CGT event happens to your CGT asset and that asset satisfies the active asset test. There are other situations in which a taxpayer may satisfy the basic conditions and there are additional basic conditions if your asset consists of shares in a company or interests in a trust. | Detailed Reasoning - Application to your circumstances: You stated that you carried on businesses in the remote area from late 20XX until the present day and that you have a gross/aggregated turnover of less than $2 million. Therefore you are a small business entity. Your assets were houses and each of these houses satisfies the active asset test - see the reasoning for question two above. As your assets did not consist of shares in a company or interests in a trust, you have satisfied the basic conditions that are applicable to you. Therefore you have satisfied the basic conditions to be eligible for the small business CGT concessions. | Detailed Reasoning - Note:: In addition to the basic conditions in section 152-10 of the ITAA 1997, some of the concessions have extra conditions that must be satisfied for the concession to be available. These extra conditions have not been considered here. The only concession that does not have extra conditions is the small business 50% active asset reduction concession.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.