Private ruling: CGT - small business concessions
Date of advice: 16 September 2025
Published: 10 November 2025
Ruling period: Income year ending 30 June 20XX | Income year ending 30 June 20XX | Income year ending 30 June 20XX

Ruling: Q1: Will the basic conditions in Subdivision 152-A of the Income Tax Assessment Act 1997 (ITAA 1997) be satisfied for any capital gain arising for ABC Co (ABC) from the disposal of the post-CGT portion of the Property? | A1: Yes. | Q2: To the extent the payment from ABC to Person X relates to the capital gain realised for the disposal of the pre-CGT portion of the Property and is equal to or less than the limit mentioned in subsection 152-125(2) of the ITAA 1997, will the Income Tax Assessment Act apply to the payment as if it were not a dividend and a frankable distribution pursuant to subsection 152-125(3) of the ITAA 1997? | A2: Yes. | Q3: To the extent the payments from ABC to Person Y (directly and via the Y Trust) relate to the capital gain realised for the disposal of the pre-CGT portion of the Property and are equal to or less than the limit mentioned in subsection 152-125(2) of the ITAA 1997, will the Income Tax Assessment Act apply to the payments as if they were not a dividend and a frankable distribution pursuant to subsection 152-125(3) of the ITAA 1997? | A3: Yes.

Relevant facts and circumstances: 1. ABC was incorporated in the 19XXs for the purpose of acquiring the Property. 2. Since incorporation, ABC has owned X properties: (a) the Property was purchased in the 19XX's and financed XX% each by the X and Y families; and (b) Property B was purchased prior to 20 September 1985, comprised of X residential apartments and used solely for residential rent. 3. The Commissioner issued a private ruling to ABC in 20XX confirming that the Property remains a pre-CGT asset. ABC's shareholding history 4. At all relevant times since shortly after ABC was incorporated, its shareholding has consisted of XX ordinary shares that carry rights to income, capital (including any surplus) and voting rights on a proportionate basis. 5. The original shareholders of ABC were comprised of X individuals, spread across the X family and the Y family, none of whom held more than XX.XX% of the issued share capital in ABC. 6. Person X's parent and Person Y's parent were siblings. Representatives of the X family collectively held 50% of the issued share capital in ABC, and representatives of the Y family collectively held the other 50% of the issued share capital. 7. There have been various changes to ABC's shareholding since its incorporation. These shareholding changes have been largely the result of the original shareholders passing away. 8. Since the early 19XX's, at least one individual from the X or Y families has held a minimum of 25% of the issued share capital in ABC at all times. 9. The table below sets out the shareholdings in ABC since 20XX: Table 1: Shareholdings in ABC since 20XX Shareholder Ordinary Shares in ABC Percentage Person X X XX.XX% Person Y X X.XX% Y Trust X XX.XX% Total XX 100.00% 10. Consistent with ABC's initial shareholding, 50% of the issued share capital is still held (and has always been held) by representatives of the X family, and 50% of the issued share capital is still held (and has always been held) by representatives of the Y family. 11. The Y Trust is a testamentary trust established pursuant to Person Y's parent's Will to hold their residuary estate which, at the time of their death, included X ordinary shares in ABC. 12. The terms of that Will provided that the trustee of the Y Trust must pay the annual income of the trust to Person Y, and all of the income of the Y Trust has been distributed to Person Y to date (as required). 13. Since 20XX the ABC directors have been Person X and Person Y. Acquisition and Historical Use of the Property 14. When the Property was purchased, it comprised of: • X retail shops on the ground level; and • a licenced boarding house on level 1 and level 2 (Boarding House). 15. ABC has leased the X retails shops on the ground floor of the Property to various commercial tenants from the 19XXs. 16. In relation to the first and second floors of the Property during the period 19XX to 19XX: • ABC operated them as a Boarding House; • they were registered as a licensed boarding house with the local Council; • the Boarding House consisted of a number of bedrooms, bathrooms (including shared bathrooms), shared kitchen, shared laundry, and other shared areas; • the bedrooms were furnished and included XX and XX; • ABC did not have any employees and the affairs of ABC were managed by its directors at the time; and • members of the X and Y families were involved in the operation of the Boarding House. For example: ­ as rooms became vacant they would purchase XX and XX for future boarders; and ­ being onsite to talk to the boarders of the Boarding House regarding any problems that needed attending to (for instance, reporting any issues in the common areas that needed fixing). 17. From 19XX until 20XX the first and second floors of the Property continued to be used for the Boarding House in the same manner as it had previously and members of the Y and X families continued to be involved in the management of the Property. 18. From 20XX until 20XX, the rooms were rented on the terms of an exclusive possession rental agreement under the Residential Tenancies Act 2010 (NSW) and its predecessors. Significant Renovations 19. During 20XX, the local Council issued a fire compliance notice which required ABC to undertake certain major fire upgrades of the building on the Property. 20. Following receipt of the notice, the directors of ABC (Person X and Person Y) appointed a project manager and an architect to prepare and submit a development application (DA) to the local Council. 21. In addition, Person X and Person Y (and their spouses) attended various pre-DA meetings at the local Council Chambers and met with the project manager and architect in respect of the necessary steps required to: • complete the necessary major fire upgrades for the existing building; • convert the Boarding House from XX rooms (with a shared kitchen) to XX self-contained boarding house rooms (each with their own kitchenette and bathroom) with a common room; and • include one of the rooms as a manager's residence. 22. Once the majority of the renovations had been completed, Person X and Person Y (and their spouses) selected the furniture and appliances for the Boarding House. 23. The significant fire upgrades and renovations: • commenced in 20XX and were completed in or around early 20XX; • cost approximately $X million, financed from money borrowed from the bank; and • constitute a capital improvement to a CGT asset acquired before 20 September 1985 and are taken to be a separate CGT asset under section 108-70 of the ITAA 1997 (referred to as the 'post-CGT portion of the Property' for the purposes of this ruling). [1] 24. Since the required renovations were completed in 20XX, the top 2 floors of the property have operated as a boarding house business and the rooms have been rented using occupancy agreements under the Boarding Houses Act 2012 (BHA). 25. In or around early 20XX, ABC appointed a resident manager to assist with the day-to-day operations of the Boarding House (including the provision of cleaning and managerial services). The manager is employed by ABC and resides in one of the rooms in the Boarding House (so that they can be available to address any issues or special requests from the boarders). 26. In or around XXX 20XX, a registered agent replaced the existing agents to assist with managing and operating the renovated Boarding House (e.g. assist with intake of boarders into the Boarding House and the collection of fees). In or around XXX 20XX, the registered agent was also appointed to manage the shops. Prior to that time, the shops were managed by Person X and Person Y. 27. Following the completion of the renovations in 20XX, Person X and Person Y managed the Boarding House with the assistance of the resident manager and a registered agent. Current Use of the Property 28. The approximate size of the Property building is XXX square meters, comprised of the following: • Ground floor - approximately XX%; and • the Boarding House - approximately XX%. 29. The layout of the Boarding House currently consists of: • XX self-contained rooms (each with their own kitchenette and bathroom); • one of the self-contained rooms is set aside for the on-site resident manager; • a number of rooms are furnished by ABC; • all rooms are provided with a fridge and a convection microwave oven; • there is a shared common room which is fully furnished for the residents of the Boarding House to use (e.g. including table, chairs and sofas); • there is a shared balcony space; and • there is also a shared laundry which includes washing machines and dryers provided under an agreement between ABC and a third-party provider for residents' use. 30. ABC is responsible for paying for the water and electricity consumed in the entire Boarding House, including usage of the boarders in the individual rooms. 31. As mentioned, there is also a full-time on-site resident manager employed by ABC who provides day-to-day operational and managerial services to boarders. 32. ABC also provides and pays for weekly cleaning and maintenance services for all of the shared areas (including the common room, laundry, balcony space and corridors) for the residents' use. The furniture in the shared spaces is also cleaned and maintained (e.g. tables, chairs and sofas) on a regular basis. Representatives of ABC (e.g. cleaners and third-party tradespeople) access the Boarding House from time to time to attend to cleaning, repairs and maintenance. In addition, ABC also provides some bathroom towels for the residents' use. 33. The Boarding House remains a licensed boarding house that is registered with the local Council. 34. Since 20XX, the Boarding House has been registered under the BHA as a 'registrable boarding house', and the Fair Trading Boarding House Register sets out that the Boarding House is a 'General Registrable Boarding House'. 35. All boarders enter into an Occupancy Agreement as required by the BHA. Unlike lease agreements under the Residential Tenancies Act 2010 and in accordance with the Occupancy Principles of the BHA, boarders of the Boarding House do not have the right to exclusive possession of the premises, as ABC retains control over the premises. ABC's current activities and turnover 36. The main activities of ABC currently consist of: • operating the Boarding House business; and • leasing the retail shops on the Property. 37. ABC's total annual turnover for the year ended 30 June 20XX and for the year ended 30 June 20XXwas less than $X million. 38. The income generated by each aspect of the Property for the income year ended 30 June 20XX is summarised in the following table: Table 2: Income generated by each aspect of the property Aspect of the Property Gross Income Percentage Retail shops Annual rent: $XX plus GST X% Boarding House Annual revenue: $XX X% Total $XX plus GST 100% 39. It is estimated that the breakdown between the Boarding House and commercial revenue for the year ended 30 June 20XX is around: • retail: $XX (X%); and • Boarding House: $XX (X%). Related entities 40. Person X and the Y Trust both hold more than XX% of the ordinary shares in ABC. Thus, they are both 'connected with' ABC in accordance section 328-125 of the ITAA 1997. 41. ABC does not have any affiliates in accordance with section 328-130 of the ITAA 1997. 42. There are no other entities that are 'connected with' either Person X, Person Y or the Y Trust in accordance with section 328-125 of the ITAA 1997. 43. Neither Person X, Person Y nor the Y Trust carry on a business in their personal capacity. Proposed sale of the Property 44. As at the date of this ruling, Person X and Person Y are both in their XXs. Given their ages, and their desire to retire, the Y and X families intend to sell both the Property and Property B. 45. Property B was disposed of by ABC in 20XX. 46. The contract for sale of the Property is expected to be executed in the 20XX income year. 47. Within X years of its entry into a contract for sale of the Property, ABC proposes to make payments relating to any 'exempt amount' under subsection 152-125(1) of the ITAA 1997 to each of its shareholders in proportion to their shareholdings in the company. That is, a payment of an amount equal to: • XX% of the exempt amount to Person X; • X% of the exempt amount to Person Y (directly); and • X% of the exempt amount to the trustees of the Y Trust who will distribute it as income to Person Y in the relevant income year. 48. In the event that the settlement period in respect of the sale of the Property is longer than X years, ABC proposes to make these payments by way of issuing a promissory note to each shareholder within X months of its entry into the contract for sale. These promissory notes: • will be issued in accordance with Part IV of the Bills of Exchange Act 1909 , and recorded as a liability in ABC's accounts; and • will entitle its holder to demand a sum of money from ABC (the issuer). 49. Following the sale of the Property, ABC will cease to conduct any active business operations. Assumptions 50. Y Trust is a fixed trust. Person Y is to receive 100% of any distribution of income by the Y Trust during their lifetime. 51. ABC's annual turnover will be less than $X million for the 20XX, 20XX and 20XX income years. 52. There will be no change to the majority underlying interests in ABC between the date of the ruling and just before the sale of the Property. 53. The holder of any promissory note issued by ABC will demand, and be paid, the amount subject of the promissory note by ABC shortly after settlement.

Relevant legislative provisions: Income Tax Assessment Act 1936 former section 160ZZS | Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 subsection 104-10(1) | Income Tax Assessment Act 1997 paragraph 104-10(5)(a) | Income Tax Assessment Act 1997 section 108-70 | Income Tax Assessment Act 1997 section 109-10 | Income Tax Assessment Act 1997 Subdivision 149-B | Income Tax Assessment Act 1997 Division 152 | Income Tax Assessment Act 1997 Subdivision 152-A | Income Tax Assessment Act 1997 subsection 152-10(1) | Income Tax Assessment Act 1997 paragraph 152-10(1)(a) | Income Tax Assessment Act 1997 paragraph 152-10(1)(b) | Income Tax Assessment Act 1997 paragraph 152-10(1)(c) | Income Tax Assessment Act 1997 subparagraph 152-10(1)(c)(i) | Income Tax Assessment Act 1997 subparagraph 152-10(1)(c)(ii) | Income Tax Assessment Act 1997 subparagraph 152-10(1)(c)(iii) | Income Tax Assessment Act 1997 subparagraph 152-10(1)(c)(iv) | Income Tax Assessment Act 1997 paragraph 152-10(1)(d) | Income Tax Assessment Act 1997 subsection 152-10(1AA) | Income Tax Assessment Act 1997 section 152-35 | Income Tax Assessment Act 1997 subsection 152-35(2) | Income Tax Assessment Act 1997 section 152-40 | Income Tax Assessment Act 1997 paragraph 152-40(1)(a) | Income Tax Assessment Act 1997 subsection 152-40(4) | Income Tax Assessment Act 1997 paragraph 152-40(4)(e) | Income Tax Assessment Act 1997 section 152-55 | Income Tax Assessment Act 1997 section 152-60 | Income Tax Assessment Act 1997 section 152-65 | Income Tax Assessment Act 1997 section 152-110 | Income Tax Assessment Act 1997 subsection 152-110(1) | Income Tax Assessment Act 1997 paragraph 152-110(1)(a) | Income Tax Assessment Act 1997 paragraph 152-110(1)(b) | Income Tax Assessment Act 1997 paragraph 152-110(1)(c) | Income Tax Assessment Act 1997 paragraph 152-110(1)(d) | Income Tax Assessment Act 1997 section 152-125 | Income Tax Assessment Act 1997 subsection 152-125(1) | Income Tax Assessment Act 1997 paragraph 152-125(1)(a) | Income Tax Assessment Act 1997 subparagraph 152-125(1)(a)(iii) | Income Tax Assessment Act 1997 paragraph 152-125(1)(b) | Income Tax Assessment Act 1997 paragraph 152-125(1)(c) | Income Tax Assessment Act 1997 subsection 152-125(2) | Income Tax Assessment Act 1997 subsection 152-125(3) | Income Tax Assessment Act 1997 section 328-110 | Income Tax Assessment Act 1997 subparagraph 328-110(1)(b)(i) | Income Tax Assessment Act 1997 subparagraph 328-110(1)(b)(ii) | Income Tax Assessment Act 1997 subsection 328-110(3) | Income Tax Assessment Act 1997 subsection 328-110(4) | Income Tax Assessment Act 1997 subsection 328-115(1) | Income Tax Assessment Act 1997 subsection 328-120(1) | Income Tax Assessment Act 1997 section 328-125 | Income Tax Assessment Act 1997 subsection 328-125(1) | Income Tax Assessment Act 1997 subsection 328-125(2) | Income Tax Assessment Act 1997 subparagraph 328-125(2)(a)(i) | Income Tax Assessment Act 1997 paragraph 328-125(2)(b) | Income Tax Assessment Act 1997 subsection 328-125(7) | Income Tax Assessment Act 1997 section 328-130

Reasons for decision: Summary: The basic conditions in Subdivision 152-A will be satisfied for any capital gain arising for ABC from the disposal of the post-CGT portion of the Property. | Detailed Reasoning - Detailed reasoning: An entity may choose to apply the small business relief set out in Division 152 to reduce or disregard a capital gain if the basic conditions set out in Subdivision 152-A are satisfied for the capital gain. The basic conditions for relief in relation to a capital gain made from a CGT event happening to CGT assets that aren't shares in a company or interests in a trust are contained in subsection 152-10(1) as follows: (a) a CGT event happens in relation to a CGT asset of yours in an income year; (b) the event would (apart from this Division) have resulted in the gain; (c) at least one of the following applies: (i) you are a CGT small business entity for the income year; (ii) you satisfy the maximum net asset value test (see section 152-15); (iii) you are a partner in a partnership that is a CGT small business entity for the income year and the CGT asset is an interest in an asset of the partnership; (iv) the conditions mentioned in subsection (1A) or (1B) are satisfied in relation to the CGT asset in the income year; (d) the CGT asset satisfies the active asset test (see section 152-35). | Detailed Reasoning - Paragraphs 152-10(1)(a) and (b): Under subsection 104-10(1), CGT event A1 happens if a CGT asset is disposed of. The event happens when a contract for disposal is entered into or, if there is no contract, when the change of ownership occurs. ABC proposes to sell the Property in the near future. A sale contract is intended to be entered into. CGT event A1 will happen when ABC enters into the sale contract (in respect of both the pre-CGT and the post-CGT portion of the Property). The event that happens in relation to the post-CGT portion of the Property will (apart from Division 152) result in a capital gain for ABC in the income year the sale contract is entered into. Consequently, the first 2 basic conditions in paragraphs 152-10(1)(a) and (b) will be satisfied. | Detailed Reasoning - Paragraph 152-10(1)(c): None of subparagraphs 152-10(1)(c)(ii), (iii) or (iv) apply to ABC. For the purposes of subparagraph 152-10(1)(c)(i), ABC is required to be a CGT small business entity. A 'CGT small business entity' for an income year is defined in subsection 152-10(1AA) to mean an entity which: • is a small business entity for the income year; and • would be a small business entity for the income year if each reference in section 328-110 to $10 million were a reference to $2 million. Section 328-110 defines a 'small business entity' for an income year as an entity that carries on a business in that year and: • both carried on a business in the previous income year and had an aggregated turnover for that year of less than $10 million (subparagraph 328-110(1)(b)(i)); or • its aggregated turnover for the current year is likely to be less than $10 million and, where it carried on a business in each of the 2 previous income years, the aggregated turnover for each of those income years was less than $10 million (subparagraph 328-110(1)(b)(ii) and subsection 328-110(3)); or • its aggregated turnover for the current year, worked out as at the end of the year, is less than $10 million (subsection 328-110(4)). Taxation Ruling TR 2019/1 Income tax: when does a company carry on a business? (TR 2019/1) provides guidance on when a company carries on a business, including within the meaning of section 328-110. Subject to rebuttal if it can be shown on the facts that the company had no aim or prospect of making a profit, it cites Westleigh and American Leaf [2] as authority for the presumption that companies are formed for the purpose of carrying on a business where they aim to make, and have a prospect of, profit. This means any gainful use to which a company puts its assets will, on its face, amount to the carrying on of a business. ABC is operating a boarding house business for reasons which include: • the Boarding House has at all relevant times been licenced by (and registered with) the local Council as a boarding house, inspected annually by the local Council as a boarding house and (since the enactment of the BHA) registered as a boarding house with Fair Trading Boarding House Register; • all boarders enter into an Occupancy Agreement as required by the BHA; • ABC invested approximately $X million and undertook significant fire upgrades and renovations to ensure the Boarding House's compliance with council requirements, and converted the Boarding House from XX rooms (with a shared kitchen) to XX self-contained boarding house rooms (each with their own kitchenette, bathroom) with a common room; • ABC employs a resident manager to assist with day-to-day operations of the Boarding House and includes one of the rooms as the manager's residence; and • on the facts, ABC both aims to make, and has a prospect of making, profit. Pursuant to subsection 328-115(1), your 'aggregated turnover' for an income year is the sum of the relevant annual turnovers. The 'relevant annual turnovers' are your annual turnover for the income year plus the annual turnovers of any connected or affiliated entities of yours during the income year. An entity's aggregated turnover is the same as its annual turnover if there are no other entities connected with or affiliated with it. Subsection 328-125(1) states: An entity is connected with another entity if: (a) either entity controls the other in a way described in this section; or (b) both entities are controlled in a way described in this section by the same third entity. In relation to entities other than discretionary trusts, the relevant control test is set out in subsection 328-125(2). It provides: An entity ( the first entity ) controls another entity if the first entity, its affiliates, or the first entity together with its affiliates: (a) except if the other entity is a discretionary trust - own, or have the right to acquire the ownership of, interests in the other entity that carry between them the right to receive a percentage (the control percentage ) that is at least 40% of: (i) any distribution of income by the other entity; or (ii) if the other entity is a partnership - the net income of the partnership; or (iii) any distribution of capital by the other entity; or (b) if the other entity is a company - own, or have the right to acquire the ownership of, equity interests in the company that carry between them the right to exercise, or control the exercise of, a percentage (the control percentage ) that is at least 40% of the voting power in the company. Subsection 328-125(7) provides that section 325-125 applies to an entity (the first entity) that directly controls another entity (the second entity) as if the first entity also controlled any other entity that is controlled by the second entity (by application of section 328-125). Person X and the Y Trust each hold more than X% of the ordinary shares in ABC and therefore control ABC pursuant to paragraph 328-125(2)(b) and are connected with ABC. As Person Y has the right to receive 100% of any distribution of income by the Y Trust (a fixed trust) during their lifetime, they are entitled to receive more than XX% of any income distribution by the trust and controls it pursuant to subparagraph 328-125(2)(a)(i). As Person Y directly controls the Y Trust and the Y Trust directly controls ABC, section 328-125 applies to Person Y as if they control ABC pursuant to subsection 328-125(7). As such, ABC is an entity that is 'connected with' Person Y (as well as with Person X and the Y Trust). As ABC does not have any affiliates under section 328-130 and there are noother entities that are controlled by either Person X, Person Y or the Y Trust, the relevant annual turnover for ABC consists of the annual turnovers of ABC, the Y Trust, Person X and Person Y. Subsection 328-120(1) provides that an entity's 'annual turnover' for an income year is the total ordinary income that the entity derives in the income year in the ordinary course of carrying on a business. 'Ordinary income' is defined in section 6-5 as income according to ordinary concepts. An entity's annual turnover therefore includes all income according to ordinary concepts derived in the ordinary course of carrying on a business. Given Person X, Person Y and the Y Trust do not carry on a business, their annual turnover for an income year would be nil. It is assumed for the purposes of this ruling that ABC's annual turnover will be less than $X million for the 20XX, 20XX and 20XX income years. On that basis, ABC's aggregated turnover for those years will also be less than $X million. ABC will therefore satisfy the definition of a CGT small business entity under subsection 152-10(1AA) for the relevant income year and the third basic condition in subparagraph 152-10(1)(c)(i) will be satisfied. | Detailed Reasoning - Paragraph 152-10(1)(d): For the purposes of paragraph 152-10(1)(d), a CGT asset satisfies the active asset test in section 152-35 if: • you have 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 test period detailed below; or • you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of at least 7.5 years during the test period. The test period (set out in subsection 152-35(2)) for these purposes begins when you acquired the asset and ends at the earlier of the CGT event or the cessation of the business. Subject to the application of any exception under subsection 152-40(4), a CGT asset that is real property is an 'active asset' at a time pursuant to paragraph 152-40(1)(a) if, at that time, 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 (whether alone or in partnership) by you, your affiliate or an entity connected with you. The pre and post-CGT interests in the Property are each a separate CGT asset owned by ABC and used in the course of carrying on a boarding house business carried on by ABC. The pre and post-CGT interests in the Property are therefore active assets pursuant to paragraph 152-40(1)(a), subject to any exception under subsection 152-40(4). Relevantly, the exception in paragraph 152-40(4)(e) provides that an asset whose main use by you is to derive rent cannot be an active asset. Whether the Property is an active asset under section 152-40 will therefore depend on whether it is mainly used to derive rent. In Taxation Determination TD 2006/78 Income tax: capital gains: are there any circumstances in which the premises used in a business of providing accommodation for reward may satisfy the active asset test in section 152-35 of the Income Tax Assessment Act 1997 notwithstanding the exclusion in paragraph 152-40(4)(e) of the Income Tax Assessment Act 1997 for assets whose main use is to derive rent? (TD 2006/78) the Commissioner explains that in certain circumstances the premises used in a business of providing accommodation for reward will satisfy the active asset test in section 152-35 notwithstanding the exclusion in paragraph 152-40(4)(e) for assets whose main use is to derive rent. As discussed in TD 2006/78, a key issue in determining whether premises are being mainly used to derive rent is whether the occupants have the right to exclusive possession under the terms of their occupation. Where this is the case the payment for their occupation is likely to be rent and the premises will not be an active asset. Where the terms of their occupation of the premise only allow them to enter and use the premises for certain purposes without granting exclusive possession, payments for this access are unlikely to be rent. Other factors taken into account in deciding if the premises are mainly used to derive rent include the degree of control retained by the owner and the extent to which the fees they charge are for the services they provide (such as room cleaning, provision of meals, supply of linen, and shared amenities). Relevantly, Example 3 in TD 2006/78 outlines a situation in which a property operates as a boarding house and is considered to be an active asset: | Detailed Reasoning - Example 3: boarding house: 8. David owns an 8 bedroom property which he operates as a boarding house. He resides on the premises. Boarders enter into arrangements to occupy single rooms with the average length of stay being 4-6 weeks. No notice is required to quit the rooms. There are rules requiring visitors to leave the premises by a certain time and David retains the right to enter the rooms. David pays for all utilities (gas, electricity, water) and provides the following services and facilities to boarders: • room cleaning and general maintenance; • linen and towels; and • common areas such as a TV/lounge room, kitchen, bathrooms, laundry and a recreation area. 9. In this example, the services and facilities provided to boarders are relatively significant and the average length of stay is relatively short. David retains a significant degree of control over the premises through being on the premises most of the time. The arrangements entered into indicate that those staying in the boarding house do not have the right to exclusive possession of a room but rather only a right to occupy the room. 10. These circumstances indicate that the relationship between David and those staying at the boarding house is not that of landlord/tenant under a lease agreement. Accordingly, the income derived is not 'rent' and therefore the paragraph 152-40(4)(e) exclusion does not apply. If David's activities amount to the carrying on of a business, the boarding house will be an active asset under section 152-40 of the ITAA 1997. Paragraph 26 of TD 2006/78 further provides that if an asset is used partly for business and partly to derive rent at any given time, determining whether the main use of the asset at the time is to derive rent is likely to involve a consideration of factors such as: • the comparative areas of use of the premises (between deriving rent and other uses); and • the comparative levels of income derived from the different uses of the asset. Based on the facts provided to the Commissioner for the purposes of this ruling (and consistent with Example 3 in TD 2006/78), it is evident that the income generated by ABC from the boarding house business is not 'rent'. This view is formed on the basis of factors which include: • All boarders enter into an Occupancy Agreement as required by the BHA and the terms of such Occupancy Agreements: ­ do not grant a boarder a right to exclusive possession of their room; and ­ ensure control and access rights are maintained by ABC (as the owner). • A substantial portion of the fees charged by ABC are for services they provide, such as furnishings in the rooms, mattress protectors, towels, the maintenance and cleaning of the common areas and shared spaces, payment of utilities, and an on-site manager to provide day-to-day operational and managerial services. Based on the facts provided to the Commissioner for the purposes of this ruling, it is also evident that 2 stories (levels 1 and 2) (i.e. more than 50% of the Property) are used to operate a boarding house business as compared to 1 storey (ground level) which is used to derive rent, and the business proportion of the Property typically derives more than 50% of the total income generated by ABC from the Property. [3] It is therefore considered that the main use of the Property is not to derive rent, and the pre and post-CGT interests of ABC in the Property are not excluded from being an active asset by paragraph 152-40(4)(e). As confirmed in ATO ID 2002/862, the active asset test must be applied separately to each of ABC's interests (pre and post-CGT) in the Property. The post-CGT portion of the Property was acquired by ABC in 20XX, when the construction or work that resulted in the creation of the asset (pursuant to section 108-70) started (see table item 1 of section 109-10), and has been used in the course of carrying on ABC's boarding house business since early 20XX. The post-CGT portion of the Property (owned for less than 15 years) therefore satisfies the active asset test under section 152-35 on the basis that it has been an active asset of ABC for a period exceeding half the ownership period. The basic condition in paragraph 152-10(1)(d), like each of the other relevant basic conditions, is therefore satisfied in respect of the capital gain ABC will make on the disposal of the post-CGT portion of the Property. | Summary: To the extent the payments from ABC to: • Person X; and • Person Y (directly and via the Y Trust) relate to the capital gain realised for the disposal of the pre-CGT portion of the Property and is equal to or less than the limit mentioned in subsection 152-125(2), the Income Tax Assessment Act will apply as if the payments were not a dividend and a frankable distribution pursuant to subsection 152-125(3). | Detailed Reasoning - Detailed reasoning: Subsection 152-125(1) provides that section 152-125 applies if: (a) one or more of the following apply: (i) under section 152-110, a capital gain (the exempt amount ) of a company or trust is disregarded; (ii) under section 152-110, an amount of income (the exempt amount ) is non-assessable non-exempt income of a company or trust; (iii) subparagraph (i) of this paragraph would have applied to an amount (the exempt amount ) except that the capital gain was disregarded anyway because the relevant CGT asset was acquired before 20 September 1985; (iv) subparagraph (i) of this paragraph would have applied to an amount (the exempt amount ) if subsection 149-30(1A) and section 149-35 had not applied to the relevant asset; and (b) the company or trust makes one or more payments relating to the exempt amount to an individual (whether directly or indirectly through one or more interposed entities) before the later of: (i) 2 years after the relevant CGT event; and (ii) if the relevant CGT event happened because the company or trust disposed of the relevant CGT asset - 6 months after the latest time a possible financial benefit becomes or could become due under a look-through earnout right relating to that CGT asset and the disposal; and (c) the individual was a CGT concession stakeholder of the company or trust just before the relevant CGT event. | Detailed Reasoning - Paragraph 152-125(1)(a): Subsection 152-110(1) sets out the following conditions that companies and trusts must satisfy before applying the small business 15-year exemption to disregard a capital gain arising from a CGT event: An entity that is a company or trust can disregard any capital gain arising from a CGT event if all if all of the following conditions are satisfied: (a) the basic conditions in Subdivision 152-A are satisfied for the gain; (b) the entity continuously owned the CGT asset for the 15-year period ending just before the CGT event; (c) the entity had a significant individual for a total of at least 15 years (even if the 15 years was not continuous and it was not always the same significant individual) during which the entity owned the CGT asset; (d) an individual who was a significant individual of the company or trust just before the CGT event either: (i) was 55 or over at the time of the CGT event and the event happened in connection with the individual's retirement; or (ii) was permanently incapacitated at that time. | Detailed Reasoning - Paragraph 152-110(1)(a): As already confirmed: • CGT event A1 will happen in respect of ABC's pre-CGT portion of the Property when ABC enters into the sale contract, thereby satisfying the basic condition in paragraph 152-10(1)(a). • ABC will satisfy the definition of a CGT small business entity under subsection 152-10(1AA) for the relevant year, thereby satisfying the basic condition in paragraph 152-10(1)(c). • The pre-CGT portion of the Property is an active asset pursuant to paragraph 152-40(1)(a). The pre-CGT portion of the Property was acquired by ABC in the 19XXs and has been used in the course of carrying on ABC's boarding house business during the period 19XX to 20XX, and since early 20XX. The pre-CGT portion of the Property (owned for more than 15 years) therefore satisfies the active asset test under section 152-35 on the basis that it has been an active asset of ABC for a total of at least 7.5 years during the test period. The basic condition in paragraph 152-10(1)(d) is therefore satisfied in respect of the capital gain ABC will make on the disposal of the pre-CGT portion of the Property. However, because the pre-CGT portion of the Property was acquired by ABC before 20 September 1985 and, for the reasons set out in the private ruling issued to ABC with authorisation number 1051217877421, there has not been a change in the majority underlying interests in that CGT asset pursuant to either former subsection 160ZZS(1) of the Income Tax Assessment Act 1936 or Subdivision 149-B, the capital gain to be made by ABC from the disposal of the pre-CGT portion of the Property will be disregarded pursuant to paragraph 104-10(5)(a). Therefore, for the purposes of the basic condition in paragraph 152-10(1)(b), it cannot be said that the CGT event A1 that happens in relation to the pre-CGT portion of the Property will (apart from Division 152) result in a capital gain for ABC in the income year the sale contract is entered into, and this basic condition will not be satisfied. | Detailed Reasoning - Paragraph 152-110(1)(b): Having owned the pre-CGT portion of the Property since the 19XXs, ABC will have continuously owned the CGT asset for the 15-year period ending just before the CGT event, thereby satisfying the condition in paragraph 152-110(1)(b). | Detailed Reasoning - Paragraph 152-110(1)(c): Section 152-55 provides that an individual is a 'significant individual' in a company or a trust at a time if, at that time, the individual has a small business participation percentage in the company or trust of at least 20%. Pursuant to section 152-65, an entity's 'small business participation percentage' in another entity at a time is the percentage that is the sum of the entity's direct and indirect small business participation percentage in the other entity at that time. ABC has had a significant individual at all times since 19XX, and therefore for a total of at least 15 years during which it owned the pre-CGT portion of the Property, thereby satisfying the condition in paragraph 152-110(1)(c). | Detailed Reasoning - Paragraph 152-110(1)(d): Person X and Person Y will be significant individuals of ABC just before the CGT event. As at the date of this ruling, both Person X and Person Y are in their XXs, and therefore will be over 55 just before the CGT event. Whether a CGT event happens 'in connection with an individual's retirement' depends on the particular circumstances of each case. There would need to be at least a significant reduction in the number of hours the individual works or a significant change in the nature of their present activities to be regarded as a retirement. However, it isn't necessary for there to be a permanent and everlasting retirement from the workforce. Once the Property has been sold, ABC will no longer be conducting any active business operations and, as a consequence, the time that Person X and Person Y will spend as directors will dramatically decrease. It is therefore evident on the facts provided that Person X and Person Y, being significant individuals of ABC just before the CGT event will be over 55 at that time and the CGT event will happen in connection with their retirement, thereby satisfying the condition in paragraph 152-110(1)(d). Based on the above, the capital gain of ABC that will arise from the sale of its pre-CGT portion of the Property would have been disregarded under section 152-110 except that the capital gain will be disregarded anyway (pursuant to paragraph 104-10(5)(a)) because the pre-CGT portion of the Property was acquired before 20 September 1985. On this basis, subparagraph 152-125(1)(a)(iii) applies, and the amount of the capital gain realised in respect of the pre-CGT portion of the Property is taken to be the 'exempt amount' for the purposes of section 152-125. | Detailed Reasoning - Paragraph 152-125(1)(b): Where ABC makes payments relating to the exempt amount to Person X (directly) and Person Y (both directly and indirectly through the Y Trust) in proportion to their shareholdings in ABC within 2 years of the company's entry into a contract for sale of the Property, as proposed, paragraph 152-125(1)(b) applies. The making of these payments via the issue of a promissory note in the circumstances contemplated in this ruling does not change this outcome. | Detailed Reasoning - Paragraph 152-125(1)(c): According to section 152-60, a 'CGT concession stakeholder' of a company or trust at a time is defined to include a significant individual in the company or trust. As noted above, both Person X and Person Y will be significant individuals of ABC just before the CGT event as they have a small business participation percentage in ABC of at least 20%. Person X and Person Y are therefore CGT concession stakeholders of ABC just before the CGT event, and paragraph 152-125(1)(c) applies. Section 152-125 therefore applies. | Detailed Reasoning - Subsections 152-125(2) and (3): Subsections 152-125(2) and (3) provide: (2) In determining the taxable income of the company, the trust, the individual, or any of the interposed entities, disregard the total amount of the payment or payments made to the CGT concession stakeholder, up to the following limit: Stakeholder's participation percentage × Exempt amount where: stakeholder's participation percentage means: (a) in the case of a company or a trust referred to in item 2 of the table in subsection 152-70(1) - the stakeholder's small business participation percentage in the company or trust just before the relevant CGT event; or ... (3) If a company makes such a payment, this Act applies to the payment, to the extent that it is less than or equal to the limit mentioned in subsection (2), as if: (a) it were not a dividend; and (b) it were not a frankable distribution. As a CGT concession stakeholder, Person X is entitled to receive XX% of the exempt amount when the calculation in subsection 152-125(2) is applied to the amount. To the extent the payment from ABC to Person X relates to the exempt amount and is equal to or less than the limit mentioned in subsection 152-125(2), the Income Tax Assessment Act will apply to the payment as if it were not a dividend and not a frankable distribution pursuant to subsection 152-125(3). As a CGT concession stakeholder, Person Y is entitled to receive XX% of the exempt amount when the calculation in subsection 152-125(2) is applied to the amount. To the extent the payments from ABC to Person Y (directly and via the Y Trust) relate to the exempt amount and are equal to or less than the limit mentioned in subsection 152-125(2), the Income Tax Assessment Act will apply to the payments as if they were not a dividend and not a frankable distribution pursuant to subsection 152-125(3). [1] The remaining part of the Property is referred to as the 'pre-CGT portion of the Property' for the purposes of this ruling. [2] American Leaf Blending Co Sdn Bhd v Director-General of Inland Revenue [1979] AC 676 ( American Leaf) and Inland Revenue Commissioners v Westleigh Estates Co Ltd [1924] 1 KB 390 ( Westleigh ). [3] With the exception of a small period during which the gross income generated by the Boarding House reduced as a direct consequence of the COVID-19 pandemic which resulted in: • a halt (followed by a reduction) in international visitation and an increase in vacancies; and • the provision of fee reductions by ABC to assist boarders in financial need.