Private ruling: Small business capital gains tax concessions
Published: December 2013
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Does the property used in the partnership business satisfy the active asset test contained in section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes | Q2: Do you meet the basic conditions in relation to the sale of the property? | A2: Yes | Q3: Are you eligible to apply the small business 50% active asset reduction to the capital gain made on the sale of the property? | A3: Yes | Q4: Are you eligible to apply the small business retirement exemption to the capital gain made on the sale of the property? | A4: 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, in partnership with others, acquired a business as a going concern. The business operated from the property. At all times, the ownership structure of the property was the same as that of the business. The property consisted of the following: · A number of self-contained units · Conference and office facilities The business derived revenue from: · Short term accommodation for individual guests (such as families and couples) and also for schools and other community groups; and · The use of the conference facilities for various meeting and functions, sometimes in conjunction with the provision of accommodation A sign was positioned at the front of the property with the business trading name for the entire period of ownership. At the time of the acquisition of the business, all of the partners were engaged in separate employment. All of the cleaning, maintenance, administration and management of the business was conducted by each of the partners on a part-time basis. However, the demands on the business quickly grew and, X ceased their other employment to take on the full-time role of managing the business. X was on call at all times and retained their role as manager until the cessation of the business. X was remunerated for their role. For a period of time, the accommodation and conference facilities were used by the general public on an ad-hoc basis. Bookings were obtained through internet advertising, signage and guest referrals. During this period the partners and X, as the manager, provided the following services: · Taking bookings for accommodation and the conference facilities · Assisting guests with all enquiries during their stay (such as tourist information) · Cleaning, washing and preparing units for guests · Sourcing meals for guests · Ensuring the rooms were maintained and organising repairs and replacements when necessary · Upkeep of surrounding grounds (cutting of lawns and shrubs) · Payment of all accounts and bookkeeping The partners became aware of an opportunity to make to property available on a long term basis to an organisation as hostel style accommodation. The partners made the decision to take up this opportunity and for a period of time, the property was available exclusively to the organisation. During this period, cleaning, washing and preparation of the meals was carried out by the organisation's staff. X maintained their role as manager and provided support to the organisation when required as well as ensuring the local community was not impacted by the arrangement. After a period of time, the property was once again used for the provision of short term accommodation and conference facilities to the general public. The property was used in this manner until the date of sale. The business, including the property, was sold during the relevant financial year and made a capital gain. You were over the age of 55 at the time of the sale of the business. At all times, the partnership was a small business entity.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section152-10 | Income Tax Assessment Act 1997 Section 152-35 | Income Tax Assessment Act 1997 Paragraph 152-40(4)(e) | Income Tax Assessment Act 1997 Subsection 152-40(1) | Income Tax Assessment Act 1997 Subdivision 152-C | Income Tax Assessment Act 1997 Subdivision 152-D

Reasons for decision: Detailed Reasoning - Active asset test: The active asset test is contained in section 152-35 of the ITAA 1997. The active asset test is satisfied 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 is from when the asset is acquired until the CGT event. If the business ceases within the 12 months before the CGT event (or such longer time as the Commissioner allows) the relevant period is from acquisition until the business ceases. A CGT asset is an active asset if it is owned by you and is used or held ready for use in a business carried on (whether alone or in partnership) by you, your affiliate or an entity connected with you (subsection 152-40(1) of the ITAA 1997). Paragraph 152-40(4)(e) of the ITAA 1997 states, however, that an asset whose main use in the course of carrying on the business is to derive rent can not be an active asset unless the main use for deriving rent was only temporary. Taxation Determination TD 2006/78 discusses the circumstances in which premises used in the business of providing accommodation for reward can be active assets not withstanding the exclusion in paragraph 152-40(4)(e) of the ITAA 1997. At paragraph 25, TD 2006/78 states: Ultimately, these are questions of fact depending on all the circumstances involved. Relevant factors to consider in determining these questions (in addition to whether the occupier has a right to exclusive possession) include the degree of control retained by the owner and the extent of any services provided by the owner such as room cleaning, provision of meals, supply of linen and shared amenities ( Allen v. Aller (1966) 1 NSWR 572), Appah v. Parncliffe Investments Ltd [1964] 1 All ER 838 and Marchant v. Charters [1977] 3 All ER 918). In this case, we accept that during the period the property was available to the general public the main use was not to derive rent. During this period the services provided to guests went beyond that of a mere landlord-tenant relationship. Accordingly, the property will not be excluded from being an active asset during these periods. As the period the property was available for accommodation to the general public is more than half of the total ownership period, the active asset test contained in section 152-35 of the ITAA 1997 will be met. | Detailed Reasoning - Basic conditions: To qualify for the small business capital gains tax (CGT) concessions, you must satisfy several conditions that are common to all the concessions. These are called the 'basic conditions'. Each concession also has further requirements that you must satisfy for the concession to apply (except for the small business 50% active asset reduction which applies if the basic conditions are satisfied). In your case, it is accepted that you meet the basic conditions due to the following: · a CGT event occurred when the property was disposed of · the event resulted in a gain · you were a partner in a partnership that was a small business entity for the relevant income year and the CGT asset was an interest in an asset of the partnership · we consider that the asset meets the active asset test. | 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 satisfy the basic conditions, 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%. | Detailed Reasoning - Small business retirement exemption: You are eligible to choose the retirement exemption if you satisfy the basic conditions and if you are under 55 just before you make the choice - you contribute an amount equal to the asset's CGT exempt amount to a complying superannuation fund or a retirement savings account. You were over 55 years of age at the time of the sale of the property; therefore, you are not required to contribute an amount equal to the asset's CGT exempt amount to a complying superannuation fund or a retirement savings account. As you satisfy the basic conditions, you are entitled to choose to apply the small business retirement exemption up to your individual lifetime exemption limit.