Private ruling: Small business concessions
Date of advice: 15 June 2016
Published: July 2016
Ruling period: Year ending 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Are you eligible for the small business concessions (specifically the 50% active asset reduction and the retirement exemption) under Division 152 of the Income Tax Assessment Act 1997 ? | A1: No.

Relevant facts and circumstances: You purchased property. You recently sold the property and made a capital gain. The property was rented out for nearly your entire ownership period. You contend that you have been in the business of property investment.

Relevant legislative provisions: Income Tax Assessment Act 1997 - Section 152-35 | Income Tax Assessment Act 1997 - Section 152-40

Reasons for decision: Summary: For the small business concessions in Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997) to apply to reduce or disregard a capital gain, the basic conditions in Subdivision 152-A must be satisfied. One of these conditions is that the relevant CGT asset is required to satisfy the active asset test 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: • begins when you acquired the asset, and • ends at the earlier of • the CGT event, and • 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). The meaning of an active asset is set out in section 152-40 of the ITAA 1997. It must firstly satisfy one of the 'positive tests' in subsection 152-40(1) of the ITAA 1997 and then also not be excluded by one of the exceptions in subsection 152-40(4) of the ITAA 1997. Under subsection 152-40(1) of the ITAA 1997, a CGT asset is an active asset (subject to the exclusions) if it is owned and used, or held ready for use, in the course of carrying on a business by you or your small business CGT affiliate or another entity that is connected with you under paragraph 152-40(1)(c) of the ITAA 1997. The combined effect of sections 152-35 and 152-40 of the ITAA 1997 is that the asset will meet the active asset test if the asset was used, or held ready for use, in the course of carrying on a business for at least half of the time period it was owned, subject to the exclusions in subsection 152-40(4) of the ITAA 1997. | Detailed Reasoning - Use of property to derive rent: Subsection 152-40(4) of the ITAA 1997 provides a list of exceptions and outlines which CGT assets cannot be active assets. Paragraph 152-40(4)(e) of the ITAA 1997 excludes, among other things, assets whose main use is to derive rent (unless such use was only temporary). Such assets are excluded even if they are used in the course of carrying on a business. The Advanced guide to capital gains tax concessions for small business 2014-15 provides the following example: Rachael owns five investment properties which she rents to tenants under lease agreements that grant exclusive possession. The lease terms vary from six months to two years. The properties are not active assets because they are mainly (only) used by Rachael to derive rent. It is irrelevant whether Rachael's activities constitute a business. | Detailed Reasoning - Application to your circumstances: Your case is similar to the example listed above. In your case, you advise that the property has been rented out throughout nearly your entire ownership period. As the main use of the property has been to derive rental income, it is excluded from being an active asset under paragraph 152-40(4)(e) of the ITAA 1997. Accordingly, as you do not satisfy the basic conditions for the small business concessions, you are not entitled to apply any of the small business concessions to reduce or disregard the capital gain made on the sale of the property