Private ruling: capital gains tax concessions for small business
Published: March 2014
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Is the property an 'active asset' for the purposes of the capital gains tax (CGT) concessions for small business? | A1:  | Q2: Do you satisfy the basic conditions necessary to be eligible for the CGT concessions for small business? | A2: 

Relevant facts and circumstances: You acquired a property in the 1990's. You have carried on a business (as a sole trader) on the property, since its acquisition, and have never lived there. You also rent a part of the property to an unrelated entity for residential purposes. In the 2012-13 financial year less than 10% of the income derived from the property was rental income. The property has been partly rented since the late 1990's. You state that less than 10% of the floor area is used for rental purposes, with the remaining floor area used in your business. You state that you are a small business entity for the purposes of the capital gains tax (CGT) concessions for small business. You state that you have no other affiliates or connected entities that need to be considered to determine if you satisfy the CGT concessions for small business. You intend to dispose of the property to your self-managed superannuation fund (SMSF).

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 152-10 | Income Tax Assessment Act 1997 Section 152-15 | Income Tax Assessment Act 1997 Section 152-35 | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 152-40

Reasons for decision: Detailed Reasoning - Small business CGT concession eligibility: Section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997) contains the basic conditions you must satisfy to be eligible for the small business CGT concessions. These conditions are: (a) a CGT event happens in relation to a CGT asset in an income year. (b) the event would have resulted in the gain (c) at least one of the following applies: (i) you are a small business entity for the income year (ii) you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997 (iii) you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an asset of the partnership or (iv) the conditions in subsection 152-10(1A) or (1B) of the ITAA 1997 are satisfied in relation to the CGT asset in the income year. (a) the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997. Section 104-10 of the ITAA 1997 provides that CGT event A1 occurs when your ownership in a CGT asset (eg. land or buildings) is transferred to another entity. | Detailed Reasoning - Active asset test: Section 152-40 of the ITAA 1997 provides the meaning of 'active asset'. A CGT asset will be an active asset at a time if, at that time, you own the asset and the asset was used or held ready for use by you, an affiliate of yours, or by another entity that is 'connected with' you, in the course of carrying on a business. Subsection 152-35(1) of the ITAA 1997 states that a CGT asset satisfies the active asset test 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 period of ownership, 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 and a half years. Importantly, subsection 152-40(4) of the ITAA 1997 provides that an asset whose main use is to derive rent cannot be an active asset. Taxation Determination TD 2006/78 considers, amongst other issues, the situation where there is part business and part rental use of an asset. It states that an asset owned by the taxpayer and used partly for business purposes and partly to derive rent can be an active asset under section 152-40 of the ITAA 1997 where it is considered that the main use of the premises is not to derive rent. In deciding if the property was mainly used to earn rent the Commissioner will consider a range of factors such as: · the comparative areas of use of the premises (between rent and business) · the comparative times of use of the premises (between rent and business), and · the comparative levels of income derived from the different uses of the asset. | Detailed Reasoning - Application to your circumstances: You intend to dispose of the property to your self-managed superannuation fund, therefore CGT event A1 will happen. The event will result in a gain and you are a small business entity for the income year in which the CGT event will happen. You have owned the asset for over 15 years and for at least 7.5 years of your ownership period of the property significantly less than 50% of the floor area of the property has been used to earn rental income. In addition, significantly less than 50% of the income derived from the property, in this time, has been rental income. Therefore, the main use of the property is not to derive rent and the property will be considered an active asset. Accordingly, as the property is considered an active asset and you satisfy the remaining basic conditions under section 152-10 of the ITAA 1997, you will be eligible for the capital gains tax concessions for small business.