Edited version of private ruling

Authorisation Number: 1011633277892

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Ruling

Subject: Capital gains tax (CGT) - small business concessions - sale of a property used to derive rent

If you sell the property, are you able to apply the small business CGT concessions to reduce the capital gain?

No.

This ruling applies for the following period:

1 July 2010 to 30 June 2011.

The scheme commences on:

1 July 2010.

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, a partnership, purchased a property more than ten years ago. The property consists of a number of flats and a number of shops. Since purchase you have always managed the property and have carried out all the upkeep with the exception of electrical and plumbing work which you are not licensed to do. You have organised all the renting and paperwork and have considered that you are carrying on a small business.

For the period of about two years you ran a business in one of the shops as the tenant left suddenly and you had no choice financially but to step in and run it until you could find a permanent tenant.

You are now considering selling the property and before listing the property for sale you would like to clarify the CGT consequence of the sale.

You own one other property in the same area which is commercially tenanted.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 152-40.

Income Tax Assessment Act 1997 Subsection 152-40(1).

Income Tax Assessment Act 1997 Subsection 152-40(1)(a).

Income Tax Assessment Act 1997 Subsection 152-40(4).

Income Tax Assessment Act 1997 Paragraph 152-40(4)(e).

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA of the ITAA 1936 applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA of the ITAA 1936, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Liability for a capital gain

Subsection 104-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that CGT event A1 will occur when you dispose of a CGT asset. The term CGT asset is defined by subsection 108-5(1) of the ITAA 1997 which is defined as any kind of property.

Paragraph 104-10(3)(a) of the ITAA 1997 states that the time of the event is when you enter into the contract for the disposal.

Small business concessions

The CGT small business concessions, only available to small businesses, are set out in Division 152 of the ITAA 1997.

The basic conditions set out in section 152-10 of the ITAA 1997 must be satisfied to apply the small business concessions.

The basic conditions:

· a CGT event happens in relation to a CGT asset of yours in an income year

· the event would (apart from Division 152 of the ITAA 1997) have resulted in the gain

· you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997, and

· the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997.

Definition of active asset

For a CGT asset of a business to be an active asset for the purposes of Division 152 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 paragraph 152-40(1)(a) of the ITAA 1997, a CGT asset is an active asset 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 by you, or your affiliate, or another entity that is connected with you.

However, paragraph 152-40(4)(e) of the ITAA 1997 provides that an asset whose main use is to derive rent cannot be an active asset unless such use was only temporary. That is, even if the asset is used in a business it will not be an active asset if its main use is to derive rent.

Where an asset is used partly for business and partly to derive rent, it will be a question of fact dependent on all the circumstances of the case as to whether the main use of the premises is to derive rent. No one single factor will necessarily be determinative and resolving the matter is likely to involve a consideration of 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.

In this particular case, if you look at this based on leased area it would appear that the property was used for deriving rent as there are a number of flats and a number of shops and only one shop was used in a manner that was not deriving rent. Also, the time period would also indicate the use of the property as being to derive rent as the property has been owned for more than ten years and was only used not to derive rent for about two years.

Having regard to the facts that the property was only used for a short time in a manner not to derive rent and then only one/sixth of the property was relevant, it is considered the main use of the property is to derive rent and accordingly, the property is excluded from being an active asset by paragraph 152-40(4)(e) of the ITAA 1997.

Note: As the property is not an active asset we have not considered whether you are carrying on a business as you are not able to utilise the small business concessions in relation to any capital gain made from the sale of the property.

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