Edited version of your written advice

Authorisation Number: 1012939932153

Date of advice: 27 January 2016

Ruling

Subject: CGT Concessions - Active Asset

Question 1

Was the taxpayer's property an "active asset" pursuant to section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Do one or more small business CGT concessions under Division 152 of the ITAA 1997 apply to the sale of the taxpayer's property?

Answer

No.

Question 3

Can any concessions under Parts 3-1 or 3-3 of the ITAA 1997 apply to the sale of the taxpayer's property?

Answer

Yes, the general CGT discount.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

01 July 20XX

Relevant facts and circumstances

1. The taxpayer purchased the property in 200X.

2. The property was sold during the year ended 30 June 20XX.

3. The taxpayer derived a capital gain.

4. The taxpayer owned the property in their own right.

5. The taxpayer is a retired businessman.

6. The taxpayer actively manages their properties in their own capacity. From these activities, the taxpayer generated a turnover of less than $2 million in each income year.

7. The property was leased to various commercial tenants during the years the taxpayer owned the property.

8. The taxpayer considers them self to be carrying on a business and is registered for GST.

9. The taxpayer used a part of the property from time to time to conduct their business activities.

Relevant legislative provisions

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Subsection 104-10(4)

Income Tax Assessment Act 1997 Subsection 108-5(1)

Income Tax Assessment Act 1997 Division 115

Income Tax Assessment Act 1997 Section 115-100

Income Tax Assessment Act 1997 Part 3-3

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 Subdivision 152-A

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 Paragraph 152-10(1)(d)

Income Tax Assessment Act 1997 Section 152-35

Income Tax Assessment Act 1997 Section 152-40

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

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

Income Tax Assessment Act 1997 Subdivision 152-B

Income Tax Assessment Act 1997 Subdivision 152-C

Income Tax Assessment Act 1997 Subdivision 152-D

Income Tax Assessment Act 1997 Subdivision 152-E

Income Tax Assessment Act 1997 Subdivision 328-C

Income Tax Assessment Act 1997 Section 328-110

Income Tax Assessment Act 1997 Section 328-115

Income Tax Assessment Act 1997 Section 328-120

Reasons for decision

Questions 1, 2, and 3

All answers to the questions are explained collectively as they are closely related.

Summary

The small business CGT concessions do not apply to the sale of the property as it is not an "active asset". With exception to the general CGT discount, no concessions will apply to the sale of the property.

Detailed reasoning

Basic conditions for the CGT small business concessions

A number of concessions that provide relief from CGT, for small businesses, are set out in Division 152 of the ITAA 1997. If the basic conditions for relief are satisfied, capital gains may be reduced or disregarded under Division 152.

The basic conditions that apply to all four small business concessions are detailed in Subdivision 152-A.

The other four Subdivisions (152-B, 152-C, 152-D, and 152-E) deal with each of the concessions and, in some instances, contain further conditions specific to each of those concessions.

The four concessions are:

• 15 year exemption

• 50% reduction

• Retirement exemption

• Roll-over relief

The basic conditions in Subdivision 152-A that need to be satisfied in order to access a concession, as relevant to the taxpayer and pursuant to subsection 152-10(1), are:

• a CGT event happening in relation to a CGT asset of the taxpayer (paragraph 152-10(1)(a))

• apart from the application of Division 152, that event resulting in a capital gain (paragraph 152-10(1)(b))

• the taxpayer being a small business entity (paragraph 152-10(1)(c)), and

• the relevant CGT asset satisfying the active asset test (paragraph 152-10(1)(d)).

Basic condition 1: CGT event relating to a CGT asset

The taxpayer sold a property (a CGT asset pursuant to subsection 108-5(1)) which gave rise to a CGT event A1 under section 104-10, thereby satisfying the first basic condition.

Basic condition 2: CGT event results in a capital gain

The sale of the property resulted in a capital gain (as per subsection 104-10(4)), thereby satisfying the second basic condition.

Basic condition 3: The small business entity test

Subdivision 328-C explains the meaning of small business entity, together with related concepts.

In order to qualify as a small business entity for an income year, as per section 328-110, the entity must:

a) be carrying on a business in that year; and

b) satisfy any one of the following three tests based on turnover:

• the aggregated turnover of the entity in the previous income year (during which a business was carried on) was less than $2 million

• the aggregated turnover for the current income year, as at the first day of that year or (if applicable) the day of that year on which the business starts (whichever is later), is likely to be less than $2 million, as long as the aggregated turnover of the entity was less than $2 million in each of the two previous income years (during which a business was carried on)

• the aggregated turnover for the current income year, as worked out at the end of that year, is less than $2 million.

Carrying on a business

The ATO's views on the indicia of carrying on a business are set out in Taxation Ruling TR 97/11. Paragraph 18 of TR 97/11 provides a summary of the main indicators of carrying on a business.

On an application of these indicators the taxpayer is considered to be carrying on a business.

Aggregated turnover

Aggregated turnover includes not only a business' own turnover but also the turnover of other entities that are connected or affiliated to it (referred to as 'relevant entities').

The term 'aggregated turnover' is defined in section 328-115. It is the sum of:

• the taxpayer's annual turnover for the income year; plus

• the annual turnover of any relevant entities.

The aggregated turnover for the taxpayer and all their relevant entities is below $2 million.

As the taxpayer's aggregated turnover was less than $2 million and they were carrying on the business for the income year, the taxpayer was a small business entity for that income year (as required for the purposes of subparagraph 152-10(1)(c)(i)), thereby satisfying the third basic condition.

Basic condition 4: The active asset test

In the taxpayer's case and pursuant to section 152-35, the property (which they owned for less than 15 years) will satisfy the active asset test if it was an active asset of theirs for at least half of the period they owned it.

An asset may be an active asset pursuant to section 152-40 where it is owned by the taxpayer and:

a) is used, or held ready for use, in the course of carrying on a business by that taxpayer, or

b) is used, or held ready for use, in the course of carrying on a business being conducted by an affiliate of the taxpayer or by an entity connected with the taxpayer.

Certain CGT assets are excluded specifically from being active assets. These include 'passive assets' and are discussed below.

Exclusion - CGT assets used mainly to derive 'passive income'

Subsection 152-40(4) excludes certain assets from being active assets mainly because they comprise passive investments. This provision provides:

…the following CGT assets cannot be active assets:

a) interests in an entity…

b) shares in a company…

c) interests in a trust…

d) financial instruments…

e) an asset whose main use by you is to derive interest, an annuity, rent, royalties or foreign exchange gains unless:

(i) the asset is an intangible asset and has been substantially developed, altered, or improved by you so that its market value has been substantially enhanced; or

(ii) its main use for deriving rent was only temporary. [emphasis added]

In Taxation Determination TD 2006/78, paragraph 22 states that whether an asset's main use is to derive rent will depend on the particular circumstances of each case.

The exclusion in paragraph 152-40(4)(e) means that investment and commercial properties cannot qualify as an active asset regardless of whether the taxpayer is carrying on a 'business' of leasing properties.

Conclusion

The taxpayer's property is not an active asset. The taxpayer leased the property on commercial terms to commercial tenants, from which, they derived 'rent' and, on the available facts, that was its main use.

Therefore, the fourth basic condition for relief is not satisfied in relation to the property and the taxpayer will not be able to access the CGT concessions under Division 152 to reduce or disregard the capital gain they made upon its disposal.

50% general discount under Division 115

Division 115 contains the provisions for a discount capital gain. A capital gain from a CGT asset is a discount capital gain only if the entity making the gain acquired the asset at least a year before the CGT event. The discount percentage for an amount of a discount capital gain is 50% if the gain is made by an individual (section 115-100).

As the taxpayer owned the property as an individual for more than 12 months they are entitled to apply the 50% discount to the capital gain under Division 115.

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