Edited version of your written advice

Authorisation Number: 1013037418740

Date of advice: 29 June 2016

Ruling

Subject: Capital Gains Tax

Question 1

Is the asset an active asset for the purposes of the small business concessions in Subdivision 152 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Are you affiliates of one another for the purposes of section 328-130 of the ITAA 1997?

Answer

Not applicable.

Question 3

Are you entitled to access the small business capital gains tax (CGT) concessions as you qualify as a small business entity?

Answer

Not applicable

Question 4

Are you required to count 100% of the Partnership one's interest in the asset towards your net assets?

Answer

Not applicable

Question 5

Are you required to count 100% of the Partnership one's interest in the asset towards your net assets?

Answer

Not applicable

Question 6

Are you required to include only your underlying economic interest in the asset towards your net assets?

Answer

Not applicable

Question 7

Are you eligible for the retirement exemption in relation to the disposal of the property?

Answer

Not applicable.

This ruling applies for the following period

30 June 2015

The scheme commences on

1 July 2014

Relevant facts and circumstances

Partnership one acquired a property before September 1985.

The property was sold, for a consideration of $X.

Partnership two acquired an X% interest in the building from the trust.

Upon vesting of the trust, the properties passed in equal X% shares to members of the Family (with the combined interest being referred to as Partnership two).

Each partner has a X% interest in the Partnership two and therefore an underlying X% economic interest in Partnership one.

The principal use of the building has been operation of a service office business.

Partnership one is a small business entity.

Partnership one employs between X and X employees to carry out its duties to engage new tenants and provide its services per the license agreement.

Partnership one owns the entire building and leases X% to third parties as a lease.

The buildings comprise three floors being ground, level one and two.

The serviced offices occupied level 2 and approximately X% of level 1. The other X% is deemed passive income and was occupied under a separate lease.

The ground floor comprises common areas and commercially operated stores.

The serviced office business premises comprise a large reception and waiting room, X serviced offices, meeting rooms, conference rooms, a manager's office, kitchens, a computer room, and a common services area.

A variety of services are offered with the serviced offices.

These additional services are charged on top of the lease for the office.

Virtual offices are also offered.

The commercial leases are typically in place for X or more years, whereas the serviced office licences are typically X or less months. On average, most occupants of the serviced offices stay for approximately X months.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 subdivision 152-C

Income Tax Assessment Act 1997 section 152-15

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 subsection 152-40(1)

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

Reasons for decision

To qualify for the small business CGT concessions, you must satisfy several conditions that are common to all the concessions. These are called the basic conditions. Subdivision 152-C of the ITAA 1997 applies the small business 50% active asset reduction provided the basic conditions are satisfied.

A capital gain that you make may be reduced or disregarded under Division 152 of the ITAA 1997 if the following basic conditions are satisfied:

• A CGT event happens in relation to a CGT asset of yours in an income year,

• The event would have resulted in a gain,

• The CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997, and

• At least one of the following applies;

• you are a small business entity for the income year,

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

• you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an interest in an asset of the partnership, or

• you do not carry on a business, but your CGT asset is used in a business carried on by a small business entity that is your affiliate or an entity connected with you.

Active asset test

Subsection 152-40(1) of the ITAA 1997 details that a CGT asset is an active asset at a time if it is used, or held ready for use, in the course of carrying on a business that is carried on by you (whether alone or in partnership), or your affiliate, or another entity that is connected with you.

Certain assets are, however, excluded from being active assets under subsection 152-40(4) of the ITAA 1997. An asset whose main use is to derive rent (unless such use was only temporary) is excluded from being an active asset. Such assets are excluded even if they are used in the course of carrying on a business.

Example 1 in Taxation Determination TD 2006/78 deals with commercial rental properties:

Commercial Property Co owns 5 commercial rental properties. The properties have been leased for several years under formal lease agreements to various commercial tenants which have used them for office and warehouse purposes. The terms of the leases have ranged from 1 year to 3 years with a 3 year option and provide for exclusive possession. The company has not engaged a real estate agent to act on its behalf and manages the leasing of the properties itself.

In this situation, the company has derived rental income from the leasing of a number of properties. Accordingly, the main (only) use of the properties is to derive rent and they are therefore excluded from being active assets under paragraph 152-40(4)(e) of the ITAA 1997 regardless of whether the activities constitute the carrying on of a business.

In this case, whilst we accept that Partnership one is carrying on a business we consider that the main use of the property is to derive rent. We acknowledge that Partnership one provides additional services, virtual offices and short term hire (less than one day) of meeting rooms. The income earned from these activities is not considered rent. However, the majority of the income earned by Partnership one is in relation to the lease. Even though the agreement states that the client does not have exclusive possession of the office in a practical sense this isn't the case. You have stated that on average clients utilise the offices for approximately X months. These are longer term arrangements and it would be reasonable to assume that the clients view the payments as rent and would not expect their personal items to be moved into a different office at any time.

Accordingly, the main use of the property is to derive rent and the asset is not an active asset. Therefore, you are not able to access the small business concessions as you do not satisfy the basic conditions.

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