Edited version of private advice

Authorisation Number: 1051576730403

Date of advice: 9 September 2019

Ruling

Subject: Capital gains tax

Question 1

Will the sale of your lessor's interest to entity A be a capital gains tax (CGT) event A1 under Division 104 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Are you entitled to a 50% CGT discount under Division 115 of the ITAA 1997?

Answer

Yes.

Question 3

Are you entitled to a small business CGT concession under Division 152 of the ITAA 1997?

Answer

No.

This ruling applies for the following period

Income year ended 30 June 20XX

The scheme commences on

1 July 20XX

Relevant facts and circumstances

You are a sole trader and have been operating a business for several years.

You have two leases relating to a structure on your property, one with entity B and one with entity C.

The original entity B lease began in 20XX and is still ongoing.

You have entered into a Sale and Purchase Agreement (the agreement) with entity A. The total term is XX years.

Under the agreement you wish to sell and entity A wishes to purchase your interest in the lease for the term. The purchase price under the agreement is $XXX.

You continue to own the property and have retained the obligations and liabilities of the Lessor under the Lease with entity B. From 20XX, except for payments in respect of outgoings or services consumed, all amounts payable by entity B to the Lessor under the Lease must be made payable to entity A.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 102-25

Income Tax Assessment Act 1997 Division 104

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 Division 115

Income Tax Assessment Act 1997 Division 152

Reasons for decision

Capital gains tax

Section 102-20 of the ITAA 1997 states that a capital gain or capital loss is made only if a CGT event happens.

Section 108-5 of the ITAA 1997 provides that a CGT asset is any kind of property, or a legal or equitable right that is not property.

In your case, you received money for the sale of certain of your lessor's interest in relation to the telecommunication tower on your property. Your interest is regarded as a CGT asset.

Division 104 of the ITAA 1997 outlines the various CGT events. If more than one CGT event could apply to your transaction or circumstances, the most relevant CGT event applies (subsection 102-25(1) of the ITAA 1997).

Under section 104-10 of the ITAA 1997 CGT event A1 happens if you dispose of a CGT asset. The time of the event is when you enter into the contract for the disposal.

In your case you are selling your lessor's interests. The disposal of the interest is a CGT event A1. CGT event A1 occurred when you entered into the Sale and Purchase Agreement with entity A.

Discount capital gain

A discount capital gain may be applied if certain conditions are met under Division 115 of the ITAA 1997. Section 115-5 of the ITAA 1997 states a discount capital gain is a capital gain that meets the requirements of sections 115-10, 115-15, 115-20 and 115-25.

You sold your Lessor's interest in the 2018-19 income year. As you acquired the interests more than 12 months ago and meet the other conditions of Division 115 of the 1997, you are entitled to a 50% discount capital gain.

Small business CGT concessions

The CGT provisions provide some small business relief in Division 152 of the ITAA 1997.

To qualify for the small business CGT concessions, the basic conditions as contained in subdivision 152-A of the ITAA 1997 must be satisfied. One of the conditions is that the CGT asset must satisfy the active asset test.

Under subsection 152-35(1) of the ITAA 1997, a CGT asset will satisfy the active asset test if:

(a)  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, or

(b)  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 7½ years during the test period.

Subsection 152-40(1) of the ITAA 1997 provides 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, or your affiliate, or another entity that is connected with you. An intangible asset is an active asset if you own it and it is inherently connected with a business that is carried on by you, your affiliate or another entity that is connected with you.

Subsection 152-40(4) of the ITAA 1997 lists CGT assets that cannot be active assets. Under subparagraph 152-40(4)(e)(ii) of the ITAA 1997, an asset whose main use is to derive rent cannot be an active asset unless the main use for deriving rent was only temporary.

In your case, the interests being sold to entity A are not connected to your business. Furthermore the main use of the structure on your property is to derive rent. Therefore, your CGT asset does not satisfy the active asset test.

As the active asset test is not satisfied, you are not entitled to any small business CGT concessions under Division 152 of the ITAA 1997.

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