Edited version of private ruling

Authorisation Number: 1011722447897

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Ruling

Subject: Capital gains tax - small business concessions

Question 1

Will I be entitled to the small business concession contained in Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997) on the sale of properties?

Answer

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

You have submitted a business plan indicating that you intend to purchase properties, renovate them and sell them.

The business is yet to be registered.

You advised that you have commenced purchasing properties.

You stated that you have purchased some properties and presently they are being held as rental properties. None of these properties have been renovated.

The business plan indicates that you currently more properties.

These properties are residential.

A few of these properties are self managed, but they are mainly managed by an agent.

There are lease agreements in place with the usual lease being for 12 months.

The normal terms of a lease apply. There are no special clauses.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5,

Income Tax Assessment Act 1997 Division 152,

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) and

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 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 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 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 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, go to our website 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

All legislative references refer to the Income Tax Assessment Act 1997 unless otherwise stated.

Summary

You cannot consider the small business concessions contained in Division 152 on the sale of properties. The properties are not active assets because their main use is to derive rental income.

Detailed reasoning

You satisfy the requirements for the small business relief provisions contained in Division 152 if:

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

the event would have resulted in a gain

at least one of the following applies:

you are a small business entity for the year

you satisfy the maximum net asset value test

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

the CGT asset satisfies the active asset test.

The active asset test is discussed in sections 152-35 and 152-40. You must satisfy this test before you can consider any of the small business concessions. One of the conditions that must be complied with is that the asset is considered to be an active asset.

The meaning of the term active asset for the purposes of the capital gains tax legislation is contained in section 152-40 which explains that a CGT asset is an active asset at a given time if, 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, your affiliate or another entity that is connected with you.

Certain CGT assets cannot be active assets. These exceptions are listed in subsection 152-40(4). Paragraph 152-40(4)(e) specifically excludes assets whose main use is to derive rent. Unless, the main use for deriving rent was only temporary.

Taxation Determination TD 2006/78 discusses satisfying the active asset test for assets whose main use is to derive rent. Paragraph 23 of TD 2006/78 states:

A key factor therefore in determining whether an occupant of premises is a lessee is whether the occupier has a right to exclusive possession (Radaich v. Smith (1959) 101 CLR 209). If, for example, premises are leased to a tenant under a lease agreement granting exclusive possession, the payments involved are likely to be rent and the premises not an active asset.

In your case:

You have purchased some properties. The properties are being held as rental properties, with just minor improvements being completed. None have been renovated.

The properties held are mostly managed by an agent with 12 month leases in place. The leases are the normal agreements and there are no special clauses in the leases.

You state that the properties are being held as rental properties and are being rented out. Lease agreements for 12 months indicate that this is not a temporary arrangement.

The overall impression gained is that the properties are used to derive rental income.

As the main use of the properties is considered to be for rental purposes, they cannot be an active assets due to the operation of paragraph 152-40(4)(e).

As you do not fulfil the requirements to satisfy the active asset test, you are not entitled to consider the small business relief provisions contained in Division 152.

Please note that even if the transactions were conducted as per the 'Business Plan', you would still not be entitled to consider the small business relief provisions. This is because as you would be purchasing and selling real estate, the real estate would then be your 'trading stock', the sale of which would result in ordinary income. Section 118-20 of the ITAA 1997 reduces a capital gain to the extent that the amount has been included in your assessable income.