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Ruling

Subject: Small business CGT concessions - active asset - main use to derive rent exclusion

Question 1:

Will the commercial property qualify as an active asset under the small business capital gains tax (CGT) concessions pursuant to section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer: Yes.

This ruling applies for the following periods:

1 July 2011 to 30 June 2012.

1 July 2012 to 30 June 2013.

The scheme commences on:

1 July 2011.

Relevant facts and circumstances

You are the registered owner of the property which is used mainly to allow you to conduct your business.

The property was acquired after 19 September 1985 with the intention of providing a location from which to operate your business and you have continued to use the property in the business since that time.

You presently satisfy the maximum net asset value test in section 152-15 of the ITAA 1997.

The property, in addition to being used in the carrying on your business, has been used partly to derive rent.

More than 30 per cent of the lettable floor space of the building has historically been used by you for your business.

The total rental income represented less than 20% of total income (that is, total business and rental income) and your business on average generated more than 80% of the total income.

Your time is devoted almost exclusively to the operation of your business and little time is devoted to rental activities.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 152-40.

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 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

Paragraph 152-40(4)(e) of the ITAA 1997 excludes from the definition of an active asset, among other things, assets whose main use is to derive rent (unless such use was only temporary). Such assets are excluded even if they are used in the course of carrying on a business. Whether an asset's main use is to derive rent will depend on the particular circumstances of each case.

Taxation Determination TD 2006/78 considers the case where there is part business and part rental use. It states that an asset owned by the taxpayer and used partly for business purposes and partly to derive rent can be an active asset under section 152-40 of the ITAA 1997 where it is considered the main use of the premises is not to derive rent. In deciding if the property was mainly used to earn rent, the Commissioner will consider 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.

Comparison of the time spent on rental and business activities is another factor which may be taken into account.

Application to your circumstances

You purchased a building from which to conduct your business. However, you only utilised a portion of the building for your business and then leased the remaining floor space to tenants. You have used the building since purchase to carry on your business and continue to do so.

As per the guidance contained within TD 2006/78, we must consider the main use of the property with reference to comparisons of area, income and time.

Your figures indicate that on an area comparison your business uses approximately one third of the space. However, on an income comparison basis business income has generally represented at least 80% of the total income.

Although the rental area is slightly larger, it remains that the majority of the income derived in relation to the property is from business income. It was also stated by you that your activities in your business take up a far greater amount of time than leasing of part of the building and the collection of rent from the other tenants.

This analysis, together with the fact that the initial reason for purchasing the property was to provide a location from which to operate your own business indicates that the main use of the property is not to derive rent. It follows that the exceptions contained within subsection 152-40(4) of the ITAA 1997 will not apply in this case, and that the property satisfies the meaning of active asset contained within section 152-40 of the ITAA 1997.