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Ruling

Subject: CGT - small business concessions

Question

Can you apply any of the small business capital gains tax (CGT) concessions to disregard the capital gain made on the sale of your rental property?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commences on:

01 July 2010

Relevant facts and circumstances

You own a number of properties.

You have managed the leasing and maintenance of these properties since you acquired them.

All of the properties have consistently been used to provide rental income.

You are preparing for your retirement.

You sold one of your properties and made a capital gain.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 section 152-35

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

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

Reasons for decision

Note that all subsequent legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated.

For the small business concessions in Division 152 to apply to reduce or disregard a capital gain, the basic conditions in Subdivision 152-A must be satisfied.

One of these conditions is that the relevant CGT asset is required to satisfy the active asset test in section 152-35.

Subsection 152-40(1) provides the meaning of an active asset and states that a CGT asset is an active asset at a time if, at that time, you own it and:

· use it, or hold it ready for use, in the course of carrying on a business; or

· it is used, or held ready for use, in the course of carrying on a business by:

· your small business CGT affiliate; or

· another entity that is connected with you.

However, paragraph 152-40(4)(e) excludes 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.

Application to your circumstances

In your case, you acquired a number of properties which have consistently been used to provide you with rental income.

As the main use of the properties has been to derive rental income, they are excluded from being active assets under paragraph 152-40(4)(e).

Therefore, as you do not satisfy the basic conditions for relief, you are not entitled to apply any of the small business concessions to disregard the capital gain made on the sale of your rental property.

Our view that your rental properties are not active assets and that whether or not you are carrying on a business is immaterial is confirmed by the following example that is provided on page 33 of our publication Advanced guide to capital gains tax concessions for small business 2011-12:

Rachael owns five investment properties which she rents to tenants under lease agreements that grant exclusive possession. The lease terms vary from six months to two years. The properties are not active assets because they are mainly (only) used by Rachael to derive rent. It is irrelevant whether Rachael's activities constitute a business.