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Edited version of your private ruling
Authorisation Number: 1012531804949
Ruling
Subject: CGT - Small business retirement exemption
Question
Will you be entitled to the small business retirement exemption?
Answer
No.
This ruling applies for the following periods:
Year ended 30 June 2015
Year ended 30 June 2016
The scheme commences on:
1 July 2014
Relevant facts and circumstances
The company was incorporated in 198x. There are 2 shareholders including yourself, and you both hold equal shares in the company.
The company is an investment company. The company's income comprises of rent from non-residential real estate, dividends from shareholdings and interest from cash holdings.
The non-residential real estate has a single tenant occupying the whole premises. This tenant has no connection or association with the company.
You are responsible for the management of the property on behalf of the company.
The company has from time to time bought, held and sold shares in public companies.
You plan to sell your shareholding in the company in the future and retire on the proceeds of the sale.
Relevant legislative provisions
Income Tax Assessment Act 1997 Subdivision 152-A ,
Income Tax Assessment Act 1997 Section 152-35 and
Income Tax Assessment Act 1997 Section 152-40.
Reasons for decision
To access the small business capital gains tax (CGT) concessions in Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997), an entity must first satisfy the basic conditions in Subdivision 152-A of the ITAA 1997.
One of the basic conditions requires the relevant CGT asset to satisfy the active asset test in section 152-35 of the ITAA 1997. The meaning of an active asset is provided in subsection 152-40(1) of the ITAA 1997, which states:
(1) A CGT asset is an active asset at a time if, at that time:
(a) you own the asset (whether the asset is tangible or intangible) and it is used, or held ready for use, in the course of carrying on a business that is carried on (whether alone or in partnership) by:
(i) you; or
(ii) your affiliate; or
(iii) another entity that is connected with you; or
(b) if the asset is an intangible asset - you own it and it is inherently connected with a business that is carried on (whether alone or in partnership) by you, 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.
This exclusion generally does not apply to a CGT asset leased to an affiliate or connected entity. An affiliate is an individual or a company that, in relation to their business affairs, acts or could be reasonably expected to act in accordance with your directions or in concert with you.
In your case, the company is carrying on a business of leasing a commercial property to an unrelated tenant. This situation is similar to the example provided in TD 2006/78. The main or only use of the commercial property is to derive rent. Therefore, the property is excluded from being an active asset under paragraph 152-40(4)(e). This is regardless of the fact that the company's activities amount to the carrying on of a business.
Accordingly, as the commercial property cannot pass the active asset test under section 152-35 of the ITAA 1997, you will not be able to access the small business retirement concession in relation to the sale of your share of the business.