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Edited version of your private ruling
Authorisation Number: 1012617088485
Ruling
Subject: CGT - small business concessions and active asset
Questions:
1. Are you carrying on a rental property business?
Answer:
No.
2. Are you eligible to apply the small business capital gains tax (CGT) concessions when you dispose of your rental properties?
Answer:
No.
This ruling applies for the following periods:
Year ended 30 June 2015
Year ended 30 June 2016
Year ended 30 June 2017
Year ended 30 June 2018
Year ended 30 June 2019
The scheme commences on:
1 July 2014
Relevant facts and circumstances
You own a number of properties on the same parcel of land in a popular holiday location.
One property is used by you during the holiday season, and the others are available for short term accommodation.
The apartments have been used for holiday accommodation since 199X.
The apartments are licensed by the local government authority for holiday accommodation.
The apartments are advertised on the internet and with the local real estate agent.
The tariff charged varies depending on the length of stay and whether peak or off peak time of the season.
As owner managers, you are onsite during the season and responsible for the overall running of the business. The activities you undertake in relation to the properties include:
• taking and managing bookings and deposits
• checking in guests on arrival and accepting the balance of the payment
• providing linen if required by the guests
• cleaning of the properties after each stay
• general maintenance of the property
• attending to any issues the guests may have during their stay
The income from the properties have been recorded equally in your tax returns since 199X as net rental income.
Relevant legislative provisions
Income Tax Assessment Act 1997 Subdivision 152-A and
Income Tax Assessment Act 1997 Subsection 152-40.
Reasons for decision
To qualify for the small business CGT concessions, you must satisfy several conditions that are common to all the concessions. These are called the 'basic conditions'.
The basic conditions are contained in subdivision 152-A of the Income Tax Assessment Act 1997 (ITAA 1997).
STEP 1
You must first satisfy one of the following:
• you are a small business entity
• you do not carry on business (other than as a partner) but your asset is used in a business carried on by a small business entity that is your affiliate or an entity connected with you (passively-held assets)
• you are a partner in a partnership that is a small business entity, and the CGT asset is
n an interest in a partnership asset (partnership assets), or
n an asset you own that is not an interest in a partnership asset (partner's assets)
• you satisfy the maximum net asset value test.
STEP 2
The asset in question must satisfy the active asset test
STEP 1 - Carrying on a business
A person who simply co-owns investment properties is usually regarded as an investor and not carrying on a rental property business. This is because of the limited scope of the rental property activities and the limited degree to which a co-owner actively participates in rental property activities.
The Rental properties 2012-13 guide provides the following example (at page 5):
Example 3: Co-owners who are not carrying on a rental property business
The Tobins own, as joint tenants, two units and a house from which they derive rental income. The Tobins occasionally inspect the properties and also interview prospective tenants. Mr Tobin performs most repairs and maintenance on the properties himself, although he generally relies on the tenants to let him know what is required. The Tobins do any cleaning or maintenance that is required when tenants move out. Arrangements have been made with the tenants for the weekly rent to be paid into an account at their local bank. Although the Tobins devote some of their time to rental income activities, their main sources of income are their respective full-time jobs.
The Tobins are not partners carrying on a rental property business, they are only co-owners of several rental properties.
It is considered that your situation aligns to that outlined in the example above and you would not be considered to be carrying on a rental property business.
Your activities are better described as leasing residential properties to receive passive income from a stream of rental income. The income is not derived from the services you provide; it is derived from the letting of the properties and is considered to be passive income.
STEP 2 - Active asset
The requirements of an active asset and the active asset test are set out in Subdivision 152-A of the ITAA 1997.
For a CGT asset of a business to be an active asset for the purposes of Division 152 of the ITAA 1997, it must firstly satisfy one of the 'positive tests' in subsection 152-40(1) of the ITAA 1997, and then also not be excluded by one of the exceptions in subsection 152-40(4) of the ITAA 1997.
Under paragraph 152-40(1)(a) of the ITAA 1997 a CGT asset is an active asset (subject to the exclusions) if it is owned and used or held ready for use in the course of carrying on a business.
However, paragraph 152-40(4)(e) of the ITAA 1997 provides that an asset whose main use in the course of carrying on the business is to derive rent cannot be an active asset (unless that main use was only temporary). That is, even if the asset is used in a business it will not be an active asset if its main use is to derive rent.
Taxation Determination TD 2006/78 states (paragraph 22) that whether an assets main use is to derive rent will depend on the particular circumstances surrounding the derivation of income.
Relevant factors include whether the occupier has a right to exclusive possession (Radaich v. Smith (1959) 101 CLR 209 at 222), the degree of control retained by the owner and the extent of any services provided by the owner such as room cleaning, provision of meals, supply of linen and shared amenities (Appah v. Parncliffe Investments Ltd [1964] 1 All ER 838; Marchant v. Charters [1977] 3 All ER 918).
In your situation, your properties are solely used to derive rent and would not be considered to be active assets.
Conclusion
Your rental property activities are not considered to be a business and the properties do not satisfy the active assets test under subdivision 152-A of the ITAA 1997. Therefore, you do not meet the basic requirements for the small business CGT concessions.