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Edited version of your written advice
Authorisation Number: 1012693257188
Ruling
Subject: CGT - small business concessions - active asset
Question
Will you be entitled to access the small business capital gains tax (CGT) concessions on the sale of your rental properties to a self-managed super fund (SMSF)?
Answer:
No.
This ruling applies for the following periods:
Year ending 30 June 2015
Year ending 30 June 2016
Year ending 30 June 2017
Year ending 30 June 2018
The scheme commences on:
1 July 2014
Relevant facts and circumstances
This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.
You have a number of residential rental properties.
All property repairs and maintenance, as well as the paperwork are done by you.
You state you are carrying on a property investment business.
You are planning to gradually sell some of the properties to a SMSF.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 152-10
Income Tax Assessment Act 1997 Section 152-35
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 section 152-10 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.
In your case, you are carrying on a business of residential property investment, renting your properties. This situation is similar to the example provided in TD 2006/78. The main or only use of the properties is to derive rent. Therefore, the properties are excluded from being active assets under paragraph 152-40(4)(e). This is regardless of the fact that your activities amount to the carrying on of a business.
Accordingly, as the properties cannot pass the active asset test under section 152-35 of the ITAA 1997, you will not be able to access any of the small business CGT concessions in relation to the sale of your properties to a SMSF.