Edited version of your written advice

Authorisation Number: 1012831184391

Date of advice: 29 June 2015

Ruling

Subject: CGT - small business concessions - active asset

Question 1

Are your rental property activities considered to be business for the purposes of the small business capital gain tax (CGT) concessions?

Answer

No

Question 2

Are you eligible for the small business CGT concessions?

Answer

No

This ruling applies for the following period

Year ending 30 June 2015

The scheme commences on

1 July 2014

Relevant facts and circumstances

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

• your application for private ruling which we received on dd/mm/yyyy.

You own X residential rental properties.

Each of the properties, were acquired after 20 September 1985.

You complete or manage the completion of repairs and maintenance for the properties and conduct cleaning of the properties when required.

You initially managed the leasing of the properties, prior to the introduction of TICA (Australia's largest tenancy data base) used by real estate agents in 19XX. After this time, you found it increasing difficult to find good, reliable tenants, so you relinquished the management to a real estate agent.

On dd/mm/yyyy you sold one of the properties.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Subdivision 152-A

Income Tax Assessment Act 1997 - Section 152-40

Reasons for decision

Summary

Your rental property activities are not considered to be a business and the properties do not satisfy the active assets test. Therefore, you do not meet the basic requirements for the small business CGT concessions.

Detailed reasoning

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 - 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

• an interest in a partnership asset (partnership assets), or

• 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 2014 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.

Your situation is similar to that outlined in the example above and you would not be considered to be carrying on a rental property business.

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.

Further issues for you to consider

CGT provisions 

CGT event A1 in section 104-10 of the ITAA 1997, relating to the disposal of a CGT asset, will happen when you disposed of the house. You will make a capital gain if the capital proceeds from the disposal are more than the cost base. You will make a capital loss of those capital proceeds are less than the reduced cost. 

You will be eligible for the discount capital gains where:

• you are an individual

• the CGT event happened after 21 September 1999

• the capital gain must be calculated without any reference to indexation of the cost base; and

• the CGT asset was acquired more than 12 months the CGT event.

The discount percentage is 50%.

Where a capital gain meets these requirements, that capital gain is a discount capital gain. Generally, the discount percentage is applied to the discount capital gain, to arrive at your net capital gain.

EXAMPLE

Naomi makes a $50,000 capital gain, which meets the requirements of a discount capital gain, in an income year.

Naomi applies the discount percentage of 50% to the discount capital gain, resulting in a net capital gain of $25,000.