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Edited version of your written advice
Authorisation Number: 1012910047797
Date of advice: 11 November 2015
Ruling
Subject: Small business capital gains tax concessions
Question
Can you apply the small business retirement exemption to reduce any capital gain made on the sale of the property?
Answer
No.
This ruling applies for the following period
Year ended 30 June 20YY
The scheme commences on
1 July 20XX
Relevant facts and circumstances
The company carries on a business of renting commercial property.
The company has owned a property for X years and it has always been leased to an unrelated entity.
The leasee is planning on purchasing the property on a lease to buy arrangement and in the 20XX-YY financial year will transfer the title to the leasee's name.
A capital gain will arise in the 20XX-YY financial year.
Relevant legislative provisions
Income Tax Assessment Act 1997 Subdivision 152-A
Income Tax Assessment Act 1997 Subdivision 152-D
Income Tax Assessment Act 1997 subsection 152-40(4)
Income Tax Assessment Act 1997 paragraph 152-40(4)(e)
Reasons for decision
Retirement exemption
The rules covering the small business retirement exemption are contained in Subdivision 152-D of the Income Tax Assessment Act 1997 (ITAA 1997). An entity may choose to disregard all or part of a capital gain under the retirement exemption if certain conditions are satisfied.
If the entity is a company, they can choose to disregard all or part of a capital gain where all of the following conditions are met:
• the company satisfies the basic conditions
• the company satisfies the significant individual test
• a written record of the amount disregarded is kept and if there are more than one CGT concession stakeholders, each stakeholder's percent of the exempt amount (one may be nil, but together they must add up to 100%)
• a payment is made to at least one of the CGT concession stakeholders worked out by reference to each individual's percentage of the exempt amount
• the payment is equal to the exempt amount or the amount of capital proceeds, whichever is less, and
• where the capital proceeds are received in instalments, a payment is made to a CGT concession stakeholder for each instalment in succession.
Basic conditions
The basic conditions for the small business CGT concessions are set out in Subdivision 152-A of the (ITAA 1997). The basic conditions relevant in this case are the small business entity test and the active asset test.
The active asset test
A CGT asset is an active asset at a given time if, at that time you own it and it is used (or held ready for use) in the course of carrying on a business by you, a small business CGT affiliate of yours or an entity 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 this case, the company is carrying on a business of leasing commercial property. This situation is similar to the example provided in TD 2006/78. The main or only use of the commercial properties is to derive rent from an unrelated entity. Therefore, the properties are excluded from being active assets under paragraph 152-40(4)(e) of the ITAA 1997. This is regardless of the fact that the company's activities amount to the carrying on of a business.
As the company does not satisfy the basic conditions, they are not entitled to apply the small business retirement exemption.