Edited version of private advice

Authorisation Number: 1051786435448

Date of advice: 2 December 2020

Ruling

Subject: Small business concessions

Question 1

Does the Company meet the definition of CGT small business entity under section 152-10 (1AA) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Does the property meet the active asset test under section 152-10(1)(d) ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You own a commercial property that you are actively negotiating the sale of and a sale is likely to result in a capital gain.

You purchased the property in 20XX.

The property is all on the one title and the building consists of warehouse space and office space.

The property has been rented out throughout its ownership period to four or more tenants at any given time.

All the tenants are/were unrelated with the exception of one related party tenant, tenant one.

Tenant one carried on a warehousing and a logistics business using a proportion of the property owned by the Company for a number of years until the business was sold to a third party.

Tenant one utilised the entire warehouse space along with a minimal amount of office space.

The floor plan provided shows the total site area of the property includes the building and surrounding land which is made up of common areas and carparks.

Tenant one occupied XX%, of the total building space (Warehouse & Office space).

Tenant one occupied XX% of the remaining land space.

Overall, Tenant one occupied XX%, of the total site area.

Rental income shows that related entities accounted for XX-XX% of total rental income until the related entity was sold.

Business income and rental income of the company shows that tenant one made up XX% to XX% of the business income and rental income made up between XX% and XX% of the income prior to Tenant one being sold.

Assumptions

Tenant one and the Company are connected entities as per section 328-125 ITAA 1997.

Aggregated turnover for the Company, its connected entities and affiliates is under $XXX.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 Section 152-40

Income Tax Assessment Act 1997 Paragraph 152-40(4)(e)

Income Tax Assessment Act 1997 Paragraph 152-40(4A)(b)

Income Tax Assessment Act 1997 Section 152-10

Income Tax Assessment Act 1997 Subsection 152-10(1A)

Income Tax Assessment Act 1997 Section 152-35

Further issues for you to consider

As this ruling contains assumptions, it has not fully considered your eligibility for small business CGT concessions. You should ensure that you satisfy the relevant conditions for the concessions. More information is available in the publication Capital gains tax concessions for small business, which is available on our website www.ato.gov.au.

Reasons for decision

Summary

You satisfy the basic conditions under subdivision 152-A in relation to the sale of the property. The property is considered to be an active asset and its main use was not to derive rent.

Detailed reasoning

Small business CGT concession eligibility

To qualify for the small business concessions, you must satisfy several conditions that are common to all the concessions. These are called the basic conditions and are contained in section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997):

(a)    a CGT event happens in relation to a CGT asset in an income year.

(b)    the event would have resulted in the gain.

(c)     at least one of the following applies:

(i)            you are a small business entity for the income year

(ii)           you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997

(iii)          you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an asset of the partnership or

(iv)          the conditions in subsection 152-10(1A) or (1B) of the ITAA 1997 are satisfied in relation to the CGT asset in the income year.

(d)    the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997.

As you have advised that the property is likely to be sold with a resultant gain and this ruling proceeds on the assumptions thatTenant one and the Company are connected entities and aggregated turnover for the Company and its connected entities is under $2million, the basic conditions in Subdivision 152-A of the ITAA 1997 under consideration are:

•         the passively held assets - affiliates and entities connected with you; and

•         the active asset test.

Passively held assets - affiliates and entities connected with you

The conditions in subsection 152-10(1A) of the ITAA 1997 are satisfied in relation to the CGT asset in the income year if:

(a)  your *affiliate, or an entity that is *connected with you, is a small business entity for the income year; and

(b)  you do not carry on a *business in the income year (other than in partnership); and

(c)   if you carry on a business in partnership - the CGT asset is not an interest in an asset of the partnership; and

(d)  in any case - the small business entity referred to in paragraph (a) is the entity that, at a time in the income year, carries on the business (as referred to in subparagraph 152-40(1)(a)(ii) or (iii) or paragraph 152-40 (1)(b) in relation to the CGT asset.

Application to your situation

For the purposes of this ruling, it has been assumed that the Company and Tenant one are connected entities and also that the Company and their connected entities had an aggregated turnover of less than $XXX. Therefore, the conditions in section 152-10(1A) of the ITAA 1997 will be met.

Active asset test

The active asset test is contained in section 152-35 of the ITAA 1997and is satisfied if:

•         you have owned the asset for 15 years or less and the asset was an active asset of yours for a total of at least half of the test period detailed below, or

•         you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of at least 7.5 years during the test period.

The test period:

•         begins when you acquired the asset;

•         ends at the earlier of:

-        the CGT event, and

-        when the business ceased, if the business in question ceased in the 12 months before the CGT event (or such longer time as the Commissioner allows).

Section 152-40 of the ITAA 1997 provides that a CGT asset is an active asset if it is owned by you and is used or held ready for use in a business carried on (whether alone or in partnership) by you, your affiliate, your spouse or child, or an entity connected with you.

However, paragraph 152-40(4)(e) of the ITAA 1997 provides that an asset whose main use is to derive rent cannot be an active asset. Paragraph 152-40(4A)(b) of the ITAA 1997 provides that to determine the main use of an asset, treat any use by your affiliate, or an entity that is connected with you, as your use. Personal use of the asset by you or your affiliate is ignored in determining its main use.

Mixed use of a property

Taxation Determination TD 2006/78 Income tax: capital gains: are there any circumstances in which the premises used in a business of providing accommodation for reward may satisfy the active asset test in section 152-35 of the Income Tax Assessment Act 1997 notwithstanding the exclusion in paragraph 152-40(4)(e) of the Income Tax Assessment Act 1997 for assets whose main use is to derive rent? considers the active asset test and the main use to derive rent concept. Paragraph 26 of Taxation Determination TD 2006/78 states that:

If an asset is used partly for business and partly to derive rent at any given time, it will be a question of fact depended on all the circumstances as to whether the main use of the asset at that time is to derive rent. No one single factor will necessarily be determinative, and resolving the matter is likely to involve a consideration of a range of factors such as:

-        the comparative areas of use of the premises (between deriving rent and other uses); and

-        the comparative levels of income derived from the different uses of the asset.

Example 5 considers mixed use of a property:

Mick owns land on which there are a number of industrial sheds. He uses one she (45% of the land by area) to conduct a motorcycle repair business. He leases the other sheds (55% of the land by area) to unrelated third parties. The income derived from the motorcycle repair business is 80% of the total income (business plus rentals) derives from the use of the land and buildings.

In determining if the main use of the land is to derive rent, it is appropriate to consider a range of factors. In this case, a substantial (although nevertheless not a majority) proportion by area of the land is used for business purposes. As well, the business proportion of the land derives the vast majority (80%) of the total income. In all the circumstances, the Tax Office considers the main use of the land in this case is not to derive rent and accordingly the land is not excluded from being an active asset by paragraph 152-40(4)(e) of the ITAA 1997.

Application to your situation

On the facts provided, Tenant one occupied XX% of the total site area or XX%. Tenant one's business use of the property is treated as the Company's use because we are assuming they are connected entities for the purposes of this ruling. Therefore, the Company is treated as renting XX% of the property and using the other XX% in a business.

Details of the business income and rental income derived by the use of the property was provided.

Tenant one business use of the property is treated as the Company's use because we are assuming for the purposes of this ruling, they are connected entities. The business proportion of the property derives the majority (approximately XX%) of the total income.

That is, on the facts provided, a majority proportion by area of the property, and the majority of income derived by use of the land is for business purposes.

Therefore, it is considered the main use of the property in this case is not to derive rent and the paragraph 152-40(4)(e) exclusion does not apply. The property is owned by you and was used in a business carried on by an entity connected with you. The property is therefore an active asset for the purposes of section 152-40 of the ITAA 1997.

The Company has owned the property for more than XX years, so to satisfy the active asset test the property must have been an active asset for a total of at least X.X years during the test period. The test period began when the asset was purchased and will end when the CGT event occurs. On the facts provided, the property was used by Tenant one for its business for most of the test period (i.e. for longer than X.X years). Therefore, the active asset test in section 152-35 of the ITAA 1997 is met.

ATO view documents

Taxation Determination TD 2006/78 Income tax: capital gains: are there any circumstances in which the premises used in a business of providing accommodation for reward may satisfy the active asset test in section 152-35 of the Income Tax Assessment Act 1997 notwithstanding the exclusion in paragraph 152-40(4)(e) of the Income Tax Assessment Act 1997 for assets whose main use is to derive rent?