Edited version of private advice

Authorisation Number: 1051787219548

Date of advice: 7 December 2020

Ruling

Subject: CGT - small business concessions - active asset and CGT discount

Question 1:

Are you eligible to claim the small business concession under section 152-10 of the Income Tax assessment Act (ITAA) 1997?

Answer:

No

Question 2:

Are you eligible to apportion the Capital Gains Tax (CGT) discount under section 115-100 of the ITAA 1997?

Answer:

Yes

This ruling applies for the following period

Income year ending 30 June 20XX

Relevant facts and circumstances

You are a foreign resident.

You were a foreign resident on the 8 May 2012.

You have siblings who are Australian residents.

You and your siblings inherited your parent's rented property (the property) after 8 May 2012 in equal shares.

The property is located in Australia.

You continued to rent out the property with your siblings for a long period of time.

The property was put on the market and sold recently.

The sale price was $XXX,XXX.

You will receive your ownership share of the sale price after costs have been paid.

You will have a capital gain to declare.

You have always declared the rental income as a non-resident and paid the non-resident tax rates on this income.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152

Income Tax Assessment Act 1997 section 115-100

Reasons for decision

Small business concessions

To qualify for the small business CGT concessions, you must satisfy several conditions, referred to as the basic conditions.

A capital gain that you make may be reduced or disregarded under section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997) if the following basic conditions are satisfied:

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

(b)     the event would have resulted in a 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

                    III.        you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an interest in an asset of the Partnership

                   IV.        you do not carry on a business, but your CGT 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 as outlined in subsections 152-10(1A) and 152-10(1B) of the ITAA 1997), and

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

Having one rental property in partnership with your siblings does not constitute carrying on a business and also the rental property is not considered an active asset for CGT purposes.

Active assets

The requirements of an active asset and the active asset test are set out in Subdivision 152-A of the ITAA 1997.

For a capital gains tax (CGT) asset of a business to be an active asset for the purposes of Subdivision 152-A 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.

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 (TD 2006/78) discusses the circumstances in which a premises used in a business of providing accommodation for reward may satisfy the active asset test, notwithstanding the exclusion mentioned above.

Whether an asset's main use is to derive rent will depend upon the particular circumstances of each case. In accordance with paragraph 22 of TD 2006/78, the term 'rent' has been described as follows:

• the amount payable by a lessee to a lessor for the use of the leased premises (C.H. Bailey Ltd v. Memorial Enterprises Ltd 1 All ER 1003 at 1010; United Scientific Holdings Ltd v. Burnley Borough Council 2 All ER 62 at 76, 80, 86, 93, 99)
• a tenant's periodical payment to an owner or landlord for the use of land or premises (Australian Oxford Dictionary, 1999, Oxford University Press, Melbourne)
• recompense paid by a tenant to a landlord for the exclusive possession of corporeal hereditaments. The modern conception of rent is a payment which a tenant is bound by contract to make to his landlord for the use of the property let (Halsbury's Laws of England 4th Edition Reissue, Butterworths, London 1994, Ch 27(1) 'Landlord and tenant', paragraph 212).

If premises are leased to a tenant under a lease agreement granting exclusive possession, the payments involved are considered to be rent and the premises will not be an active asset.

Application to your situation

Where there is a question of whether the amount paid constitutes rent, a key factor to consider is whether the occupier has a right to exclusive possession of the property. If such a right exists, the payments involved are likely to be rent. Conversely, if the arrangement allows the occupier only to enter and use the premises for certain purposes and does not amount to a lease granting exclusive possession, the payments involved are unlikely to be rent.

Other relevant factors include the degree of control retained by the owner, the extent of any services performed by the owner, such as room cleaning, provision of meals, supply of linen and shared amenities, and the length of the arrangement.

As outlined above, if premises are leased to a tenant under a lease agreement granting exclusive possession, the payments involved are likely to be rent and the premises will not be an active asset.

In your situation, the property has been used to derive rental income for a long period of time and the property was leased with the tenants having exclusive possession.

It cannot be viewed that the main use of the Property to earn rent was only temporary or short period of time during the ownership period.

As the income earned from the Property was rent, the Property cannot be viewed as an active asset and you cannot apply any small business concession to any capital gain made on the disposal of your ownership interest in the Property.

Additionally, the property was not used in relation to the carrying on of a business and therefore the basic condition for the capital gains tax small business concessions have not been satisfied.

Discount Capital Gain

Up to 8 May 2012, the CGT discount of 50% was available to foreign resident individuals who were subject to CGT on taxable Australian property.

For assets acquired after 8 May 2012, the discount is generally not available to foreign and temporary individuals (including beneficiaries of trusts and partners in a partnership).

The discount is apportioned where a CGT event happens after 8 May 2012 and:

•         you acquired the asset before that date, or

•         you had a period of Australian residency after that date.

In your case, you acquired a XX% share in the property from your parent and you were a foreign resident on 8 May 2012. Therefore, you are entitled to apportion the discount capital gain when working out your capital gain.

In order to assist you in calculating the CGT discount, you can use the following link which is on our website; CGT discount worksheet (PDF 135KB)

As you were a foreign resident on 8 May 2012, you may choose to get a market value (from a qualified valuer) for the rental property as at 8 May 2012 and use the market value calculation. This will apportion the CGT discount to take into account the capital gain you accrued before 8 May 2012.