Edited version of private advice

Authorisation Number: 1051993523711

Date of advice: 17 June 2022

Ruling

Subject: Small business concessions - 50% active asset reduction

Question

Do you satisfy the Basic Conditions for the small business capital gains tax (CGT) concessions under section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997) and eligible for the small business 50% reduction under the Subdivision 152-C of the ITAA 1997 in relation to the disposal of the Property?

Answer

Yes, based on the information provided, you satisfy the basics conditions under section 152-10 of the ITAA 1997.

(a)         You have disposed a CGT asset of yours in the relevant income year

(b)         the CGT event have resulted in a capital gain.

(c)         Your CGT asset, the Property, has been used in the course of carrying on a business by an entity connected with you that satisfied subsection 152-10(1A) of the ITAA 1997.

(d)         the CGT asset satisfies the active asset test under section 152-35 of the ITTA 1997, as you have held the property for approximately 15 years and the property was continuously used in the course of carrying on a business by an entity connected with you for the entire test period.

Accordingly, you are eligible for the small business 50% reduction under the Subdivision 152-C of the ITAA 1997.

Further information can be found by searching for 'QC 52289' on the ATO website

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Individual A owned Property A which consists of three buildings. Two of the buildings each contain two conjoined studio apartments with the third building housing the reception area and a fifth apartment.

The studio apartments are fully self-contained and offer the following features:

•         Queen size bed

•         Fully equipped kitchen

•         Modern facilities and furnishings

•         Flat screen TV/DVD players

•         Direct dial telephones

•         Wireless broadband internet access

•         Off street parking

•         Private balconies

The fifth apartment is a three-bedroom house accommodating up to eight people and offers the following features:

•         3 Bedrooms: 1 queen bed, 2 double beds and 1 single bunk. Double sofa bed is also available on request.

•         Two bathrooms - spa bath in en-suite bathroom, the second bathroom also features a bath

•         Leather sofas

•         Wood fired heating

•         Off-street parking

•         Laundry - washing machine and dryer

•         Large deck

•         Private barbeque

•         Fully self-contained modern kitchen, full size refrigerator

•         Large flat screen TV and DVD player

•         Mini bar with local wines and produce

•         Internet access

The fifth apartment is in the same building as the reception area but has a separate entrance to the reception area.

Reception is open from 8.30am to 6pm however is not continually manned. There is usually someone on-site each day between 8.30am and 11am carrying out laundry and cleaning functions although for the remainder of the day, whilst not on-site, guests are able to contact you by phone for any queries. All guests are provided with a keycode to access their accommodation on arrival if management is not on-site at the time.

Guests are provided with a welcome letter detailing local attractions, eating options etc.

There is no provision of meals or breakfast.

Property A is managed and operated by a related management entity being ABC Pty Ltd as trustee for the X Family Trust (trading as ABC). All future references to the ABC will be a reference to Tourism Operator.

The Tourism Operator is in the business of operating and managing short-term accommodation including the Property and approximately 14 other properties. The Tourism Operator manages the properties on behalf of various property owners, including you.

The reception area located on Property A is utilised for services for all properties managed by the Tourism Operator.

The Owners of the properties make the supplies of the accommodation in their own right. The Tourism Operator acts as an agent on behalf of the property owners.

The Owners have not entered into a lease/licence in regard to the properties.

Schedule 1 and Schedule 2 of the various Management Agreements contain identical roles and responsibilities of the parties including:

Tourism Operator Maintenance Duties

•         Keep the interior and exterior of the property including the floors, ceilings, any glass and the Property Owner's fixtures, clean and in good condition.

•         Shall not be liable or otherwise responsible for any lost, stolen, damaged or worn furniture, chattels, fixtures or fittings located in or about the Property.

•         Undertake repairs and replacements which are the property owner's responsibility as are urgently necessary to maintain existing services required by law to an amount not exceeding $X on any one occasion. Repairs or replacement of items exceeding $X will be subject to the prior approval of the owner.

Tourism Operator Management Duties

•         Management and administration of the property as high quality holiday accommodation.

•         Promotion and advertising under the brand of the Tourism Operator.

•         Listing of property where applicable on various websites.

•         Taking bookings, telephone/web/email enquiries.

•         Check-in/check-out of guests, client care and communication.

•         Bookkeeping and monthly financial reporting.

•         Provision of cleaning service and products.

•         Provision of day-to-day linen and laundering.

•         Provision of standard consumables.

•         Organisation and management of day-to-day maintenance.

Property Owner Responsibilities

•         Payment of services and utilities to the property (electricity, gas, rates, etc)

•         Tourism Operator shall charge back to the property owner costs for undertaking the following:

­   Maintenance of property and grounds

­   Supply and management of firewood

­   Six monthly inspections of fire equipment

­   Repairs/replacement of equipment

­   Cleaning charges (for stays by the property owner)

•         Provision of furnishings, chattels, etc

•         Bedding (quilts, pillows, etc) and initial linen supply cost (sheets, towels and daily linen - two sets per bedspace). Changeover is supplied by the Tourism Operator.

•         Overheads (electricity, firewood, gas, rates, etc)

•         Requirements for safety accreditation including:

­   Form X

­   Insurance (including public liability of $X)

­   Certificate of Occupancy

­   Six monthly servicing of fire extinguisher and blanket.

Schedule 2 of the Management Agreements provides that the property owner shall pay the Tourism Operator a percentage of all income net of any third-party fees in respect of the maintenance duties.

Income and expenses from each property are treated completely separately and monies are held in trust to be paid out to the respective property owners on the departure of guests.

You confirmed you and the employees of the Tourism Operator performed the Tourism Operator's duties as listed in the Schedule 1 of the relevant Management Agreements.

The property was advertised on a number of online platforms.

The Tourism Operator is an entity 'connected with' you.

The Tourism Operator was a small business entity for the income year of the CGT event with aggregated turnover less than $X million in the previous year. The Tourism Operator is therefore a CGT small business entity under subsection 152-10(1AA) of the ITAA 1997.

You acquired Property A in 20XX.

Property A was disposed in 20XX.

Property A was continuously used for short-stay accommodation purpose and managed by the Tourism Operator throughout your ownership period.

Following the sale of Property A, the reception area for the Tourism Operator will remain on Property A.

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

Income Tax Assessment Act 1997 Subdivision 152-C