Edited version of private advice

Authorisation Number: 1052188354289

Date of advice: 14 November 2023

Ruling

Subject: Small business CGT concessions - 15-year exemption - main use to derive rent

Question

Does the disposal of your residential property satisfy the conditions for the small business CGT 15-year exemption in Subdivision 152-B of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You purchased residential property.

The property is leased to tenants granting exclusive possession. The property is managed by a real estate agency.

You are looking to dispose of the property and would like to access the small business Capital Gains Tax (CGT) concessions.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152-40

Income Tax Assessment Act 1997 Subdivision 152-B

Reasons for decision

Section 152-105 of the ITAA 1997 sets out the conditions that must be met to disregard a capital gain from a CGT asset. One of the conditions is that the basic conditions for relief in Subdivision 152-A are satisfied.

The basic conditions in Subdivision 152-A of the ITAA 1997 stipulates the CGT asset must satisfy the active asset test.

However, subsection 152-40(4) lists CGT assets that cannot be active assets that need to be considered.

Under paragraph 152-40(4)(e), an asset whose main use is to derive rent cannot be an active asset unless the main use for deriving rent was only temporary.

If the main use of the property was to derive rent at any time, the property was not an active asset at that time.

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 22 of TD 2006/78 states that:

Whether an asset's main use is to derive rent will depend on the particular circumstances of each case. The term 'rent' has been described as follows:

•                     the amount payable by a tenant to a landlord for the use of the leased premises (C.H. Bailey Ltd v. Memorial Enterprises Ltd [1974] 1 All ER 1003 at 1010, United Scientific Holdings Ltd v. Burnley Borough Council [1977] 2 All ER 62 at 76, 86, 93, 99)

•                     a tenant's periodical payment to an owner or landlord for the use of land or premises (The Australian Oxford Dictionary, 1999, Oxford University Press, Melbourne), and

•                     recompense paid by the tenant to the 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, Vol 27(1) 'Landlord and Tenant',paragraph 212).

In addition, paragraph 23 states:

A key factor therefore in determining whether an occupant of premises is a lessee is whether the occupier has a right to exclusive possession (Radaich v. Smith (1959) 101 CLR 209; Tingari Village North Pty Ltd v. Commissioner of Taxation [2010] AATA 233 at paragraphs 44-46, 2010 ATC 10-131, 78 ATR 693 and associated Decision Impact Statement 2008/4646 & 2008/4647). If, for example, premises are leased to a tenant under a lease agreement granting exclusive possession, the payments involved are likely to be rent and the premises not an active asset. On the other hand, if the arrangement allows the person 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

Example 1 in TD 2006/78 considers if the main use is to derive rent and states:

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.

Application to your circumstances

In your situation you own a residential property that is leased to tenants granting exclusive possession. Accordingly, the main (only) use of the property is to derive rent and is therefore excluded from being an active asset under paragraph 152-40(4)(e) of the ITAA 1997.

Consequently, as the property does not satisfy the active asset test, the capital gain from the sale of the property cannot be disregarded under the small business 15-year exemption.