Edited version of private advice

Authorisation Number: 1052247087343

Date of advice: 7 June 2024

Ruling

Subject: CGT - basic conditions

Question

Do you satisfy the basic conditions for relief for the small business CGT concessions under section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

DD MM 20XX

Relevant facts and circumstances

You are a partnership.

You purchased commercial property together a few decades ago for your business. You also acquired other assets at the same time.

You operated the business in partnership for several months.

You then leased the premises to an unrelated third party for several years.

At the end of the lease, you resumed operating the business in partnership.

On DD MM 20XX, you leased the premises to an unrelated third party.

Several years later, a storm destroyed the property, leaving the business inoperable. You decided to terminate the lease, pay out the lessee and step back into the business to coordinate the ongoing repairs required to get it back to an operational condition.

You received insurance compensation for the damage caused by the storm which was finalised and paid out between MM 20XX and MM 20XX. You included the insurance proceeds in your income year tax return as assessable income.

The building has been repaired to a lockable condition but requires substantial capital works before trading could recommence. You have continued to maintain licences and pay for rates since the storm.

To date, you have not been able to recommence trading. The reasons for this are due to delays caused by Covid-19 as well as one of the partners experiencing poor health.

You sold the other assets on DD MM 20XX. They were always used in the business when you operated it and were used by the unrelated third-party entities during the times that the property was leased.

Since finalisation of the insurance claim, the property has sat empty and no records have been kept other than for the payment of the rates and relevant licences each year. The property has been on the market ever since works were completed to secure the property to a lockable state.

You have advised that you do not meet the maximum net asset value test due to your assets exceeding a net value of $6 million.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 subparagraph 152-10(1)(c)(iii)

Income Tax Assessment Act 1997 subsection 152-10(1AA)

Income Tax Assessment Act 1997 section 328-110

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision

To access the small business CGT concessions, you must meet the basic conditions for relief under section 152-10 of the ITAA 1997. You may reduce or disregard a capital gain you make under Division 152 of the ITAA 1997 if a CGT event happens in related to a CGT asset of yours in an income year and the event would have resulted in a gain. Under subparagraph 152-10(1)(c)(iii) of the ITAA 1997, you must be a partner in a partnership that is a CGT small business entity for the income year, and the CGT asset must be an asset of the partnership.

'CGT small business entity' is defined in subsection 152-10(1AA) of the ITAA 1997. You are a CGT small business entity if you are a small business entity and your aggregated turnover is less than $2 million.

'Small business entity' is defined under section 328-110 of the ITAA 1997. You are a small business entity for an income year if you carry on a business and your aggregated turnover for the current year is likely to be less than $10 million and/or your turnover in the previous income year was less than $10 million. Note that the reference to $10 million is replaced with $2 million for a CGT small business entity.

'Business' is defined under subsection 995-1(1) of the ITAA 1997 as being any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

The Commissioner considers various indicators to determine whether a business is being carried on which are set out under TR 97/11. The indicators are not limited to primary production businesses only and are used to weigh up whether an activity is a business.

Paragraph 13 of TR 97/11 lists the business indicators as follows:

•         whether the activity has a significant commercial purpose or character;

•         whether the taxpayer has more than just an intention to engage in business;

•         whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity;

•         whether there is repetition and regularity of the activity;

•         whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business;

•         whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit;

•         the size, scale and permanency of the activity; and

•         whether the activity is better described as a hobby, a form of recreation or a sporting activity.

No single indicator will be decisive in determining whether a business is carried on. The indicators must be considered in combination and as a whole. Where there is no overall profit motive and the activity looks like it will never produce a profit, it is unlikely that the activity will be considered to be a business.

Paragraph 22 of TR 97/11 provides that an application where the matter in issue includes whether a business is being carried on, 'sufficient information' should be provided to enable the Commissioner to give the ruling.

Application to your circumstance

Since the storm, your business has been inoperable. The information you have provided to support that your activity was a business included the following:

•         the property has 'sat empty' since it was repaired to a lockable state - in other words, it has not opened its doors or provided services that the business ordinarily would if it was operational and has therefore not generated any profit

•         images of the property showing that it was now in a lockable state, but still requires substantial capital works before the business could be operational

•         the only income generated from the activity since the storm has been the insurance proceeds

•         no records have been kept relating to the activity, aside from maintaining relevant licences and continuing to pay local council rates

There is no evidence that the activity has been carried on for commercial reasons and in a commercially viable manner.

It appears that there is only a mere intention to resume carrying on the business. The activity is preparatory or preliminary and there is no intention to make a profit until trading could resume.

Although there is some evidence to support the profitability of the activity, given that you have operated the business in the past, there is a lack of evidence to support how the activity can make a profit in its current condition.

There is a lack of repetition or regularity due to the condition of the property. You have not provided details on what activities are being carried out in terms of resuming trading. Due to the fact that the property is not in an operational condition, there appears to be no services being provided on a regular basis which would be usual in the type of business that you operate.

The activity is not being operated in a similar manner to that of an ordinary business in the same industry.

You have not provided any information to support that there is a business plan in place, or any records to show that the activity is planned, organised and carried on in a businesslike manner directed at making a profit.

There is a lack of evidence provided to support that there is a purpose of profit and prospect of profit from the activity. There appears to be no sales and therefore no profits being generated. Allowance is given for the uncontrollable weather event which rendered the business inoperable. Regard is also given to the fact that you have knowledge and experience in the activity, having operated the business previously. However, in the absence of profit motive, the general impression from the activity is that it is not a business.

After reviewing the information provided, taking all of the indicators in TR 97/11 into consideration and on weighing those indicators to your facts, we have determined that you are not carrying on a business.

You are therefore not a CGT small business entity under paragraph 152-10(1AA)(a) of the ITAA 1997 which means that you do not satisfy the basic condition under subparagraph 152-10(1)(c)(iii) of the ITAA 1997. You will be unable to access small business concessions.