Tax Determination TD 2021/2 (the Determination) released on 24 Feb 2021, confirmed that companies whose only activity is renting out investment property cannot claim the small business CGT concessions outlined in Division 152 of the Income Taxation Assessment Act (ITAA) 1997 even if it is ‘carrying on a business’ in a general sense as described in the Ruling (TR 2019/1).
Why it does not apply:
For the small business CGT concessions to apply, the CGT asset must satisfy the active asset test (s.152.35 of the ITAA 1997) which requires taxpayers to:
OR
An asset is an active asset at a particular time if it is being used for or is inherently connected with (in the case of an intangible asset), a business that is carried on by the taxpayer, the taxpayer’s affiliate, or an entity connected to the taxpayer.
However, an asset whose ‘main use’ by the taxpayer is to derive rent is automatically excluded from the definition of an active asset. The Determination confirms that it is the Commissioner’s view that such assets are excluded even if they are used in the course of carrying on a business.
Example:
‘A’ is a company incorporated in Australia and owns commercial property, which it has rented to unrelated third parties at market rates on normal commercial terms since its inception. ‘A’ provides no other services in relation to the property and conducts no other activities. ‘A’ has produced a profit in each of the income years it has rented out the property and is engaged in ongoing activities that have a purpose and prospect of profit, namely letting out the property.
In this situation, the company has derived rental income from the leasing of a property to an unrelated third party. Accordingly, the company carries on a business in a general sense described in TR 2019/1. However, the main (only) use of the property is to derive rent and it is therefore excluded from being an active asset under s. 152-40(4)(e) regardless of whether the activities constitute the carrying on of a business in a general sense. Therefore, the investment property would not satisfy the active asset test in s. 152-35 and ‘A’ would not meet the requirement in s.152-10(1)(d) to be eligible for the CGT small business concessions in Division 152 in relation to the disposal of the investment property.
Arrangements where the active asset exclusion does not apply:
TD 2006/78 provides examples of when the Commissioner considered property is for the main use of deriving rent for the purpose of the active asset test exclusion. In some examples, the ATO considers that the income derived is not ‘rent’ and therefore the exclusion does not apply. These arrangements include:
Reference
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