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I previously reported on the Commissioner’s draft determination in relation to investment properties, companies and the Small Business CGT Concessions. That draft determination has since been finalised as Taxation Determination TD 2021/2.
By way of context, there are many requirements that need to be satisfied for the Small Business CGT Concessions to be available on the sale of a CGT asset. One of them is that the CGT asset satisfies the Active Asset Test.
A CGT asset satisfies the Active Asset test if, in broad terms, the asset is an active asset for at least half of the taxpayer’s ownership period in respect of the asset or at least 7.5 years.
A CGT asset should be an active asset at a particular time where the taxpayer owns the asset and it is used, or held ready for use, in the course of carrying on a business that is carried on by the taxpayer, the taxpayer’s affiliate or entities that are connected with the taxpayer.
However, there are some exceptions regarding which CGT assets can be active assets. One of the exceptions is where the CGT asset is used to derive rent (other than from affiliates or connected entities).
In the context of investment properties owned by companies, the above raises the following two questions:
- is the company (or its affiliates or connected entities) carrying on a business in relation to the investment property; and
- is the investment property used to derive rent.
In relation to the first question, the Commissioner of Taxation released (on 5 April 2019) Taxation Ruling TR 2019/1 which considers when a company carries on a business for the purpose of the meaning of “small business entity”, which is a term relevant for the satisfaction of the Small Business CGT Concession “CGT small business entity” test. Whilst the Taxation Ruling is specifically limited in its application, it is submitted that the principles discussed in that Taxation Ruling are also applicable for the purpose of determining whether a company is carrying on a business for the purpose of the Active Asset Test.
In broad terms, the Commissioner of Taxation considers that there is a rebuttable presumption that a company carries on a business subject to the following indicia of carrying on a business:
- whether the company intends to carry on a business;
- the nature of the activities, particularly whether they have a profit-making purpose;
- whether the activities are repeated and regular and organised in a business-like manner, including the keeping of books, records and the use of a system;
- the size and scale of a company's activities including the amount of capital employed in them; and
- whether the activity is better described as a hobby, or recreation.
Based on the above, it is quite possible that a company can be carrying on a business (a leasing business) in relation to an investment property.
In relation to the second question, the Commissioner of Taxation released (on 24 February 2021) Taxation Determination TD 2021/2 which considers whether a company carrying on a business in a general sense can claim the Small Business CGT Concessions in relation to an investment property which is used to derive rent.
In broad terms, the Commissioner considers (correctly) that even though the company may be carrying on a business in relation to the investment property, that is only one of the tests. The exclusion for CGT assets that derive rent still applies to exclude investment properties deriving rental income from being active assets, and therefore excludes the investment properties from being able to satisfy the Active Asset Test.
As a result, the Small Business CGT Concessions should not be available to companies on the sale of their investment properties which derive rental income.
Of course, not all investment properties are used to derive rental income. Some are used to derive licence income. The difference relates to a number of factors, with a key factor being whether the occupant of a premises has a right to exclusive possession vs a limited right to use.