Modest and infrequent maintenance activities of a property whose “main use” is to derive rent will not entitle a taxpayer to access the small business CGT concessions.

In its recent decision in The Executors of the Estate of the late Peter Fowler and Commissioner of Taxation, the Administrative Appeals Tribunal (AAT) held that Mr Fowler was not entitled to apply the small business capital gains tax (CGT) concessions in Division 152 of the Income Tax Assessment Act 1997, on the sale of a block of 10 residential units (Manly Property) as he was not carrying on a business and the Manly Property did not qualify as an “active asset”.

The small business CGT concessions are complex due to the inclusion of, and interaction of, various defined terms and exceptions and should be applied with careful consideration.

Mr Fowler purchased the Manly Property with his wife in 1986 and became the sole owner of the property after her death in 1994.

Mr Fowler’s son testified that, based on comments made by his father, he had seemingly conducted the management of the Manly Property at least until 2006 when his health began to decline. The management activities had included “…advertising, interviewing prospective tenants and supervising tenant inspections; cleaning units when a tenant moved out; receiving phone enquiries from potential tenants; checking references; providing access for potential tenants to inspect a vacant unit; preparation of some of the residential leases; sending the documentation to the new tenants and lodging rental bonds with the Rental Bond Board; arranging for and making payment of all expenses relating to the ownership and running of the rental units at the Manly property; attending to and performing most of the ground and general maintenance of the Manly property; repairs and maintenance, including cleaning of the common property and gardening..”

After Mr Fowler went into an aged care facility in 2011 and with the costs of maintaining the Manly Property becoming prohibitive, Mr Fowler’s three children (acting under a power of attorney) sold the Manly Property in 2012 for $4.1 million. They engaged a tax agent to prepare Mr Fowler’s 2012 income tax return and reduce his 2012 taxable income to nil after applying the small business CGT concessions to the discounted capital gain of $1.7 million.

The Commissioner amended Mr Fowler’s 2012 income tax assessment on the basis that for the purposes of the small business CGT concessions, Mr Fowler was not a “small business entity” and the Manly Property was not an “active asset”, and imposed administrative penalties. Mr Fowler passed away in 2015 and the executors of his estate sought a review of the Commissioner’s decision by the AAT.

The AAT confirmed that Mr Fowler was not entitled to the small business relief, holding that:

1.   the “small business entity” test in section 328-110 requires a taxpayer to have an annual turnover of less than $2 million (which Mr Fowler did) and to carry on a business in the relevant income year;

2.   the “active asset” test in section 152-40 required that the Manly Property have been used, or held ready for use, in the course of carrying on a business carried on by Mr Fowler. Even if the property was used as such, it would not have qualified as an “active asset” if its “main use” was to derive rent, due to the exclusion in section 152-40(4)(e);

3.   the evidence in favour of the existence of a business was “vague” and “unconvincing”:

  • the son’s evidence of his father’s activities was limited and was not based on direct observation but on what his father had told him;
  • Mr Fowler’s approach to the Manly Property was more likely to have been a “set and forget” approach as “…once a tenant moved in and had been given a bank deposit book, there was little to do (catastrophes and payment reconciliations aside) until the tenant later moved out.”;
  • any ground maintenance and other work that Mr Fowler carried out on the property may have been modest and undertaken infrequently; and

4.   in any event, based on the evidence, the Manly Property did not qualify as an “active asset” as its “main use” had been to derive rent.

This article was written with the assistance of Patricia Martins, Legal Executive / Project Manager

To discuss this further or for more information please contact:

Renuka Somers
Special Counsel
Sladen Legal
M +61 407 478 592|  T +61 3 9611 0110


Daniel Smedley
Principal | Accredited Specialist in Tax Law
Sladen Legal
M +61 411 319 327|  T +61 3 9611 0105


Patricia Martins
Legal Executive / Project Manager
Sladen Legal
T +61 3 9611 0138