Sladen Snippet - ATO releases draft tax determination on the application of the Small Business CGT concessions to investment properties

The Commissioner of Federal Taxation has expressed his preliminary views, in Tax Determination TD 2019/D4, that a company, which

  • carries on a business in a general sense (as described in Tax Ruling TR 2019/1),

  • leases a single investment property; and

  • undertakes no other activities

will be ineligible to use the Small Business Capital Gains Tax Concessions (SB CGT Concessions) in relation to that investment property.  

The basis for the Commissioner’s position is that whilst a company that rents out properties may be considered to carry on a business under TR 2019/1, access to the SB CGT Concessions is reliant on the asset being an “active asset.”

The question of whether an asset is an “active asset” and satisfies the “active asset test” is a separate consideration to whether a company is carrying on a business. For the purposes of the SB CGT Concessions, assets whose main use is to derive rent (which would typically include investment properties), cannot be “active assets.” There is an exception to this rule where the “main use” may be treated as the use within the business rather than to derive rent where the property is leased to a connected entity or affiliate for use in their business. This exception is not addressed in the determination.

Additional key parts to note with respect to this draft determination are:

  • It is specific to companies, and not individuals or trusts.

  • It should be read in conjunction with TR 2019/1, which outlines when a company “carries on a business” for the purposes of, among other things, qualifying as a “small business entity” and potentially accessing the SB CGT Concessions.

While the ATO’s draft guidance is certainly welcomed as public guidance on these issues are often in short supply, the determination is somewhat simplified. For instance, the draft determination does not address the situation when a taxpayer owns multiple (rather than a single) investment properties, and whether that in any way changes the outcome to the SB CGT Concessions. Whilst unlikely, clarity on this point should be provided.

The draft determination is nevertheless an important reminder that qualifying for the SB CGT Concessions is complex and requires consideration of multiple factors including whether a business is being carried on and whether an asset satisfies the “active asset” requirements.

Consultation on the draft determination is open until 10 May 2019 and therefore we may see further development to the draft determination prior to it’s finalisation.

If you have any questions with respect to the above, please contact our specialist tax advisors.

Edward Hennebry
T +61 3 9611 0113

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

Laura Spencer
Senior Associate
T +61 3 9611 0110