Claiming Capital Gains Tax (CGT) Small Business Concession if Company’s only activity is renting out an investment property.
Income tax: can a company that carries on a business in a general sense as described in Taxation Ruling TR 2019/1 Income tax: when does a company carry on a business? but whose only activity is renting out an investment property claim the capital gains tax small business concessions in relation to that investment property?
There can be instances when a company owns investment property, and its only activity is renting out an investment property – whether its commercial or rental.
Can the company access CGT small business concession in relation to investment property claiming the investment property as an active asset?
Short answer is NO. A company that carries on a business in a general sense as described in Taxation Ruling TR 2019/1 Income tax: when does a company carry on a business? but whose only activity is renting out an investment property cannot claim the capital gains tax (CGT) small business concessions in Division 152 of the Income Tax Assessment Act 1997 in relation to that investment property. This is because an asset whose main use is to derive rent (unless such use was only temporary) is subject to an exclusion from those concessions, even if it is used in the course of carrying on a business.
Example – property investment company
ABC Pty Ltd is a company incorporated in Australia. ABC Pty Ltd owns a commercial property, which it has rented to unrelated third parties at market rates on normal commercial terms since its inception. ABC Pty Ltd provides no other services in relation to the property and conducts no other activities. ABC Pty Ltd has produced a profit in each of the income years it has rented out the property. ABC Pty Ltd 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 paragraph 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 section 152-35 and ABC Pty Ltd would not meet the requirement in paragraph 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.
For the CGT small business concessions to apply, one of the conditions that must be satisfied is that the relevant CGT asset satisfies the active asset test in section 152-35.
The active asset test requires the relevant CGT asset to be an active asset of yours for at least:
- half of the relevant period, if you owned the asset for 15 years or less, or
- 5 years during the relevant period.
A CGT asset is an active asset at a given time if, at that time, you own it and it is:
- used (or held ready for use) in the course of carrying on a business by you, your affiliate or an entity connected with you, or
- an intangible asset that is inherently connected with a business that is carried on by you, your affiliate, or an entity connected with you.
The relevant period described in subsection 152-35(2) is the time between when you acquired the asset and the earlier of either the CGT event or the cessation of the business (if the business ceased to be carried on in the 12 months before the CGT event or any longer period the Commissioner allows).
For further assistance, contact Expert Tax on 0449 952 855 or 1300 869 829