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Small Business CGT Exemption - Property

Discussion in 'Accounting & Tax' started by Paul@PFI, 12th May, 2016.

  1. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

    18th Jun, 2015
    From time to time we encounter the issue of a person operating a commercial property business.
    However not all businesses are eligible for the CGT Small Business concessions such as the 15 year tax exemption.

    A common concern is where a business owns and rents say factory units, an office space, even a shop, restaurant etc. Perhaps many of them. It has an ABN, pays GST etc etc. It may be a company, a partnership, trust or personal ownership (Obviously legal ownership is always with a human partner and not a partnership !!)

    16, 18, 25 years later the property is sold.

    Unfortunately at this point s152-40(4)(e) operates and denies eligibility to the small business CGT concessions on the grounds that passive rental property is not an "active asset" used in a business. The key issue isnt so much the business. Thats not disputed. But the asset is not an active asset. It is a passive investment no different to say residential rental properties which also are subject to CGT.

    So what does it take to make it an active asset used in a business ??
    Thats complex and I will simplify what can be a complex arrangement so I dont get posts from every man and his dog with divergent views.

    To be an active asset the property must be used (held ready, actively used or connected with) in a small business which is an affiliate or connected with the property owner. I will use an example, Paul owns a commercial office and rents it to Prince Accounting Services. Prince is owned by Paul. Prince pays rent to Paul. An accounting practice is run in that office and is a small business. The sale of that property should satisfy the small business concessions if it is sold.

    However if Paul rents to Jim's Accounting and Paul is not connected with Jim's then Pauls property merely earns passive income and fails the active asset test. No CGT small business concession.

    This area of tax law is very complex and advice is a must. Tax Ruling TD 2006/78 provides examples of exceptions
    Last edited: 12th May, 2016
    Terry_w and sanj like this.