One of the basic conditions required to be able to access the generous small business CGT concessions is that the asset passes the Active Asset Test.
It is generally understood that for the asset to pass the test, it must be used in your business for at least 7.5 years, or for at least half of the asset’s ownership period.
One of the notable assets that is excluded from qualifying as an active asset, is an asset that is mainly used to derive rent. This exclusion does not extend to an asset where its main use for deriving rent was only temporary, or where the asset was being used in a business being run by a related party.
This “exclusion from the exclusion” allows for the common scenario of having a business and its premises owned by different entities, but under common ownership, to have access to the small business CGT concessions for all the assets used in the business.
So where does this leave a business where the main income is rental income, but that rental income is not coming from a related party’s business?
The devil (or anti-devil in this case) may just lie in the detail.
Consideration has to be given to the specific circumstances, as the generalisation that it is rental income being received does not necessarily hold true for small business CGT concession purposes.
One of the keys to income being considered “rental income” is the right of the tenant to exclusive possession of the property. It is this element that generally excludes a standard leased residential or commercial property from being an active asset. But how may this apply to other “rental arrangements”?
The Commissioner has set a few examples in TD 2006/78 where, in his view, the otherwise rental arrangement would not actually be deriving rental income.
These scenarios cover the lease of commercial storage units, the operation of a boarding house and the leasing of a complex of holiday apartments. When reviewing the legal rights of the tenants, the Commissioner is of the view that the tenants do not have exclusive possession of the relevant property, and as a result a landlord/tenant relationship does not exist and the income is not rental income. Therefore, the asset is not an excluded asset under the Active Asset Test.
This does not necessarily mean the sale of the asset would pass the Active Asset Test, as consideration still needs to be given as to whether a business is actually being conducted.
So the questions that exist for your “rental asset” are: What are the contractual terms of the rental arrangement? What rights do the tenants have? If they do not have exclusive possession that may be the first step in the asset passing the Active Asset Test.
If you have any questions on the Active Asset Test please contact Ross Prosper.