No CGT benefit for small businesses primarily collecting rent

The Australian Taxation Office (ATO) has issued Taxation Determination TD 2021/2 that contains the ATO view that companies that carry on a business in a general sense but whose only activity is renting out an investment property will be unable to benefit from the small business capital gains tax (CGT) concessions in relation to that property.

The ATO view in TD 2021/2 is not controversial and accords with the legislative definition of an “active asset”. However, TD 2021/2 is a useful reminder that many companies that primarily derive rental income from their activities may not qualify for the small business CGT concessions. (While TD 2021/2 did not refer to it, presumably the exception to the view in TD 2021/2, where the property is used by a connected entity or affiliate in carrying on a business still applies).  

For businesses looking at this ruling, determining whether receipts from a CGT asset are properly characterised as rent, or something less than rent (for example, license fees) will remain a consideration. 

The case law and the ATO have interpreted the concept of rent as being an integral component of a lease as compared to a licence. The essential feature that distinguishes a lease from a licence is “exclusive possession,” and it is a question of fact and degree whether exclusive possession exists.

Taxpayers may find useful guidance in Taxation Determination TD 2006/78, where the ATO highlight its views on the distinctions between lease and licence arrangements.

While each case will need to be assessed on its merits (and particularly, the terms and form of any agreement between the parties) recent cases in the court are reminders that taxpayers may struggle to persuade a court or tribunal that their arrangement is not a lease.

Lastly, although the ATO’s views in TD 2021/2 are specific to companies, non-corporate entities should still have regard to this ruling as the rules with respect to what constitutes an “active asset” are equally applicable. 

If you require any assistance with the small business CGT concessions, please contact:

Rob Warnock
Principal Lawyer
T: 03 5226 8541
E: rwarnock@ha.legal