In Rus and FCT  AATA 1854, the Taxpayer was disallowed from challenging a private binding ruling made by the Commissioner which found that her land, of which 90% was vacant, was not an ‘active asset’ for the purposes of the small business capital gains tax (CGT) concessions under the Income Tax Assessment Act 1997 (ITAA 97).
As SME advisors will know, the small business CGT concessions are complex. Also, they are an area where the ATO is constantly undertaking compliance reviews of positions taken by taxpayers. Where the CGT asset involved is land and if the concession is sought to be applied on the basis that the entity disposing of the land is a ‘small business entity’, greater care is warranted.
Taxpayers should be mindful that the Commissioner will carefully consider the nature and extent to which land is used in carrying on a business in determining whether the land is considered an ‘active asset’. It is likely that the Commissioner will refuse to allow the small business CGT concessions in relation to the land if the business activities on the land are minimal or insignificant, or if the majority of the land is vacant.
Section 152-10 of the ITAA 97 provides, among other things, that a capital gain may be reduced or disregarded if the CGT asset to which the capital gain relates is an ‘active asset’ of a small business entity. Under Division 152, an asset is an ‘active asset’ if it has been actively used, or held ready for use, in the course of carrying on the small business, for a specified period of time as defined in the Division. The specified period of time for the purposes of section 152-10 is as follows:
- if the asset has been owned for 15 years or less, at least half of the period of ownership or
- if the asset has been owned for more than 15 years, at least 7.5 years.
Furthermore, under Division 152, the capital gain may be completely disregarded where the active asset has been continuously owned by the small business for 15 years and the Taxpayer is aged 55 years or over and is retiring or permanently incapacitated.
In this instance, the Taxpayer owned a small construction company which he operated from the land, however, the shed and office which were used for the business only occupied approximately 10% of the 16 hectare property. The remainder of the business activities of the company were conducted offsite. The Taxpayer contended that, despite this, the particular activities that were carried out on the land were sufficiently important to the functions of the business operations for the land to be considered an active asset of the company.
The Tribunal rejected the arguments of the Taxpayer. The main factors contributing to the decision of the Tribunal were as follows:
- Only 10% of the land was used
- The vast majority of the remaining land was vacant and did not produce any income assessable to the Taxpayer (such as through agistment) and
- Of the 10% of the land that was used, only part comprised buildings used for the business as the land also contained several private dwellings of the Taxpayer and of the Taxpayer’s adult children.
Consequently, the Tribunal found that the land was not an active asset of the small business and duly refused to allow the Taxpayer to apply the CGT concession in section 152-10.