In a recent Brisbane Administrative Appeals Tribunal case, the
sellers of a mobile home park in NSW had their taxable income
increased by more than $2 million because of the Tribunal's
decision as to how the small business capital gains tax (CGT)
The small business CGT concessions are reasonably generous, but
there are strict and complex rules as to when they can be used. The
rules have changed over time, but currently require businesses to
either satisfy the maximum net asset value test (net assets of $6
million or less), or to be a small business entity with aggregated
yearly turnover of less than $2 million.
These asset and turnover tests don't only consider the
business selling the asset, but take into account associated
entities as well. The asset being sold must also be an active asset
for CGT purposes. Broadly speaking, an active asset is one that is
used in the business, but an asset used to derive rent is
specifically excluded from this category.
In the case decided by the Tribunal, if the park owners
satisfied all the rules and used the small business CGT
concessions, their capital gain would be reduced from $2.14 million
to $1.07 million (by using the active asset 50 percent reduction).
They could also possibly reduce the gain further if each park owner
paid up to $500,000 into superannuation, so that the tax payable
was calculated on the remaining gain of about $70,000.
Unfortunately for the park owners, the Commissioner did not
accept that the small business CGT concessions were available. He
increased their income by $2.4 million and imposed a 50 percent
penalty for making the claims in the first place. The Tribunal
considered two main issues:
Whether the park owner satisfied the net asset test; and
Whether the park was an active asset so that the concessions
applied, or disqualified because its main use was to derive
Leaving aside the net asset value issues that related to these
particular owners, the Tribunal decided that the park was not an
active asset, as its main use in carrying out the taxpayers'
business was to derive rent.
The Tribunal maintained that rent is a payment for the right to
occupy under a lease, as opposed to a licence fee, and a lease
arises where a party has exclusive possession of a particular
By looking at the lease agreements and the terms of the relevant
NSW legislation, the Tribunal concluded that, in this case, the
park owners received rent payments, and the significant tax
reduction available from the small business CGT concessions was
therefore not available. As a small consolation, the penalty
imposed on the park owners was reduced to 25 percent.
Although the park's particular service arrangements (such as
arrangements with its amenities) were taken into account, the
Tribunal decided that these could not be compared with the kinds of
services commonly provided by hotels, boarding and lodging houses,
where payments may not be regarded as rent.
The decision has been appealed to the Federal Court, and we will
wait for the outcome of that litigation. Whatever the appeal
decision, it is likely that the CGT consequences of sales will
depend on the particular arrangements in each instance. Park owners
and business owners generally need to take care when taking
advantage of the valuable small business CGT concessions.
For more information about this case or small business CGT
concessions, please contact HopgoodGanim's Taxation and Revenue
The income tax treatment of any property lease incentive will vary, depending on the nature of the inducement provided.
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