When we think of rental properties most of us think of passive investments. However, are you really carrying on a business in your company?
If you are carrying on a business you may be entitled to the small business depreciation rules and depending on the type of accommodation provided the small business Capital Gains Tax concessions. As CGT concessions exclude business assets that are used mainly to produce rental income not all property investments will be able to access these concessions. The types of businesses providing accommodation that may be able to access the CGT small business concessions are commercial storage and holiday apartments. Further details on this can be found in ATO publication TD 2006/78.
This rental exclusion is not present in the requirements for the small business depreciation rules. The first hurdle that you have to pass to access the small business depreciation rules is that you must be carrying on a business in the current year.
In footnote 3 of ATO TR 2017/D2 the ATO states "generally, where a company is established or maintained to make profit or gain for its shareholders it is likely to carry on business. This is so even if the company only holds passive investments, and its activities consist of receiving rents or returns on its investments and distributing them to shareholders.”
Furthermore, in the Administrative Appeals Tribunal (AAT) case of Jakjoy Pty Ltd v FCT, the company was the owner of several commercial investment properties; C R Walsh states at paragraph 54 "it is common ground that Jakjoy is carrying on a business of renting properties”. While the taxpayer in Jakjoy lost because of the restrictions in the small business CGT concessions the case is intriguing due to the AAT senior members’ comments regarding carrying on a business.
Contact us if you’d like to know more about the small business rules and how they can help you or your business.