By Max Newnham
Successive federal governments have recognised the importance of the small business sector to the Australian economy. As a result a number of income tax and capital gains tax incentives have been introduced to assist small businesses.
The definition of a small business has changed over the years, and now there are effectively three definitions. There are the $2 million turnover test small business capital gains tax concessions, the $5 million turnover test for accessing small business income tax offset, and for all other small business concessions there is a $10 million turnover test.
Q. Given that if a home office is used as part of running a small business one can avoid any capital gains tax (i.e. if the business has a turnover of less than 2 million), will a registered small business that brings in students and provides them with full board and has income of less than $2 million, be eligible for the capital gains tax concessions on the sale of the home?
A. Having an office or a bedroom that is used to run a small business does not necessarily mean the property, or a portion of it, will be classed as a business property. There are many tests that must be passed before a property can be classed as being used for business purposes.
Given that no capital gains tax is payable on a person’s main residence, there would be no reason for someone to try and claim the small business capital gains tax exemption, unless the ATO ruled that a business was being operated from their home and denied them the main residence CGT exemption on the capital gain made.
As to whether you would be regarded as running a business, by providing students with full board and lodging, will depend on the facts of your case. The ATO on their website lists the following factors that they consider when assessing whether a business is being operated:
- You have made a decision to start a business and operate it in a businesslike manner, such as registering a business name and obtaining an ABN.
- You intend to make a profit, or genuinely believe you will make a profit from the activity, even if you are unlikely to do so in the short term.
- You repeat similar types of activities.
- The size or scale of your activity is consistent with other businesses in your industry.
- Your activity is planned, organised and carried out in a businesslike manner. This may include
- keeping business records and account books
- having a separate business bank account
- operating from business premises
- having licenses or qualifications
- having a registered business name.
Where someone cannot pass these tests they would be regarded as conducting a hobby and therefore not running a business. In your situation if the ATO held that you were running a business you would be eligible to claim the small business capital gains tax exemption on that portion of the home regarded as business premises.
Source: The Age
