ATO ID 2011/38: CGT small business concessions: maximum net asset value test - disregarded assets - dwellings
Date of decision: 3 May 2011
Year of income: Year ended 30 June 2011
Business line: Private Groups and High Wealth Individuals

Issue
In working out the net value of the CGT assets of an individual, does the reference to 'dwelling' in subsection 152-20(2A) of the Income Tax Assessment Act 1997 (ITAA 1997) only refer to a dwelling that is an individual's main residence?

Decision
Yes. The reference to 'dwelling' in subsection 152-20(2A) of the ITAA 1997 only refers to a dwelling that is an individual's main residence.

Facts
An individual taxpayer makes a capital gain from the sale of a business asset. The individual also owns a dwelling (separate from their business). The dwelling has been leased to tenants for a period of 5 years from the time of acquisition until one month before the sale of the business asset. From the time the leasing of the dwelling ceased until after the sale of the business asset, the dwelling was used solely for the personal use and enjoyment of the individual (but not as a main residence). The individual is not a small business entity within the meaning of section 328-110 of the ITAA 1997 at any time. For the purpose of determining whether they qualify for the small business CGT concessions, the individual must determine the net value of their CGT assets and in particular, whether the value of the dwelling is included in the calculation.

Reasons for decision
Summary: To qualify for the small business CGT concessions, a taxpayer must generally satisfy either the maximum net asset value test (section 152-15 of the ITAA 1997), or be a CGT small business entity (as defined by subsection 152-10(1AA), paragraph 152-10(1)(c) of the ITAA 1997). A taxpayer satisfies the maximum net asset value test if, just before the CGT event, the net value of their CGT assets and of certain related entities does not exceed a threshold (section 152-15 of the ITAA 1997). In working out the net value of the CGT assets of an individual, subsection 152-20(2A) of the ITAA 1997 provides for the inclusion of an apportioned amount of the value of certain dwellings that have been used to produce assessable income. In particular, if an individual's dwelling was used during all or part of its ownership period to produce assessable income and the individual satisfied paragraph 118-190(1)(c) of the ITAA 1997 (about interest deductibility) to some extent, then a reasonable proportion of the value of the dwelling is included in the net value of the individual's CGT assets, having regard to the extent of interest deductibility. Section 118-190 of the ITAA 1997 applies to dwellings that are main residences. It provides for apportionment of the main residence exemption where a dwelling is used to produce assessable income during all or part of the ownership period and at least some interest could be deducted if it was incurred on money borrowed to acquire the dwelling. The question arises as to whether subsection 152-20(2A) of the ITAA 1997 only applies to a dwelling that is the relevant individual's main residence or whether it applies to dwellings more generally. A dwelling is defined in section 118-115 of the ITAA 1997 as including a unit of accommodation that is a building or is contained in a building and consists wholly or mainly of residential accommodation. It also includes a unit of accommodation that is a caravan, houseboat or other mobile home and any land immediately under the unit of accommodation. As such, the definition of dwelling is not restricted to main residences. However, the requirement in paragraph 152-20(2A)(b) of the ITAA 1997 for the individual to satisfy to some extent the interest deductibility test in the main residence provisions indicates that the provision is intended to apply to dwellings that are main residences. Further, subsection 152-20(2A) of the ITAA 1997 is linked to subparagraph 152-20(2)(b)(ii) of the ITAA 1997, which, except for an amount that is included under subsection 152-20(2A), disregards the value of a dwelling that is an individual's main residence. In other words, the subject matter of subsection 152-20(2A) is a subset or a part of the subject matter of subparagraph 152-20(2)(b)(ii), which is main residence. It can also be noted that dwellings, being assets, are considered under subparagraph 152-20(2)(b)(i) of the ITAA 1997 (except for dwellings that are main residences). This is consistent with the view that subparagraph 152-20(2)(b)(ii) of the ITAA 1997 and subsection 152-20(2A) of the ITAA 1997 only apply to dwellings that are main residences. Accordingly, it is considered the reference to 'dwelling' in subsection 152-20(2A) of the ITAA 1997 only refers to a dwelling that is an individual's main residence. Therefore in this case, as the individual's dwelling has never been their main residence, the dwelling is not disregarded from the net value of the individual's CGT assets under subparagraph 152-20(2)(b)(ii) of the ITAA 1997 and subsection 152-20(2A) also does not apply to provide for only an apportioned amount of the value of the dwelling to be included. The dwelling is also not disregarded under subparagraph 152-20(2)(b)(i) of the ITAA 1997 (see ATO ID 2011/37) and therefore must be included in the net value of the individual's CGT assets.

Legislative references: Income Tax Assessment Act 1997 section 118-115 section 118-190 paragraph 118-190(1)(c) paragraph 152-10(1)(c) subsection 152-10(1AA) section 152-15 subparagraph 152-20(2)(b)(i) subparagraph 152-20(2)(b)(ii) subsection 152-20(2A) paragraph 152-20(2A)(b) section 328-110
Related ATO interpretative decisions: ATO ID 2011/37
Subject references: Basic conditions for relief Capital gains CGT small business relief