Private ruling: capital gains tax implications on disposal of property
Published: June 2012
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2011

Ruling: Q1: Are the pre-CGT and post-CGT portions of the land treated as separate CGT assets and therefore have separate cost bases (which include the costs of a valuation) for capital gains tax purposes? | A1: Yes | Q2: Are you entitled to disregard any capital gain made on the disposal of the post-CGT portion of the land due to you satisfying the conditions for the small business 15-year exemption concession? | A2: Yes | Q3: Will any capital gain made on disposal of the pre-CGT portion of the land be disregarded? | A3: Yes | Q4: Are you entitled to disregard any capital gain made on the disposal of the dwelling under the main residence exemption? | A4: Yes

Relevant facts and circumstances: You own some livestock grazing land. You acquired a portion of the land in 19XX. You acquired another portion of the land in 19XX. You have been conducting a business under a partnership structure with your spouse since 1999-00 financial year. The land is used in carrying on this business. You both have a 50% interest in the partnership. Prior to this time, the land was used by your spouse in their business activity they conducted as a sole trader. You previously sold approximately 50% of the land. A portion which was considered pre-CGT and a portion post-CGT. You satisfy the maximum net asset value test. You state that the remaining land is made up of pre-CGT and post-CGT portions with an approximate 50/50 split. You will be over 55 in the 2011-12 and 2012-13 financial years. You intend to sell the land and provide that your intention, once the land has been sold, there will be a reduction in the hours you work. You have resided in the dwelling on the land since you have owned it. The dwelling has not been used to earn assessable income.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Subsection 104-10(5) | Income Tax Assessment Act 1997 Section 152-10 | Income Tax Assessment Act 1997 Section 152-15 | Income Tax Assessment Act 1997 Subsection 152-10(1A) | Income Tax Assessment Act 1997 Section 152-35 | Income Tax Assessment Act 1997 Section 152-40 | Income Tax Assessment Act 1997 Section 328-125 | Income Tax Assessment Act 1997 Section 152-105 | Income Tax Assessment Act 1997 Section 110-25 | Income Tax Assessment Act 1997 Section 110-35 | Income Tax Assessment Act 1997 Section 118-110 | Income Tax Assessment Act 1997 Section 118-120

Reasons for decision: Summary: Any capital gain or loss made on the pre-CGT portion of the land will be disregarded as the asset was acquired before 20 September 1985. Any capital gain made on disposal of the dwelling (and up to 2 hectares of adjacent land not used to produce assessable income) will be disregarded under the main residence exemption. You will be entitled to the small business 15-year exemption concession allowing you to entirely disregard any capital gain made on the disposal of the post-CGT portion of the land as you satisfy the conditions necessary for this concession. Therefore, while you are also entitled to the small business 50% active asset reduction concession, you will not need to apply it as the gain will already be fully disregarded. The small business concessions will continue to apply for the 2011-12 and 2012-13 financial years, as long as you satisfy the conditions to be eligible for the concessions. As the land to be sold compromises part pre-CGT asset and part post-CGT asset at approximately a 50/50 split. You will need to ensure that the cost base and capital proceeds of each asset is apportioned appropriately. | Detailed Reasoning - Detailed reasoning: Capital gains tax (CGT) applies when certain events or transactions happen. These are referred to as CGT events. The most common CGT event is CGT event A1 which relates to the disposal of an asset (section 104-10 of the ITAA 1997). Subsection 104-10(5) of the ITAA 1997 provides that a capital gain or capital loss will be disregarded if the asset was acquired before 20 September 1985. As the land to be disposed of compromises part pre-CGT asset and part post-CGT asset at approximately a 50/50 split, any gain made from the disposal of the pre-CGT portion of the land will be disregarded and it is only the post-CGT portion to which any concession or exemptions need apply. | Detailed Reasoning - Small business CGT concession eligibility and the active asset test: Section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997) contains the basic conditions you must satisfy to be eligible for the small business capital gains tax (CGT) concessions. These conditions are: · a CGT event happens in relation to a CGT asset in an income year. · the event would have resulted in the gain · at least one of the following applies: · you are a small business entity for the income year · you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997 · you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an asset of the partnership or · the conditions in subsection 152-10(1A) or (1B) of the ITAA 1997 are satisfied in relation to the CGT asset in the income year. · the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997. Section 152-40 of the ITAA 1997 provides the meaning of 'active asset'. A CGT asset will be an active asset at a time if, at that time, you own the asset and the asset was used or held ready for use by you, an affiliate of yours, or by another entity that is 'connected with' you, in the course of carrying on a business. However, an asset whose main use is to derive rent, can not be an active asset. Section 152-35 of the ITAA 1997 explains that an asset will be an active asset if you have owned the asset for more than 15 years and it was an active asset for a total of at least 7 ½ years from the time when you acquired the asset until the CGT event. Or, you have owned the asset for 15 years or less and the asset was an active asset of yours for a total of at least half of the time from when you acquired the asset until the CGT event. Section 328-125 of the ITAA 1997 provides the meaning of 'connected with' an entity. Under this provision, an entity will be connected with you if either entity controls the other entity or, both entities are controlled by the same third entity. In the case of a partnership, an entity controls another entity if it beneficially owns interest in the other entity that gives the right to receive at least 40% of any distribution of income or capital by the other entity. In your case, you intend to sell the land, in doing so, CGT event A1 relating to the disposal of an asset, will occur. The event will result in a capital gain and, you state that you satisfy the maximum net asset value. The partnership was controlled by you from 1999-00 financial year as this is when the partnership between you and your spouse began and you each held 50% interest in the partnership, and thereby a controlling interest. As such, the partnership has been an entity 'connected' with you since this time. You provide that the partnership has used the asset since this time in carrying on the partnership business. Therefore, we consider that the land has been an active asset since 1999-00 financial year. Based on the information provided, you have satisfied the basic conditions required to be eligible for the small business CGT concessions. Accordingly, you are automatically entitled to the 50% active asset reduction for any capital gain made on the disposal of the post-CGT portion of the land. | Detailed Reasoning - 15 year exemption: Section 152-105 of the ITAA 1997 provides that an individual can disregard any capital gain if all of the following conditions are satisfied: · you satisfy the basic conditions · you continuously owned the CGT asset for the 15-year period ending just before the CGT event · you are either: · 55 or over at the time of the CGT event and the event happens in connection with your retirement; or · you are permanently incapacitated at the time of the CGT event. In your case, you would satisfy the basic conditions (as detailed above). You have continuously owned the asset for over 15 years. You are aged over 55 and the disposal of the land happens in connection with a reduction in the hours you work. Accordingly, as you would satisfy all the conditions for the small business 15 year exemption concession, you will be entitled to disregard any capital gain made on disposal of the post-CGT portion of the land and will not need to apply any other small business concessions. | Detailed Reasoning - How long will the small business concessions apply: This private ruling has been limited to apply for the period 1 July 2011 to 30 June 2013, as requested in your ruling application. In addition, the Commissioner would not normally rule for indefinite or extended periods as there may be changes to the facts of the arrangement or the law in question. For the period of this ruling, however, the small business concessions will continue to apply as long as you satisfy the conditions to be eligible for the concessions. You will be entitled to claim the small business active asset 50% reduction if you satisfy the basic conditions (as mentioned above). You will be entitled to claim other small business concessions if you satisfy the extra specific conditions applicable to each concession. For more information, please refer to the Advanced guide to capital gains tax concessions for small business 2010-11 publication, available on our website at www.ato.gov.au. | Detailed Reasoning - Cost base for pre CGT and post CGT interests in an asset: Taxation Determination TD 2000/31 discusses the capital gains treatment of interests in CGT assets that were acquired at different times. TD 2000/31 provides that the interests remain separate CGT assets for capital gains tax purposes and that when a CGT event such as CGT event A1 (about the disposal of CGT assets) occurs, the following applies; (a) there is a separate date of acquisition for each interest; (b) there is a separate cost base for each interest; and (c) capital proceeds are determined separately for each interest. Section 110-25 of the ITAA 1997 provides that there are five elements of the cost base; · money paid, or market value of property given, to acquire the asset · incidental costs of acquiring the asset, or that relate to the CGT event that happens to the asset · certain non-capital costs of ownership · capital expenditure on improvements · capital expenditure in respect of title or right to the asset Section 110-35 of the ITAA 1997 provides that incidental costs include remuneration for the services of a surveyor, valuer, auctioneer, accountant, broker, agent, consultant or legal adviser. In your case, you advised that the remaining land to be sold compromises part pre-CGT asset and part post-CGT asset at approximately a 50/50 split. Therefore, you will need to ensure that the cost base and capital proceeds of each asset is apportioned appropriately. This will include apportioning the cost of the appraisal valuation into the cost base of the pre-CGT asset and the post-CGT asset. | Detailed Reasoning - Main residence exemption: Section 118-110 of the ITAA 1997 provides that a capital gain or loss you make on disposal of a CGT asset that is a dwelling is disregarded if · you are an individual; and · the dwelling was your main residence throughout your ownership period; and · the interest did not pass to you as a beneficiary in, and you did not acquire it as a trustee of, the estate of a deceased person. Section 118-120 of the ITAA 1997 provides that the land adjacent to a dwelling is also exempt if: · during the period you owned it, the land is used mainly for private and domestic purposes in association with the dwelling, and · the total area of the land around the dwelling, including the land on which it stands, is not greater than 2 hectares. If the land used for private purposes is greater than 2 hectares, you can choose which 2 hectares are exempt but the land you choose must include the land on which the dwelling is built. Any part of the land around a dwelling used to produce income is not exempt, even if the total land is less than 2 hectares. However, the dwelling and any buildings and other land used in association with it remain exempt if you do not use them to produce income. Example from Guide to capital gains tax 2010-11 : | Detailed Reasoning - Land used for private purposes: Tim bought a home with 15 hectares of land in November 2000. He uses 10 hectares of the land to produce income and 5 hectares for private purposes. Tim can get the main residence exemption for the home and 2 hectares of land he selects out of the 5 hectares that are used for private purposes. Tim gets a valuation which states that the home and 2 hectares of land that he has selected are worth two-thirds of the total value of the property. The relative values of the different parts of the property remained the same between the time of purchase and the time of sale. Tim entered into a contract to sell the property on 8 May 2011. The capital gain from the property is $150,000. Tim may claim the main residence exemption on the two-thirds of the capital gain attributable to the house and 2 hectares of land, that is, $100,000. In your case, the dwelling on the property has been your residence throughout your ownership period and the dwelling has never been used to produce assessable income. Therefore, any capital gain made on disposal of the dwelling (and up to 2 hectares of adjacent land not used to produce assessable income) will be disregarded. As any capital gain made on the sale of the property will be disregarded under either; · the sale of the pre-CGT sale portion of land (pre-CGT asset) · the sale of the post-CGT portion of the land (15-year exemption) · main residence exemption We consider that the question relating to whether a valuation appraisal performed by a real estate agent is sufficient for CGT purposes, is not necessary in the current situation. However, we have supplied the following general information in relation to the valuation of property which may be helpful. | Detailed Reasoning - General information on valuations of property: For tax purposes, it is usually the valuation process undertaken rather than who conducted it, that governs the acceptability of the valuation. Depending on the situation, a market valuation may be undertaken by a: · registered valuer · member of a recognised professional valuation body · director, for balance sheet purposes, or · person without formal valuation qualifications whose assessment is based on reasonably objective and supportable data. According to legal precedent, experts who assess market value should have specific knowledge, experience and judgment in that particular field. While professional qualifications may add weight to the valuer's opinion, he or she should also display personal integrity and competence. To ensure the objectivity of the report, the valuer should be independent of the interests of the party commissioning the report. We also suggest referring to the publication Market valuation for tax purposes on our website www.ato.gov.au, which gives further detailed information about valuation methods and qualifications and experience of valuers.

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