Private ruling: Capital gains tax and maximum net asset value test
Date of advice: 4 May 2018
Published: July 2018
Ruling period: 1 July 2017 – 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Is the market value of Property 1 required to be included in the net value of your capital gains tax (CGT) assets under section 152-20 of the Income Tax Assessment Act 1997 (ITAA 1997), for the purpose of the maximum net asset value (MNAV) test under section 152-15 of the ITAA 1997? | A1: No | Q2: Is the market value of Property 2 required to be included in the net value of your CGT assets under section 152-20 of the ITAA 1997, for the purpose of the MNAV test under section 152-15 of the ITAA 1997? | A2: No

Relevant facts and circumstances: You propose to sell your interest in a business. You and your spouse own two residential properties jointly. Property 1 was acquired many years ago and has been used as your main residence since. It has never been rented and no interest deductions have been made. Property 2 was recently acquired and was demolished soon after acquisition. Construction of a new building has commenced and is in progress. Construction is expected to complete shortly. You and your spouse will move into Property 2 to reside there upon completion of construction works. Construction costs are funded from your personal savings. No loans have been taken out and no interest deductions have been or will be made. At the time of the sale of your business interest, construction works are still in progress and you will still be residing in Property 1.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 152-15 | Income Tax Assessment Act 1997 section 152-20 | Income Tax Assessment Act 1997 subparagraph 152-20(2)(b)(i) | Income Tax Assessment Act 1997 subparagraph 152-20(2)(b)(ii)

Reasons for decision: Summary: The market value of your interest in Property 1 is disregarded from the net value of your CGT assets under subparagraph 152-20(2)(b)(ii) of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Section 152-10 of the ITAA 1997 lists the basic conditions for accessing capital gains concessions in Division 152 of the ITAA. Relevantly, one of the conditions is satisfying the maximum net asset value test (MNAV test). A taxpayer satisfies the MNAV test if, just before the CGT event, the net value of their CGT assets and those of certain related entities does not exceed $6,000,000 (section 152-15 of the ITAA 1997). All CGT assets of all relevant entities need to be included unless they are specifically excluded by the legislation. Paragraph 152-20(2)(b) of the ITAA 1997 provides that in working out the net value of the CGT assets of an entity: b) if the entity is an individual, disregard: (i) assets being used solely for the personal use and enjoyment of the individual, or the individual's affiliate (except a dwelling, or an ownership interest in a dwelling, that is the individual's main residence, including any adjacent land to which the main residence exemption can extend because of section 118-120); and (ii) except for an amount included under subsection (2A), the market value of a dwelling, or an ownership interest in a dwelling, that is the individual's main residence (including any relevant adjacent land); and …. 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. In this case, Property 1 has never been used to produce assessable income and will continue to be used as your main residence until just before the anticipated CGT event. Accordingly, subsection 152-20(2A) of the ITAA 1997 does not apply and the market value of your interest in Property 1 is disregarded from the net value of your CGT assets under subparagraph 152-20(2)(b)(ii) of the ITAA 1997. The market value of your spouse’s interest in Property 1 is also not required to be included in the net value of your CGT assets for the same reasons. | Summary: The market value of your interest in Property 2 is disregarded from the net value of your CGT assets under subparagraph 152-20(2)(b)(i) of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Subparagraph 152-20(2)(b)(i) of the ITAA 1997 states that assets which are being used solely for the personal use and enjoyment of the individual or the individual's affiliate, are disregarded in working out the net value of the CGT assets of an entity. In this case, you acquired Property 2 and demolished it shortly after that. During the period between acquisition and demolition Property 2 was not used to produce assessable income. It is currently a building site and will become your main residence once construction works complete. Paragraph 1.14 of the Explanatory Memorandum for the New Business Tax System (Capital Gains Tax) Bill 1999 (EM) states that: … assets of a private or personal nature are also not included in the maximum net asset value test for a small business entity that is not a company or trust. The EM suggests that regard has to be had for the private use of an asset as opposed to business use asset for the purpose of the MNAV test. In determining whether an asset is being used for the personal use and enjoyment, regard should also be given to the circumstances and events happening in the period of time prior to the CGT event, rather than merely considering the asset’s use at a single point in time when the CGT event is occurring. In this case, Property 2 has never been used for income producing purpose, in particular, it was not used for income producing purpose during the period from acquisition to demolition. It has been under construction for a main residence for yourself and your spouse and you will move in as soon as construction completes. Accordingly, Property 2 is being used for your personal use and enjoyment just before the CGT event. Therefore, your interest in Property 2 is disregarded in working out the net value of your CGT assets under subparagraph 152-20(2)(b)(i) of the ITAA 1997. The market value of your spouse’s interest in Property 2 is also not required to be included in the net value of your CGT assets for the same reasons.