Private ruling: Capital gains tax implications on disposal of a property
Date of advice: 11 March 2016
Published: May 2016
Ruling period: Year ending 30 June 20VV | Year ending 30 June 20WW
Date scheme commenced: 1 July 20UU

Ruling: Q1: 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? | A1: Yes. | Q2: Will any capital gain made on disposal of the pre-CGT portion of the land be disregarded? | A2: Yes. | Q3: Are you entitled to disregard any capital gain made on the disposal of the dwelling under the main residence exemption? | A3: Yes.

Relevant facts and circumstances: You own some livestock grazing land. You acquired a portion of the land pre 20 September 1985. You acquired another portion of the land post 20 September 1985. You have been conducting a business under a partnership structure with your spouse since 19XX-YY 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 20UU-VV and 20VV-WW 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 104-10, | Income Tax Assessment Act 1997 104-10(5), | Income Tax Assessment Act 1997 152-10, | Income Tax Assessment Act 1997 152-15, | Income Tax Assessment Act 1997 152-10(1A), | Income Tax Assessment Act 1997 152-35, | Income Tax Assessment Act 1997 152-40, | Income Tax Assessment Act 1997 328-125, | Income Tax Assessment Act 1997 152-105, | Income Tax Assessment Act 1997 118-110 and | Income Tax Assessment Act 1997 118-120.

Reasons for decision: 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) a CGT event happens in relation to a CGT asset in an income year. (b) the event would have resulted in the gain (c) at least one of the following applies: (i) you are a small business entity for the income year (ii) you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997 (iii) you are a partner in a partnership that is a small business entity for the income year and the CGT asset is: 1. an interest in a partnership asset (partnership assets), or 2. an asset you own that is not an interest in a partnership asset (partner's asset) Which is used in the business of the partnership (iv) you do not carry on a business (other than as a partner) but your CGT asset is used in a business carried on by a small business entity that is your affiliate or an entity connected with you (passively-held assets) (d) 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, cannot 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 7.5 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 19XX-YY 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 19XX-YY 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: (a) you satisfy the basic conditions (b) you continuously owned the CGT asset for the 15-year period ending just before the CGT event (c) you are either: a. 55 or over at the time of the CGT event and the event happens in connection with your retirement; or b. 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 you intend to purchase a home for retirement when you dispose of the land. You provide that once the land is sold there will not be a farm to run anymore and therefore there will be 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 20UU to 30 June 20WW, 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. | Detailed Reasoning - Question 2: 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 - Question 3: 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. 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.