Private ruling: Capital gains tax
Date of advice: 11 February 2016
Published: April 2016
Ruling period: Year ended 30 June 2016 | Year ended 30 June 2017 | Year ended 30 June 2018
Date scheme commenced: 1 July 2015

Ruling: Question and answer: | Are you entitled to disregard in full any capital gain that results from the disposal of your property? | Yes.

Relevant facts and circumstances: You and your spouse purchased a property that was less than 2 hectares as joint tenants. Contracts to purchase the property were exchanged post 20 September 1985. A portion of the property consisted of a dwelling that was used as your main residence, as well as a shed, driveway etc. The remaining portion of the property was used to conduct various business activities for a period of approximately 30 years. During the years that you operated your business activities, at no stage did the aggregate turnover exceed $2 million. The combined net asset wealth of both you and your spouse does not exceed $6 million. Upon retirement you intend to dispose of the property. When you dispose of the property you will make a gain on sale.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 102-20 | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 108-5 | Income Tax Assessment Act 1997 Section 118-110 | Income Tax Assessment Act 1997 Section 152-10 | Income Tax Assessment Act 1997 Section 152-15 | Income Tax Assessment Act 1997 Section 152-40 | Income Tax Assessment Act 1997 Section 152-35 | Income Tax Assessment Act 1997 Section 328-125 | Income Tax Assessment Act 1997 Section 328-130 | Income Tax Assessment Act 1997 Section 152-110 | Income Tax Assessment Act 1997 Section 152-55 | Income Tax Assessment Act 1997 Section 152-65 | Income Tax Assessment Act 1997 Section 152-70

Reasons for decision: Detailed Reasoning - Capital gains tax: Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you make a capital gain or loss as a result of a CGT event happening to a CGT asset in which you have an ownership interest. Buildings and land are CGT assets as defined under section 108-5 of the ITAA 1997, and the disposal of a CGT asset triggers a CGT event under section 104-10 of the ITAA 1997. The most common event is a CGT event A1 which occurs when you dispose of a CGT asset to someone else. Subsection 104-10(5) of the ITAA 1997 provides that any capital gain or loss is disregarded if you acquire the asset before 20 September 1985. In your case, you and your spouse purchased a property post 20 September 1985. As this property was acquired post 20 September 1985 it is a CGT asset under section 108-5 of the ITAA 1997 and when it is disposed of it will trigger CGT event A1 under section 104-10 of the ITAA 1997. | Detailed Reasoning - Main residence exemption (one third of the property): Section 118-110 of the ITAA 1997 provides that you can disregard a capital gain or loss made from a CGT event that happens to a dwelling that is your main residence. To qualify for full exemption, the dwelling must have been your main residence for the whole period you owned it, must not have been used to produce assessable income, and the land surrounding the dwelling (including the land on which the dwelling is situated) must not be more than 2 hectares. In your case, a portion of your property consists of a dwelling, driveway, shed etc. You and your spouse moved into the dwelling and occupied it as your main residence as soon as was practical. You have elected this portion of the property as your main residence and the land adjacent to the property is less than 2 hectares. Therefore, you are entitled to disregard any capital gain or loss that results from its disposal under section 118-110 of the ITAA 1997. | Detailed Reasoning - Small business CGT concessions (remaining portion of the property): Section 152-105 of the ITAA 1997 provides that a taxpayer is entitled to disregard any capital gain that results from a CGT event if the following conditions are satisfied: a) the basic conditions in subdivision 152-A of the ITAA 1997 are satisfied for the gain; and you continuously owned the CGT asset for the 15-year period ending just before the CGT event; and c) if the CGT asset is a share in a company or an interest in a trust - the company or trust had a significant individual for a total of at least 15 years (even if the 15 years was not continuous and it was not always the same significant individual) during which you owned the asset; d) either: a. you are 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 will have continuously owned the property for the 15 year period ending just before the CGT event and the property is not a share in a company or interest in a trust. Further you are over the age of 55 years and the disposal of the property is in connection with your retirement. Therefore it only needs to be established whether you satisfy the basic conditions under subdivision 152-A of the ITAA 1997. | Detailed Reasoning - Basic conditions (subdivision 152-A of the ITAA 1997): Section 152-10 of the ITAA 1997) outlines the basic conditions for relief where a capital gain may be reduced or disregarded. These conditions are as follows: a) a CGT event happens in relation to a CGT asset; and b) the event results in a gain; and c) at least one of the following applies; and i. the taxpayer is a small business entity for the income year ii. the maximum net asset value test is satisfied iii. the taxpayer is 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 d) the CGT asset satisfies the active asset test. In your case contracts for the purchase of your property were exchanged post 20 September 1985, therefore the property is a CGT asset under section 108-5 of the ITAA 1997. The disposal of the property will trigger CGT event A1 under section 104-10 of the ITAA 1997, and the disposal of the will result in a gain. The aggregate turnover of your business activities has been under $2 million hence you are a small business entity. Further the value of you and your spouse's assets is less than $6 million. The active asset test also requires the CGT asset to be an active asset for: • 7 ½ years, if owned for more than 15 years, or • half of the ownership period if owned for 15 years or less (section 152-35 of the ITAA 1997). There are a number of assets that cannot be an active asset for the purpose of the small business concessions under subsection 152-40(4) of the ITAA 1997, however these exclusions are not applicable in the case of the property that you and your spouse own. With regards to the remaining portion share of the property, you have owned the property for a period of greater than 15 years. During this period of ownership, business activities have been conducted on the property for a period of greater than 7 ½ years. | Detailed Reasoning - Small business CGT concessions: Accordingly, as you have satisfied the conditions for small business CGT concessions under section 152-105 of the ITAA 1997, you are entitled to disregard any capital gain that results from its where business activities were conducted. | Detailed Reasoning - Conclusion: Under section 118-110 of the ITAA 1997 you are entitled to disregard any capital gain or loss that results from its disposal of the portion of the property that includes the dwelling that you occupied as your main residence. Under section 152-105 of the ITAA 1997 you are entitled to disregard any capital gain that results from the disposal of the remaining portion of the property that was used for business activities. Accordingly, you are entitled to disregard in full any capital gain that results from the disposal of your property under sections 118-110 and 152-105 of the ITAA 1997.