Private ruling: Capital gains tax implications on the disposal of property
Published: October 2013
Ruling period: Year ending 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Are you entitled to disregard any capital gain made on the disposal of your 50% pre-capital gains tax (CGT) interest in the property? | A1: Yes | Q2: Will you be liable for any capital gain made on the disposal of the 50% post-CGT interest, acquired from your spouse, in the property? | A2: Yes | Q3: Do you satisfy the basic conditions necessary to be eligible for the CGT concessions for small business, thereby allowing you to reduce the capital gain made on the disposal of the 50% post-CGT interest in the property? | A3: No | Q4: Are you entitled to apply the 50% CGT discount to the capital gain made on the disposal of the 50% post-CGT interest in the property? | A4: Yes

Relevant facts and circumstances: You acquired a property prior to 20 September 1985. Title to the property was held by you and your spouse, as joint tenants, until your spouse's death. You are now the sole surviving tenant. The property is not your main residence. You state that on acquiring the property, your intention was to use it for business purposes. The land had some fencing and a small house on it. The small house has been rented. The remainder of the land was used by you and your spouse, in partnership, to carry out a business activity up until your spouse's death. The land is now being used by another entity, in partnership, to carry out a business activity. In return for the grant of the use of the land, the other entity is paying the council rates and water rates for the land. You state that the other entity is not an entity that is 'connected with' you. You state that the other entity is not your affiliate. The land has not been developed or subdivided by you. The land has now been rezoned low density residential. A purchaser has approached you to sell you property and an offer has been made. The offer has been accepted by you and contracts exchanged to sell the property. The property is being sold as is. You state that the small house will continue to be leased up until the date of settlement. Further, the land will continue to be used by the other entity in carrying on a business up until the date of settlement. You do not have a history of buying and selling land or buildings.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 110-25 | Income Tax Assessment Act 1997 Section 110-35 | Income Tax Assessment Act 1997 Section 128-50 | Income Tax Assessment Act 1997 Section 152-80 | Income Tax Assessment Act 1997 Section 152-10 | Income Tax Assessment Act 1997 Section 152-15 | Income Tax Assessment Act 1997 Section 152-35 | Income Tax Assessment Act 1997 Section 152-40 | Income Tax Assessment Act 1997 Section 115-10 | Income Tax Assessment Act 1997 Section 115-100 | Income Tax Assessment Act 1997 Section 115-25

Reasons for decision: Detailed Reasoning - Post-CGT and pre-CGT interests in the property: You acquired the property prior to 20 September 1985. Title to the property was held by you and your spouse, as joint tenants. As such, you both held a 50% pre-CGT interest in the property. When your spouse passed away, you acquired their 50% interest in the property. Accordingly, you now hold a 50% pre-CGT interest in the property and a 50% post-CGT interest in the property. Any capital gain made on the disposal of your 50% pre-CGT interest the property will be disregarded by virtue of paragraph 104-10(5)(a) of the Income Tax Assessment Act 1997 (ITAA 1997). However, as you now also hold a 50% post-CGT interest in the property, you will be liable for any capital gain made on the disposal of this post-CGT interest. | Detailed Reasoning - Death and the small business CGT concessions: Section 152-80 of the ITAA 1997 provides that the legal personal representative (LPR) or beneficiary of a deceased estate (or a surviving joint tenant) will be eligible for the small business CGT concessions where: · the asset is disposed of within two years of the date of death (although the Commissioner may allow a longer period by granting an extension of time), and · the asset would have qualified for the small business CGT concessions if the deceased had disposed of the asset immediately before his or her death. Provided these conditions are satisfied, the CGT small concessions are also available to the trustee of a trust established by the will of the deceased, a beneficiary of such a trust, and a surviving joint tenant. However, if the asset in question is not disposed of within the two-year time limit, the conditions for the small business concessions must be satisfied by the new owner. If a person carrying on a business dies and their assets devolve to their LPR, beneficiary, surviving joint tenant or trustee or beneficiary of a testamentary trust (the transferee), the active asset test is applied to the transferee in relation to any capital gain made on a sale of the assets after the two-year time limit (or such further time that the Commissioner allows). This means that if the transferee does not continue to carry on the deceased's business, or use the asset in another business, after the two-year time limit, the active asset test may not be satisfied and the small business concessions may not be available. In your case, the asset in question is the 50% share of the property acquired by you on the date of death of your spouse. As the asset was not disposed of within two years of the date of death of your spouse, you (as transferee), will need to satisfy the basic conditions necessary to access the CGT concessions for small business from the time you acquired the 50% share of the property. | Detailed Reasoning - Small business CGT concession eligibility and the active asset test: Section 152-10 of the ITAA 1997 contains the basic conditions you must satisfy to be eligible for the small business 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 an asset of the partnership or (iv) 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. (a) 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. In your case, you acquired the 50% share of the property, as joint surviving tenant, when your spouse passed away. Part of the property, being the small house, was rented to an unrelated 3 rd party since your spouse passed away, as it has been for over 10 years. The remainder of the property, since your spouse passed away, was effectively leased to another entity to use in their business, however, the other entity is not an affiliate, or an entity that is 'connected with' you. Accordingly, as the main (only) use of the property since your spouse passed away was to derive rent (or lease income), the property can not be an active asset. Therefore, as the 50% share of the property you acquired when your spouse passed away, was not an active asset of yours from the period from two years after the date of your spouse's death until its intended disposal date in the relevant financial year, you do not meet the basic conditions necessary to access the small business CGT concessions, and you are not entitled to apply the 50% active asset reduction concession to any capital gain made on the disposal of the 50% share of the property acquired from your spouse. | Detailed Reasoning - Death and the cost base of a CGT asset: In situations where a surviving joint tenant does not dispose of their ownership interest in the CGT asset within two years of the date of death, the surviving joint tenant will be assessed on any capital gain made on the disposal of the CGT asset. You make a capital gain from the disposal of an asset if the amount of money you received on the disposal was more than the cost base of the asset. Section 110-25 of the ITAA 1997 provides that there are five elements of the cost base; 1) money paid, or market value of property given, to acquire the asset 2) incidental costs of acquiring the asset, or that relate to the CGT event that happens to the asset 3) certain non-capital costs of ownership 4) capital expenditure on improvements 5) 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. Subsection 128-50(4) of the ITAA 1997 explains modifications to the cost base of CGT assets for surviving joint tenants. It provides that if the deceased person acquired their asset before 20 September 1985, the first element of your cost base and reduced cost base is the market value of the asset on the day the person died. Accordingly, as the deceased acquired the property in question prior to 20 September 1985, the first element of the cost base of the asset is the market value of the asset on the date of the deceased's death. | Detailed Reasoning - 50% CGT discount: Section 115-10 of the ITAA 1997 provides that a discount capital gain can be made by an individual. A 50% discount (section 115-100 of the ITAA 1997) may be applied to a discount capital gain realised by an individual where the asset that gave rise to the capital gain has been owned for a period of at least 12 months prior to the CGT event (section 115-25 of the ITAA 1997). In your case, you have held the 50% post-CGT interest in the property for longer than 12 months, accordingly, you will be entitled to apply the 50% discount to any capital gain made on the sale of the your 50% post-CGT interest in the property.