Private ruling: CGT concessions for small business
Date of advice: 15 March 2017
Published: August 2017
Ruling period: 1 July 2015 to 30 June 2016
Date scheme commenced: February 2016

Ruling: Q1: Are the life insurance proceeds disregarded under subparagraph 152-20(2)(b)(v) of the Income Tax Assessment Act 1997 (ITAA 1997) in calculating the net value of CGT assets? | A1: No | Q2: Are the life insurance proceeds disregarded in working out the net value of the CGT assets under subparagraph 152-20(2)(b)(i) of the ITAA 1997 as being solely for the personal use and enjoyment of the individual? | A2: No

Relevant facts and circumstances: The taxpayer and policy owner received life insurance proceeds following the death of her husband. The insurance proceeds were deposited into a personal bank account of the policy owner. Withdrawals were made from this bank account and placed in term deposits by their nature interest bearing. Business assets were sold which triggered a CGT event shortly after the insurance proceeds were paid out.

Relevant legislative provisions: Division 152 of the Income Tax Assessment Act 1997 | Subdivision 152-A of the Income Tax Assessment Act 1997 Section 152-20 of the Income Tax Assessment Act 1997

Reasons for decision: Summary: Division 152 of the ITAA 1997 sets out the basic conditions for relief from capital gains for small business entities. The four available concessions are: | Detailed Reasoning - The basic conditions in Subdivision 152-A of the ITAA 1997: Section 152-10 of the ITAA 1997 contains the basic conditions that must be satisfied to be eligible for the small business CGT concessions. These conditions, as set-out in subsection 152-10(1) of the ITAA 1997, 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 152-10(1B) of the ITAA 1997 are satisfied in relation to the CGT asset in the income year; and (d) the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997. Maximum net asset value test An entity satisfies the maximum net asset value test under section 152-15 of the ITAA 1997, if just before the CGT event, the sum of the following amounts does not exceed $6,000,000: (a) the net value of the CGT assets of yours; (b) the net value of the CGT assets of any entities connected with you; (c) the net value of the CGT assets of any affiliates of yours or entities connected with your affiliates (not counting any assets already counted under paragraph (b)). In working out the net value of the CGT assets of an entity, certain assets are disregarded under subsection 152-20(2) of the ITAA 1997. Subparagraph 152-20(2)(b)(v) of the ITAA 1997 states a policy of insurance on the life of an individual is disregarded if the entity is an individual. In this case the life insurance policy has been paid out to the taxpayer, there are proceeds from an insurance policy but no policy is in existence. In this situation subparagraph 152-20(2)(b)(v) of the ITAA 1997 does not apply and the insurance cannot be disregarded in calculating the net value of the assets to satisfy the maximum net asset value test. | Detailed Reasoning - CGT Asset: A CGT asset is defined in section 108-5 of the ITAA 1997 and includes any kind of property or a legal or equitable right that is not property. CGT assets fall into one of three categories: ● collectables ● personal use assets, or ● other assets. All assets are subject to the CGT rules unless they are specifically excluded. Capital assets acquired before 20 September 1985 are exempt assets. | Detailed Reasoning - Personal use asset: A personal use asset is: ● a CGT asset, other than a collectable, that you use or keep mainly for your personal use or enjoyment ● an option or a right to acquire a personal use asset ● a debt resulting from a CGT event involving a CGT asset kept mainly for your personal use and enjoyment, or ● a debt resulting from you doing something other than gaining or producing your assessable income or carrying on a business. It is considered that the insurance proceeds are a CGT asset used or kept mainly for your personal use and enjoyment and are therefore personal use assets under paragraph 108-20(2)(a) of the ITAA 1997. ATO ID 2009/33 Income Tax - CGT Small Business Concessions: maximum net asset value test - assets used solely for personal use and enjoyment - personal bank account An interest-bearing personal bank account of an individual would not be used solely for the account holder's personal use and enjoyment because of the interest earned, even if the account holder only pays personal living expenses from the account. | Detailed Reasoning - Application to your circumstances: The insurance proceeds were deposited into a personal bank account. Withdrawals were made from the bank account into which the insurance proceeds were deposited and placed in term deposits which are by their nature interest bearing. The income earning nature of the account is considered a separate purpose to the personal use of the funds. It is considered that the insurance proceeds are CGT assets used or kept mainly but not solely for personal use and enjoyment and are therefore personal use assets under paragraph 108-20(2)(a) of the ITAA 1997. | Detailed Reasoning - Conclusion: The insurance proceeds are not a disregarded asset in determining whether the maximum net asset test is satisfied.