Private ruling: capital gains tax
Published: February 2012
Ruling period: The year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Is the sale of the Hotel, subject to CGT under part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes | Q2: Are you entitled to any discounts under the CGT legislation? | A2: Yes. You will be entitled to a 50% discount providing you do not use indexation when calculating your cost base. | Q3: Are you entitled to the Small Business Capital Gains Tax Concessions in Division 152 of the ITAA, including the 50% small business reduction and the retirement exemption? | A3: No.

Relevant facts and circumstances: You purchased the freehold of the Hotel a few years ago. You state that at the time of the purchase, the hoteliers licence had a readily saleable market value. At purchase, the hotel had no poker machine entitlements. The hotel was immediately leased. The Lessee was not connected to you. Shortly after you purchased the hotel, it acquired some poker machine entitlements. By arrangement with the lessee, you paid for the entitlements and poker machines and you became entitled to some of the net profits from them. More recently, a few of the poker machine entitlements and machines were sold. You paid capital gains tax on this sale. Your interest in the remaining machines continued until the lease was transferred. Recently, you resumed full ownership of the machines when the then lessee vacated and you took over the hotel as 'owner in possession'. You became entitled to the profits from the poker machines until the hotel was sold, walk in walk out, as a going concern. You advised during a telephone conversation that someone volunteered to help out for the last period. You state that you owned (whole or partially) the poker machine entitlements for more than 50% of the time. You advise that at the time of the sale, the hoteliers licence was virtually unsaleable and valueless, but the poker machine entitlements were readily saleable and had a greater market value. Contracts for the sale of the Hotel were signed, with settlement later in the month. The hotel was sold. All assets were included in a single sale price. You explain that as the value of the hoteliers licence had reduced from over the period of ownership, then any assessable capital gain is the result of excess of sale value over cost of the poker machine entitlements.

Relevant legislative provisions: Part 3-1 of the Income Tax Assessment Act 1997 | Division 100 of the Income Tax Assessment Act 1997 | Section 102-3 of the Income Tax Assessment Act 1997 | Subsection 102-3(1) of the Income Tax Assessment Act 1997 | Section 102-5(1) of the Income Tax Assessment Act 1997 | Section 104-10 of the Income Tax Assessment Act 1997 | Subsection 104-10(1) of the Income Tax Assessment Act 1997 | Paragraph 104-10(3)(a) of the Income Tax Assessment Act 1997 Subsection 104-10(4) of the Income Tax Assessment Act 1997 | Subsection 110-25(2) of the Income Tax Assessment Act 1997 | Section 115-1 of the Income Tax Assessment Act 1997 | Section 115-5 of the Income Tax Assessment Act 1997 | Subdivision 115A of the Income Tax Assessment Act 1997 | Paragraph 115-100(a)(i) of the Income Tax Assessment Act 1997 Section 116-20 of the Income Tax Assessment Act 1997 | Division 152 of the Income Tax Assessment Act 1997 | Section 152-5 of the Income Tax Assessment Act 1997 | Subsection 152-35(1) of the Income Tax Assessment Act 1997 | Subsection 152-40(1) of the Income Tax Assessment Act 1997 | Subsection 152-40(4) of the Income Tax Assessment Act 1997 | Section 7 Gaming Machines Act 2001

Reasons for decision: Summary: You will make a capital gain on the disposal of the Hotel, which includes the poker machines and poker machine entitlements. The capital gain is subject to the capital gain provisions in Part 3-1 of the ITAA 1997 and included in your income under section 102-5(1) of the ITAA 1997. You will be entitled to reduce your capital gain by 50% providing you do not index your cost base. No further concessions are available. | Detailed Reasoning - Detailed reasoning: CGT event A1 happens when an entity disposes of an asset (subsection 104-10(1) of the ITAA 1997). An entity makes a capital gain when the capital proceeds from the disposal are more than the asset's cost base and an entity makes a capital loss when the capital proceeds are less than the asst's reduced cost base (subsection 104-10(4) of the ITAA 1997). Generally, capital proceeds from a CGT event are amounts of money and the market value of any other property that an entity receives or is entitled to receive for the event happening (section 116-20 of the ITAA 1997). The cost base of a CGT asset generally consists of the total of the money an entity paid or property it gave in respect of acquiring the CGT asset (subsection 110-25(2) of the ITAA 1997). Paragraph 104-10(3)(a) of the ITAA 1997 explains that the timing of CGT event A1 is when you enter into the contract for the disposal of the CGT asset. Concessional rules apply to working out a net capital gain resulting from the disposal of a CGT asset acquired at least 12 months before the CGT event. The concessional rules can only apply if you have chosen not to include indexation in the cost base of the asset for working out the capital gain (subsection 102-3(1) of the ITAA 1997). Section 115-1 of the ITAA 1997 explains that a discount capital gain remaining after the application of any capital losses and net capital losses from previous income years may be reduced by the discount percentage when working out your net capital gain. Discount capital gains are discussed in Subdivision 115A of the ITAA. Subparagraph 115-100(a)(i) of the ITAA provides for a discount percentage of 50% if the capital gain is made by an individual and meets the requirements of a discount capital gain under section 115-5 of the ITAA. A discount capital gain must: · be made by an individual, a complying superannuation fund, a trust or a life insurance company (in specific circumstances) · be made after 21 September 1999 · not have an indexed cost base · be on an asset acquired at least 12 months before. Small Business Capital Gains Tax Concessions Further concessions may be available if you qualify for small business relief under Division 152 of the ITAA 1997. These include: · the 15 year exemption · the 50% reduction · the retirement concession · the roll-over. There are basic conditions that must be satisfied before any of the small business concessions can be considered (section 152-5 of the ITAA 1997). You must: be a small business entity or a partner in a partnership that is a small business entity, or the net value of assets that you and related entities own must not exceed $6,000,000 the CGT asset must be an active asset. Subsection 152-35(1) of the ITAA 1997 explains that a CGT asset satisfies the active asset test if you owned the asset for 15 years or less and the asset was an active asset of yours for a total of at least half that period. · A CGT asset is an active asset at any given time according to subsection 152-40(1) of the ITAA 1997, if, at that time, you own it and: · you use it, or hold it ready for use, in the course of carrying on a business, or · it is an intangible asset that is inherently connected with a business that you, or another entity that is connected with you, carries on (eg goodwill), or · it is used, or held ready for use, in the course of carrying on a business by: · your small business CGT affiliate, or · another entity that is connected with you. Subsection 152-40(4) of the ITAA 1997 lists CGT assets that cannot be active assets. These assets include an asset whose main use in the course of carrying on the business is to derive interest, an annuity, rent, royalties or foreign exchange unless: The asset is an intangible asset and has been substantially developed, altered or improved by you so that its market value has been substantially enhanced, or Its main use for deriving rent was only temporary. | Detailed Reasoning - Application to your circumstances: The Hotel is a CGT asset. You sold the hotel. Disposal of a CGT asset is a CGT event A1 under section 104-10 of the ITAA 1997. A CGT event happened to a CGT asset; therefore you may have a capital gain or a loss. As you are an individual who disposed of the Hotel after 21 September 1999 and have owned the hotel for more than 12 months, you will be entitled to a 50% discount on any capital gains under section 102-3 of the ITAA 1997 providing you do not use indexation when calculating your cost base. You have explained that the hotel was leased immediately after you purchased it, and the lessee was not connected with you. As you did not use the hotel, or hold it ready for use in the course of carrying on a business and the business was not carried on by your affiliate or an entity connected with you, then, the hotel is not an active asset, and you will therefore not be eligible for any of the small business CGT concessions. Even if the Hotel were to be considered to be an active asset for the period of time that you were owner in possession, this period is less than 50% of the total ownership period. Therefore the Hotel would still not be considered an active asset, and you would still not be eligible for the small business CGT concessions. | Detailed Reasoning - Poker Machines and Poker Machine Entitlements: In NSW, the Gaming Machines Act 2001 states at section 7 that it is lawful to keep or operate an approved gaming machine in a hotel or on the premises of a registered club. This means, under NSW law, poker machines must be part of a hotel or registered club, they can not be an independent business. An entitlement provides the legal right to the holder of the entitlement in relation to certain activities and hence it is a CGT asset. The entitlement must be used, or held ready for use, in the course of carrying on a business. Alternatively, if it is an intangible asset, it must be inherently connected with the business that you, or an entity connected with you, carries on. The poker machines and the poker machine entitlements are inherently connected with the Hotel and form part of the business of the Hotel. You do not carry on that business, nor is it carried on by an affiliate or an entity connected with you. Therefore, the poker machines and the poker machine entitlements are not active assets and as such, the small business CGT concessions cannot be applied to any capital gains arising from these assets. It is also noted that you sold the Hotel as an entirety, a walk in-walk out going concern. The poker machines and the poker machine entitlements were not sold as a separate business.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Does Part IVA apply to this ruling?: Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable. | We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. | If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply. | For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: 'Part IVA: the general anti-avoidance rule for income tax'.