Private ruling: Capital gains tax implications on disposal of property
Published: June 2012
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Will any capital gains tax (CGT) be payable on disposal of the property? | A1: Yes | Q2: Are you entitled to reduce the capital gain made on disposal of the property by utilising the 50% CGT discount? | A2: Yes | Q3: Are you entitled to reduce the capital gain made on disposal of the property by utilising the small business concessions? | A3: No

Relevant facts and circumstances: The family trust acquired a property approximately 15 years ago. The property was leased to an unrelated party who conducted a business on the property. There is no habitable residence on the property. Due to a marriage breakdown, a court order was made to have the property (held by the trust) transferred to you. You state that this occurred approximately 2 years prior to the end of the 2011-12 financial year. The family home was located on a separate block of land. You sold the property, in the later half of the 2012 financial year.

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 152-10 | Income Tax Assessment Act 1997 Section 152-15 | Income Tax Assessment Act 1997 Subsection 152-10(1A) | Income Tax Assessment Act 1997 Section 152-35 | Income Tax Assessment Act 1997 Section 152-40 | Income Tax Assessment Act 1997 Section 115-25 | Income Tax Assessment Act 1997 Section 102-5

Reasons for decision: Summary: You have disposed of a CGT asset and therefore CGT event A1 has occurred and the capital gains tax provisions will apply. If the capital proceeds received from the event are more than the cost base of the asset disposed of, you will make a capital gain. As you have held the asset for over 12 months, you will be entitled to reduce any capital gain made on the disposal of the asset by 50% due to the utilisation of the 50% CGT discount for individuals. You are not entitled to utilise any small business concessions to further reduce the capital gain as you do not satisfy the basic conditions. | Detailed Reasoning - Disposal of a CGT asset: Section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that CGT event A1 occurs when your ownership in a CGT asset (eg. property) is transferred to another entity. The time of the event is when you enter into a contract for the disposal, or, if there is no contract, the time of disposal is taken to be the time when the change in ownership occurs. In your case, you have disposed of a CGT asset (the property). Therefore CGT event A1 has happened and the capital gains tax provisions will apply. The time of the event is when you entered into the contract to sell the land. | Detailed Reasoning - Cost base for a 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: · money paid, or market value of property given, to acquire the asset · incidental costs of acquiring the asset, or that relate to the CGT event that happens to the asset · certain non-capital costs of ownership · capital expenditure on improvements · 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. If you receive the CGT asset (or a share of a jointly owned asset) and there is a marriage or relationship breakdown rollover, you are taken to have acquired the asset (or share of the asset) at the time it was transferred from your spouse (or the company or trustee). To calculate your capital gain or capital loss when a later CGT event happens, the first element of your cost base will be the same as the cost base of your spouse (or the company or trustee) at the time of the transfer. Your cost base also include any costs incurred by you or the previous owner (your spouse, the company or trustee) in transferring the particular asset on the breakdown of your marriage or relationship, such as conveyancing costs and stamp duty. General legal costs relating to the breakdown or incurred in seeking a property settlement are not included. | 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 capital gains tax concessions. These conditions are: · a CGT event happens in relation to a CGT asset in an income year. · the event would have resulted in the gain · at least one of the following applies: o you are a small business entity for the income year o you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997 o 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 o 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. o 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, can not be an active asset. In your case, the property was leased to an unrelated third party to use in their farming business. In this situation, the main use for the property is to derive rent. Accordingly, the asset can not be an active asset and therefore no small business concessions will apply on the disposal of the property. | Detailed Reasoning - 50% CGT discount: A 50% discount may be applied to a discount capital gain realised by an individual. In order to be considered a discount capital gain, the asset that gave rise to the capital gain must have 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 provide that the property was transferred from the family trust to you approximately 2 years before you disposed of it. Accordingly, as the property has been held for over 12 months, you would be entitled to reduce the capital gain made on the disposal of the property by 50%. | Detailed Reasoning - Calculating your capital gain: 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 102-5 of the ITAA 1997 outlines a method statement for calculating a net capital gain. This amount is then included in the taxpayer's assessable income. A net capital gain is essentially the result of the following process: · the sum of the taxpayer's individual capital gains for the income year · less any capital losses made in the income year and previously unapplied net capital losses from earlier income years · adjusting for any concessions (such as the discount capital gain concession) Example: Val bought a property for $150,000 under a contract dated 24 June 1991. She paid stamp duty of $5,000 on 20 July 1991. On 5 August 1991, she received an account for solicitor's fees of $2,000, which she paid as part of the settlement process. She sold the property on 15 October 2010 (the day the contracts were exchanged) for $350,000. She incurred costs of $1,500 in solicitor's fees and $4,000 in agent's commission. Purchase price $150,000 Stamp duty $5,000 Solicitors fees for purchase of property $2,000 Solicitors fees for sale of property $1,500 Agents commission $4,000 Cost base (total) $162,500 Val works out her capital gain as follows: Capital proceeds $350,000 less cost base $162,500 Capital gain before applying discount (Val's total current year capital gain using this method) $187,500 less CGT discount (as Val has no capital losses) $93,750 Net capital gain $93,750 For further information that may be useful, please refer to the Guide to capital gains tax 2010-11 publication that can be accessed on our website www.ato.gov.au

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.