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: Do the individual partners satisfy the basic conditions necessary to be eligible for the CGT concessions for small business, thereby allowing a reduction to the capital gain made on the disposal of their interest in the property? | A1: No | Q2: Are the individual partners in the partnership entitled to apply the 50% CGT discount to the capital gain made on the disposal of the their interest in the property? | A2: Yes

Relevant facts and circumstances: You, the current partnership of A, B and C are a tax law partnership consisting of the three remaining partners that was created from the four partner partnership A, B, C and D (old partnership), also a tax law partnership, following the death of one of the partners. The partners A, B and C are the current co-owners of the property. The co-owners along with D acquired this property in the early XX's and legal title was held by them as tenants in common. C and their spouse D's share is 50% and, A and B's share is 50%. A and B are partners and hold their share equally as joint tenants. C and D held their 50% share equally as joint tenants. C now holds the whole 50% share following their spouse's death. On acquisition, the land had fencing and a residential house and was primarily rural land. The partners do not reside on the land. The co-owners' intention when acquiring the property was to use it for investment purposes and to provide possible future land for future expansion of existing businesses carried on by C and D and A and B's business activity. The part of the property that has the residential house has been leased and continues to be leased. The rest of the land on the property, since it has been acquired, has been leased to a tenant who has carried on a business on the land and continues to be used in this way. The tenant is not an entity that is 'connected with' the partnership or partners. The partnership has not used the land in carrying on a business activity. However, you state that the partnership will use the land in carrying on a business activity from the contract date until settlement. All decisions are made jointly by the co-owners for their mutual benefit. The leasing income from the house and the land on the property is received jointly in partnership and deposited into a joint bank account. Apart from repairs to the residential house which were carried out more than 10 years ago, no other improvements have been made on the property. The property is held as a partnership asset. The partnership has claimed income tax deductions in respect to this property. 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 your property and has made an offer. This offer has been accepted by you and contracts exchanged to sell the property. You are selling to maximise the realisation of your property. The property is being sold as is. You advised that the residential house will continue to be leased up until the day of settlement and in addition the land will continue to be leased up until the day of settlement. The partnership has previously acquired X commercial strata units which are rented. No properties have previously been sold. The partnership does not have a history of buying and selling land or buildings.

Relevant legislative provisions: 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 | Income Tax Assessment Act 1997 Section 106-50

Reasons for decision: Detailed Reasoning - Small business CGT concession eligibility and the active asset test: Section 152-10 of the Income Tax Assessment Act 1997 (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, can not be an active asset. In your case, you acquired the property in the early XX's. Part of the property, being the house, was rented to an unrelated third party. The remainder of the property has been leased to another entity to use in the course of carrying on a primary production business since its acquisition. However, the other entity is not an entity that is 'connected with' you. You state that you intend to use the property in your business from the contract date to the settlement date. Accordingly, as the main use of the property since its acquisition was to derive rent (or lease income), the property can not be an active asset. Therefore, you (the partners) 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 property. | 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 (the partners) have held an 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 property. | Detailed Reasoning - Capital gains and partnerships: 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 106-5 of the ITAA 1997 discusses capital gains in relation to partnerships. It provides that any capital gain from a CGT event happening to a partnership asset is made by the partners individually (not by the partnership itself), with each partner's gain calculated by reference to the partnership agreement, or partnership law if there is no agreement. Each partner has a separate cost base for the partner's interest in the CGT asset of the partnership.