ATO Interpretative Decision

ATO ID 2002/753

Capital Gains Tax

Capital gains tax: small business roll-over/ replacement active asset/ main residence
FOI status: may be released
CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

Can an interest in a property from which the taxpayer will carry on a business satisfy the meaning of an active asset under section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997) for the purpose of choosing the small business roll-over under section 152-410 of the ITAA 1997?

Decision

Yes. An interest in a property from which the taxpayer will carry on a business will satisfy the meaning of an active asset under section 152-40 of the ITAA 1997.

Facts

The taxpayer is a company which anticipates making a capital gain from the sale of a business.

The taxpayer intends to use the capital gains tax (CGT) small business roll-over by buying a replacement active asset, being a 30% interest in a property from which it will run a new business.

The property will include a house, and the taxpayer estimates it will use approximately 30% of the house for business purposes. The remaining interest in the property will be held by several individuals who intend to use the house as their main residence.

Reasons for Decision

For the interest in the property to be a replacement asset for the CGT small business roll-over relief under Subdivision 152-E of the ITAA 1997 the property must be an active asset when it is acquired or within 2 years of the relevant CGT event (subsection 152-420(4) of the ITAA 1997).

Active asset is defined in section 152-40 of the ITAA 1997. Essentially an asset is an active asset if it is owned by a taxpayer and used or held ready for use in the course of carrying on a business and does not fall within one of the exclusions contained in subsection 152-40(4) of the ITAA 1997.

The property will be used to carry on the business by the taxpayer and does not fall within one of the exclusions under subsection 152-40(4) of the ITAA therefore it will be an active asset. The fact that other persons will use the property for private purposes does not affect the property's standing as an active asset in the hands of the taxpayer. The taxpayer may therefore choose to use the CGT small business roll-over and treat the property as a replacement asset.

Note: Even if the taxpayer's interest in the property were to be greater than the business use of the property, the taxpayer may still use all of its interest in the property as a replacement asset. The definition of 'active asset' does not require exclusive use of the asset for business purposes. For example, if the taxpayer's interest in the property is 30%, and the business use is 20%, the taxpayer may still use its entire interest in the property as a replacement asset.
Note: Subsection 152-420(4) was repealed by the Tax Laws Amendment (2006 Measures No. 7) Act 2007 (55 of 2007). CGT event J5 happens under section 104-197 if, by the end of the replacement asset period, a replacement asset is not acquired or the replacement asset is not an active asset. The replacement asset period is specified in paragraph 104-185(1)(a).

Date of decision:  8 May 2002

Year of income:  Year ending 30 June 2003

Legislative References:
Income Tax Assessment Act 1997
   section 152-40
   subsection 152-40(4)
   Subdivision 152-E
   subsection 152-420(4)

Keywords
CGT replacement assets
Small business roll-over
Active asset test
CGT small business relief

Siebel/TDMS Reference Number:  DW378962

Business Line:  Centres of Expertise Capital Gains Tax

Date of publication:  31 July 2002

ISSN: 1445-2782

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).