ATO Interpretative Decision
ATO ID 2011/37
Income Tax
CGT small business concessions: maximum net asset value test - disregarded assets - asset being used solely for personal use and enjoymentFOI status: may be released
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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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
Is the use of an asset over its ownership period taken into account in determining whether the asset is being used solely for personal use and enjoyment and therefore disregarded from the net value of an individual's CGT assets under subparagraph 152-20(2)(b)(i) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
Yes. The use of an asset over its ownership period is taken into account in determining whether the asset is being used solely for personal use and enjoyment and therefore disregarded from the net value of an individual's CGT assets under subparagraph 152-20(2)(b)(i) of the ITAA 1997.
Facts
An individual taxpayer makes a capital gain from the sale of a business asset. The individual also owns a dwelling (separate from their business). The dwelling has been leased to tenants for a period of 5 years from the time of acquisition until one month before the sale of the business asset. From the time the leasing of the dwelling ceased until after the sale of the business asset, the dwelling was used solely for the personal use and enjoyment of the individual (but not as a main residence).
The individual is not a small business entity within the meaning of section 328-110 of the ITAA 1997 at any time.
For the purpose of determining whether they qualify for the small business CGT concessions, the individual must determine the net value of their CGT assets and in particular, whether the value of the dwelling is included in the calculation.
Reasons for Decision
To qualify for the small business CGT concessions, a taxpayer must generally satisfy either the maximum net asset value test or, for CGT events happening in the 2007-08 or later income years, be a small business entity ($2 million turnover test) (paragraph 152-10(1)(c) of the ITAA 1997).
A taxpayer satisfies the maximum net asset value test if, just before the CGT event, the net value of their CGT assets and of certain related entities does not exceed a threshold (section 152-15 of the ITAA 1997).
In working out the net value of the CGT assets of an individual, assets being used solely for the personal use and enjoyment of the individual, or the individual's affiliate (except a dwelling, or an ownership interest in a dwelling, that is the individual's main residence, including any relevant adjacent land) are disregarded (subparagraph 152-20(2)(b)(i) of the ITAA 1997).
The question arises as to whether subparagraph 152-20(2)(b)(i) of the ITAA 1997 requires only a consideration of the use of an asset immediately before the relevant CGT event or requires a consideration of the use of the asset throughout its ownership period to determine whether it is an asset being used solely for personal use and enjoyment.
It is considered that if regard was had only to an asset's use at a single point in time, that is, immediately before the relevant CGT event, the result would not necessarily reflect the true nature of the use of the asset. Accordingly, it is considered that regard must be had to the use of an asset over its ownership period in order to ascertain whether the asset is being used solely for personal use and enjoyment. As the provision refers to sole personal use, any non-personal use of an asset over its ownership period will mean the asset is not disregarded under subparagraph 152-20(2)(b)(i) of the ITAA 1997.
In this case, the individual has used their dwelling for non-personal use for nearly the entire period of ownership up to the time of the sale of the business asset. Accordingly, the dwelling is not an asset being used solely for the personal use and enjoyment of the individual and is not disregarded under subparagraph 152-20(2)(b)(i) of the ITAA 1997. The dwelling must be included in the net value of the individual's assets under section 152-15 of the ITAA 1997.
Date of decision: 3 May 2011Year of income: Year ended 30 June 2011
Legislative References:
Income Tax Assessment Act 1997
paragraph 152-10(1)(c)
section 152-15
subparagraph 152-20(2)(b)(i)
section 328-110
Keywords
Basic conditions for relief
Capital gains
CGT small business relief
Date reviewed: 21 November 2017
ISSN: 1445 - 2782
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