Edited version of private ruling

Authorisation Number: 1011474370974

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Ruling

Subject: Capital gains tax - having a different main residence from your spouse

Are you eligible to claim the small business 15 year exemption in relation to the compulsory acquisition of part of your land under section 152-105 of the Income Tax assessment Act 1997 (ITAA 1997)?

No.

This ruling applies for the following period

1 July 2009 to 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The city exercised its power and made a compulsory acquisition of a portion of your land for the extension of the highway. The city was not prepared to purchase the whole of the land from the taxpayer as the city only acquires that portion of the land that is necessary for the road extension.

The terms of the compulsory acquisition were finalised. Under the terms of the Agreement the city acquired an area for an amount. The agreement was varied to include additional land. Settlement took place.

A capital gain was realised from the compulsory acquisition.

You and your spouse obtained a previous ruling based on the information you provided that determined you are entitled to the small business 15 year exemption as the land is an active asset and satisfies the active asset test. You and your spouse owned the land for more than 15 years and used the land in your business for a period of more than 71/2 years.

You have stated that you and your spouse are not currently carrying on a business and the business ceased several years ago. Therefore, you are not currently a small business entity.

You and your spouse believe that you satisfy the maximum net asset value test as you own the following assets that are subject to the $6 million test:

· the proceeds from the compulsory acquisition

· the remaining portion of the land, and

· money in other personal bank accounts

You will continue with your plans to sell the remainder of the land to fund your retirement. You are both over 55 years of age and are both retired from full time work and currently undertaking or intending to undertake part time casual employment.

You provided information with regard the business including the date of commencement, yearly gross income and yearly net income.

You indicated that one spouse operated the business and the other was in other fulltime employment and assisted them in the business.

Relevant legislative provisions

Division 152 of the Income Tax Assessment Act 1997

Section 152-10 of the Income Tax Assessment Act 1997

Section 152-15 of the Income Tax Assessment Act 1997

Section 152-35 of the Income Tax Assessment Act 1997

Section 152-15 of the Income Tax Assessment Act 1997

Paragraph 152-40(1)(a) of the Income Tax Assessment Act 1997

Subdivision 152-B of the Income Tax Assessment Act 1997

Subdivision 152- A of the Income Tax Assessment Act 1997

Section152-105 of the Income Tax Assessment Act 1997

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 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 of the ITAA 1936 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 of the ITAA 1936 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 of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA of the ITAA 1936 may apply.

For more information on Part IVA of the ITAA 1936, 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.

Summary: Capital gains tax - small business 15 year exemption

Capital gains tax

Capital gains tax (CGT) is the tax you pay on any capital gain you make that you include in your annual income tax return. There is no separate tax on capital gains - rather, it is a component of your income tax. You are taxed on your net capital gain at your marginal tax rate. Any net capital gain you make for an income year must be included in your assessable income.

Small business CGT concessions

If a property is used in carrying on a business you may be eligible to apply the Small Business CGT Concessions under Division 152 of the ITAA 1997 to reduce the capital gain that you must include in your assessable income.

Basic conditions

You must first satisfy the basic conditions that apply to all the CGT concessions for small business (Section 152-10 of the ITAA 1997). You must then satisfy any additional conditions that apply specifically to the individual concessions.

These conditions are:

(a) a CGT event happens in relation to a CGT asset of yours in an income year. This condition does not apply in the case of CGT event D1

(b) the event would (apart from Division 152 of the ITAA 1997) 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 or

(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

(d) the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997.

Meaning of active asset

A CGT asset is an active asset at a time if:

· you own the asset (tangible or intangible), and

· you use it, or hold it ready for use, in the course of carrying on a business, or

· it is used, or held ready for use, in the course of carrying on a business by your affiliate or by another entity that is connected with you.

Active asset test

This test requires the CGT asset to be an active asset for:

· 7.5 years, if owned for more than 15 years, or

· half of the period of ownership if owned for 15 years or less (section 152-35 of the ITAA 1997).

A tangible or intangible asset is a CGT active asset if it used or held ready for use in the course of carrying on a business by:

· you

· your spouse or child under 18 years

· your affiliate, or

· an entity connected with you (paragraph 152-40(1)(a) of the ITAA 1997).

Fifteen year exemption

Subdivision 152-B of the ITAA 1997 states that the capital gain made on the sale of an asset can be entirely disregarded if you qualify for the small business 15 year exemption.

Section 152-105 of the ITAA 1997 outlines the conditions an individual must satisfy to be eligible for the 15-year exemption. They are as follows:

a) you must satisfy the basic conditions for the small business CGT concessions in subdivision 152-A of the ITAA 1997

b) you continuously owned the CGT asset for the 15 year period ending just before the CGT event, and

d) either:

i) you are 55 or over at the time of the CGT event and the event happens in connection with your retirement; or

ii) you are permanently incapacitated at the time of the CGT event. The conditions will now be applied to your facts to determine your eligibility for the exemption.

Carrying on a business

The question of whether a business is being carried on is a question of fact and degree. The determination of the question is generally the result of a process of weighing all the relevant indicators.

The courts have developed a series of indicators to determine the matter on the particular facts, these indicators are summarised in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production?

These indicators are relevant to business activity in general. Relevant indicators include:

· significant commercial purpose or character

· the intention of the taxpayer

· prospect of profit

· repetition and regularity

· is the activity of the same kind and carried on in a manner that is characteristic of the industry?

· organisation in a business like manner and the use of system

· size or scale of activity.

In showing that a business is being carried on, it is important that the taxpayer is able to shows that the activity is carried on for commercial reasons and in a commercially viable manner. It is particularly linked to the size and scale of activity, the repetition and regularity of activity and the profit indicators

Application to your circumstances

You are both individuals and have made a capital gain from the disposal of a portion of your land from a compulsory acquisition made by the city.

You have continuously owned the land for more than 15 years.

To be eligible to claim the small business concessions you must be carrying on a business and have used the land for at least 7.5 years in carrying on a business.

Available evidence indicates that your activity was conducted on a very small scale over the relevant income years.

Based on the information you have supplied we do not consider that there is sufficient evidence to show that there was a market gardening activity of a scale sufficient to be considered a business being carried out on the land resumed for 7.5 years.

Note: no information was provided to show that the land resumed was used in your activity, or that one spouse was an affiliate of the other's business.

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