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Authorisation Number: 1011831683621

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Ruling

Subject: CGT - Maximum Net Asset Value and Primary Residence

Question 1

If the principal residence is being rented at the time of sale of the business, will the entire value of the principal residence be included in the calculation of the Maximum Net Asset Value for the purposes of the Capital Gains Tax (CGT) Small Business Concessions?

Answer

No. The amount applicable to be included in the Maximum Net Asset Value will only be the proportionate value of the residence from when it became income producing to the whole ownership period.

This ruling applies for the following period

Income year ended 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts

The taxpayer and spouse have separated.

At this time, they are both in a business together with another entity in partnership, which they are trying to sell.

The business partners are a number of discretionary trusts.

They also own a principal residence valued at a substantial amount, which they are both living in to date.

They have owned the principal residence outright for a number of years, which they have put for sale for several months. To date, they have not had any success in selling the property.

They are now seriously considering renting out the principal residence so they can both move out to separate accommodation.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 118-145

Income Tax Assessment Act 1997 Subsection 118-185(1)

Income Tax Assessment Act 1997 Subsection 118-185(2)

Income Tax Assessment Act 1997 Section 118-192

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 Section 152.15

Income Tax Assessment Act 1997 Section 152-20

Income Tax Assessment Act 1997 Subsection 152-20(2A)

Reasons for decision

Issue 1

Question 1

To qualify for the small business CGT concessions, you must first satisfy several conditions that are common to all the concessions. These are called 'basic conditions'. The basic conditions are contained in Subdivision 152-A of the Income Tax Assessment Act 1997 (ITAA 1997). One of those conditions you must satisfy is the 'maximum net asset value test'.

A taxpayer will satisfy the 'maximum net asset value test' in section 152-15 of the ITAA 1997 if, just before the CGT event for which the small business CGT concessions are sought, the total net value of the following does not exceed $6 million:

· the taxpayer's CGT assets;

· any entities connected with the taxpayer; and

· any affiliates of the taxpayer or entities connected with the taxpayer's affiliates (not including any assets already counted under item 2)

The CGT event in your case will be the disposal of the business, which the partnership carries on.

Section 152-20 of the ITAA 1997 provides the meaning of 'net value of the CGT assets'. Under subsection 152-20(1) of the ITAA 1997, the net value of the CGT assets of an entity is the amount (whether positive, negative or nil) by which the sum of the market values of those assets exceeds the sum of the liabilities of the entity that are related to the assets and certain provisions made by the entity.

Assets to be included in determining the net value of the CGT assets are not restricted to business assets. They include all CGT assets of the entity, unless the assets are specifically excluded.

In the case of a taxpayer's main residence, generally the market value of the main residence would not be included in the calculation of the maximum net asset value test as the main residence would be disregarded. However, once the main residence becomes income producing in full or in part, then the full main residence exemption will not be available to the taxpayer from the time it first became income producing.

Subsection 152-20(2A) of the ITAA 1997 provides that in working out the net value of the CGT assets, the taxpayer will only include the current market value of the dwelling in their net assets value to the extent that is reasonable, the proportionate amount that the dwelling has been used to produce assessable income during all or part of the ownership period, which gives rise to deductions for interest payments or would give rise to deduction for interest if interest had been paid

If the main residence has had some income producing use, the percentage of income producing use is multiplied by the current market value to work out the value of the dwelling that should be included. This will take into account the length of time and percentage of income producing use of the dwelling.

Applying the above guidelines to your circumstances

You state that you, your spouse and a third party have put for sale the partnership business, which to date has not been sold.

You also stated that you and your spouse have put for sale your main residence for several months, but to date have had no takers. You and your spouse have decided to move out and put for rent the main residence as you are both in the process of divorce and are still living in the house. Due to this decision, you wanted to know how this will affect the maximum net asset value calculation when the business is sold.

In the event that the business is sold before your main residence and your main residence is income producing (being rented out) at the time of sale, you will include in the maximum net asset value the percentage of income producing use multiplied by the current market value over the whole ownership period to work out the value of the dwelling

Eg. Number of days rented out x Current Market Value

Number of days of ownership period

Main Residence Exemption

As you have mentioned that, you and your spouse will also sell your jointly owned main residence, the following information is for you to consider in the event that the property is actually sold.

Generally a capital gain made from the sale of your ownership interest in a dwelling that is your main residence can be disregarded: section 118-110 of the ITAA 1997.

You can choose to apply section 118-145 of the ITAA 1997, which is the provision for absences to continue to treat the dwelling as your main residence, even though it has ceased to be so, for the total period of six years where the dwelling was used to produce assessable income (i.e. rented out). However, if you make that choice, you cannot treat any other dwelling as your main residence while you apply the absence rule to this main residence.

Where a dwelling is your main residence for only part of the ownership period, you will need to apportion your capital gain: subsection 118-185(1) of the ITAA 1997.

The capital gain, which is assessable, is calculated using the following formula: subsection 118-185(2) of the ITAA 1997:

Capital gain amount X total non-main residence days .

total number of days of your ownership period.

The non-main residence days are the number of days in your ownership period when the dwelling was not your main residence, that is, from the date the property first became income producing until the date the property is sold. You make a capital gain if your capital proceeds exceed your cost base. You make a capital loss if those capital proceeds are less than the assets reduced cost base.

Cost Base

If a dwelling that was your main residence is used to produce income during the ownership period, and that use commenced after 20 August 1996, you would have had a full main residence exemption if you had sold the dwelling just before you began using it as a rental property. You are then taken to have acquired the dwelling for its market value at the time it first became income producing: section 118-192 of the ITAA 1997.

Where the market value of an asset needs to be determined, our publication 'Market valuation for tax purposes' provides assistance to taxpayers and their advisers on the processes to establish the market value for taxation purposes. The accepted principles of valuations are outlined in this guide.

As you have owned the property for more than 12 months, you can apply the discount method to calculate your net capital gain.

For information on the discount method, you are referred to Part A Chapter 2: How to work out your capital gain or capital loss of the Guide to Capital Gains Tax 2009-10. This guide will also give you more information on main residence at Chapter 7 Real Estate and Main Residence. You can access this publication from our website www.ato.gov.au.

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