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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of your private ruling

Authorisation Number: 1012561035683

Ruling

Subject: Capital gains tax

Question 1

Are you entitled to a partial main residence exemption on the capital gain from the sale of the property?

Answer

Yes.

Question 2

Are you entitled to apply the 50% general discount to the remainder of the capital gain from the sale of the property?

Answer

Yes.

Question 3

Are you entitled to apply the 50% active asset reduction, to the remainder of the capital gain from the sale of the property, if the property is sold before a certain date?

Answer

No.

Question 4

Are you entitled to apply the 50% active asset reduction, to the remainder of the capital gain from the sale of the property, if the property is sold after a certain date?

Answer

Yes.

This ruling applies for the following period

Year ending 30 June 2014

The scheme commences on

1 July 2013

Relevant facts and circumstances

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

You and your spouse purchased a property to live in more than 15 years ago.

The land is less than 2 hectares.

In the 2006-07 financial year, you and your spouse separated part of the land and used it to run a business in partnership

The partnership is a small business entity with a turnover of less than $2 million.

The business commenced in the 2006-07 financial year and is still in operation. You and your spouse intend to continue running the business until the property is sold.

You and your spouse have decided to sell the business as well as the main residence.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 115-10

Income Tax Assessment Act 1997 subdivision 152-A

Income Tax Assessment Act 1997 section 152-35

Reasons for decision

Question 1

Capital gains tax (CGT) is the tax that you pay on certain gains you make. You make a capital gain or capital loss as a result of a CGT event, happening to an asset in which you have an ownership interest. 

Main residence exemption

Generally, you ignore a capital gain or capital loss from a capital gains tax (CGT) event that happens to your ownership interest in a dwelling that is your main residence.

To get the full exemption from CGT:

In this case, the property is less than two hectares and it is the main residence of you and your spouse. However, a portion of the property has been used to operate a business and produce assessable income. Therefore, you and your spouse are entitled to a partial main residence exemption.

Question 2

Under section 115-10 of the Income Tax Assessment Act 1997 (ITAA 1997), to qualify for the 50% general discount a capital gain must be made by an individual, a complying superannuation entity, a trust or a life insurance company. The capital gain must result from a capital gains tax (CGT) event happening after 11:45am on 21 September 1999 and must not have an indexed cost base. Also, the gain must result from a CGT event happening to an asset that was acquired at least 12 months before the CGT event.

In this case, the property was purchased more than 12 months ago. As it has been owned for more than 12 months you and your spouse are entitled to apply the 50% general discount.

Question 3 and 4

The basic conditions for the small business CGT concessions are set out in Subdivision 152-A of the ITAA 1997. The basic conditions relevant in this case are the small business entity test and the active asset test. If an entity satisfies the basic conditions, they are entitled to apply the 50% active asset reduction.

In the application for private ruling it was stated that the company is a small business entity. Therefore, we need to determine whether or not the asset in question satisfy the active asset test.

Active asset test

The active asset test is contained in section 152-35 of the ITAA 1997. The active asset test is satisfied if:

· you have owned the asset for 15 years or less and the asset was an active asset of yours for a total of at least half of the test period detailed below, or

· you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of at least 7.5 years during the test period.

The test period is from when the asset is acquired until the CGT event. If the business ceases within the 12 months before the CGT event (or such longer time as the Commissioner allows) the relevant period is from acquisition until the business ceases.

A CGT asset is an active asset if it is owned by you and is used or held ready for use in a business carried on (whether alone or in partnership) by you, your affiliate, your spouse or child, or an entity connected with you.

Private purpose and active asset

The definition of 'active asset' does not require exclusive use of the asset for business purposes. The fact that part of the property is used for private purposes, such as for main residence purposes, does not affect the property's standing as an active asset in the hands of the taxpayer.

Application to your circumstances

In this case, you and your spouse purchased the property more than 15 years ago. As the asset has been owned for more than 15 years, it needs to have been used in the course of carrying on a business for at least 7.5 years. The business commenced operations on in the 2006-07 financial year. If the property is sold prior to a certain date, it will have been used by the business for less than 7 years. The property will not satisfy the active asset test if it is sold prior to a certain date. Therefore, the basic conditions cannot be satisfied and you and your spouse are not entitled to apply the 50% active asset reduction.

However, if the property is sold after a certain date, it will have been an active asset for more than 7.5 years. Therefore, the property will satisfy the active asset test and you and your spouse would be entitled to apply the 50% active asset reduction.

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