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This edited version has been archived due to the length of time since original publication.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.

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Edited version of your written advice

Authorisation Number: 1013015195202

Date of advice: 18 May 2016

Ruling

Subject: Capital gains tax and GST

Question 1

Will the sale of the property be subject to GST?

Answer

No.

Question 2

Will part of the capital gain be exempt from capital gains tax under the main residence exemption?

Answer

Yes.

Question 3

Will the small business 15 year exemption apply to allow you to disregard the capital gain on the sale of the property?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 2017

The scheme commences on:

1 July 2016.

Relevant facts and circumstances

You purchased a property after 20 September 1985.

The property has remained your principal place of residence continuously since it was purchased.

Shortly after moving into the property you commenced a small business working from home.

Over the years the percentage of floor space used for business purposes has varied.

You are retiring from business life and recently sold the business. You plan to sell the property, soon after this.

You will be fully retired by the time the property is sold.

You will not be registered for GST at the time the property is sold.

You are not in the business of selling properties.

The property has not been extensively renovated during the last five years.

You have owned the property for more than 15 years.

You will satisfy the maximum net asset test when the property is sold.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 - Section 9-20

A New Tax System (Goods and Services Tax) Act 1999 - Section 195-1

Income Tax Assessment Act 1997 - Section 102-20,

Income Tax Assessment Act 1997 - Section 118-110,

Income Tax Assessment Act 1997 - Section 152-105,

Income Tax Assessment Act 1997 - Section 118-190,

Income Tax Assessment Act 1997 - Section 152-35,

Income Tax Assessment Act 1997 - Section 152-40, and

Income Tax Assessment Act 1997 - Section 152-105.

Reasons for decision

Question 1

Carrying on an enterprise

Section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides the definition of enterprise for GST purposes. This definition includes an activity or series of activities done in the form of a business; or in the form of an adventure or concern in the nature of trade.

The definition of 'business' in section 195-1 of the GST Act is the same as that in section 995-1 of the Income Tax Assessment Act 1997. The meaning of 'business' is considered in Taxation Ruling TR 97/11 which discusses the main indicators of carrying on a business.

In order to be conducted 'in the form of a business' the activities would need to have the essential appearance or characteristics of a business.

In this case the property has been used to operate your small business; however the operations have substantially diminished over the years.

You are retiring from business life and recently sold the business. You are planning to sell the property soon.

In this case you have held the property for many years and you are not in the business of property selling.

Therefore, based on the facts provided, after weighing all the relevant indicators, we are satisfied that your activities would not amount to a business of selling properties.

However, the term 'enterprise' also includes an activity or series of activities carried on 'in the form of an adventure or concern in the nature of trade'. An adventure or concern in the nature of trade may include isolated transactions that do not amount to a business, but which have the characteristics of a business deal.

The question of whether an entity is carrying on as an enterprise often arises where there are 'one-off' property transactions. The decision to be made is whether the activities are an adventure or concern in the nature of trade as opposed to the mere realisation of a capital asset.

Miscellaneous Taxation Ruling MT 2006/1 sets out guidelines on the meaning of the word 'enterprise' for the purpose of entities' entitlement to an Australian business number (ABN). Goods and Services Tax Determination GSTD 2006/6 confirms that the principles in MT 2006/1 apply equally to the term 'enterprise' for GST purposes.

Paragraph 265 of MT2006/1 details a list of factors that provide assistance in determining whether activities are an adventure or concern in the nature of trade. If several of the factors are present it may be an indication that an adventure or concern in the nature of trade is being carried on.

In this case, you have held the property for some time and currently are not carrying on any business or enterprise in relation to the property.

You are selling the property 'as is' and we acknowledge that you may make a profit from the sale of the property. However, this fact alone is not detrimental to the conclusion that the sale may not be an adventure or concern in the nature of trade. We refer to paragraph 244 of MT 2006/1 which states:

Having applied all the principles in MT 2006/1 to the present circumstances, we conclude that the sale of your property, does not amount to an enterprise for GST purposes. The sale of the property will be regarded as the mere realisation of a capital asset. Further, at the time of sale you will not be registered and will not be required to be registered for GST. Consequently, the sale of the property will not be subject to GST.

Question 2

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a capital gain or capital loss results from a CGT event occurring. The most common CGT event, A1, occurs when you dispose of a CGT asset to someone else. You will trigger CGT event A1 when you sell your property.

Under section 118-110 of the ITAA 1997, you can generally disregard any capital gain or capital loss from a CGT event that happens to a dwelling that is your main residence for the entire period you owned it when:

In your case, you advise that the dwelling has been your main residence for your entire ownership period but it has also been used to produce assessable income. Accordingly, you are only eligible for a partial main residence exemption (section 118-190 of the ITAA 1997).

In calculating your capital gain, subsection 118-190(2) of the ITAA 1997 states that the capital gain or capital loss that you would have made apart from this section from the CGT event is increased by an amount that is reasonable having regard to the extent to which you would have been able to deduct interest. This is referred to as the interest deductibility test.

The interest deductibility test applies regardless of whether you actually borrowed money to acquire your dwelling. You must apply it on the assumption that you did borrow money to acquire the dwelling. If you run a business in part of your home, you would be entitled to deduct part of the interest on money you borrowed to acquire the dwelling if:

TD 1999/66 Income tax: capital gains: what factors should be taken into account in determining the 'amount that is reasonable' in applying subsection 118-190(2) of the Income Tax Assessment Act 1997? provides the following example:

Your application indicates that similarly to the above example, you would apply a partial main residence exemption based on the period of time the dwelling was used to produce assessable income and the floor space that was used over that period. The 50% CGT discount can then be applied as you have owned the asset for more than 12 months.

Question 3

Section 152-105 of the ITAA 1997 provides a small business 15-year exemption for individuals. Under this section, you can disregard the capital gain from the disposal of your property, being CGT event A1 happening to the asset, if you:

Condition (a)

The basic conditions for the small business capital gains tax concessions in subdivision 152-A of the ITAA 1997 (as relevant to this case) are:

Maximum net asset value test

There is a limit of $6 million on the net value of CGT assets that you and certain entities can own and still qualify for the small business CGT concessions. This $6 million limit is called the maximum net asset value test. It is not indexed for inflation.

You satisfy the maximum net asset value test if the total net value of CGT assets owned by certain entities does not exceed $6 million just before the CGT event that results in the capital gain for which the concessions are sought. You must include the net value of CGT assets owned by:

This figures includes the net value of assets of your affiliates, and entities connected with your affiliates, only if the assets are used, or held ready for use, in a business carried on by your or an entity connected with you.

You advise that you satisfy the maximum net asset value test.

Active asset test

The active asset test is satisfied if:

The test period:

The test period:

The asset does not need to be an active asset just before the CGT event.

The meaning of an active asset is set out in section 152-40 of the ITAA 1997. It must firstly satisfy one of the 'positive tests' in subsection 152-40(1) of the ITAA 1997 and then also not be excluded by one of the exceptions in subsection 152-40(4) of the ITAA 1997.

Under subsection 152-40(1) of the ITAA 1997, a CGT asset is an active asset (subject to the exclusions) if it is owned and used, or held ready for use, in the course of carrying on a business by you or your small business CGT affiliate or another entity that is connected with you under paragraph 152-40(1)(c) of the ITAA 1997.

The combined effect of sections 152-35 and 152-40 of the ITAA 1997 is that the asset will meet the active asset test if the asset was used, or held ready for use, in the course of carrying on a business for at least half of the time period it was owned, subject to the exclusions in subsection 152-40(4) of the ITAA 1997.

In your case, you have held the asset for more than 15 years and it has been used in the course of carrying on your business for more than 7.5 years. Accordingly, the active asset test is satisfied.

Small business 15 year exemption

Because you satisfy both the maximum net asset value test and the active asset test, the basic conditions for the small business concessions are satisfied. As for the conditions specific to the 15-year exemption, condition (b) is satisfied because you have owned the asset for over 15 years.

Condition (c)

Condition (c) of the 15 year exemption applies if when the CGT event happened:

Whether a CGT event happens in connection with an individual's retirement depends on the particular circumstances of each case. There needs to be at least a significant reduction in the number of hours that you work or a significant change in the nature of your present activities to be regarded as a retirement. However, it is not necessary for there to be a permanent and everlasting retirement from the workforce.

The provisions relating to the small business 15-year exemption do not define what is meant by the phrase 'in connection with a taxpayer's retirement', nor does it give any indication of the degree of retirement required in order to take advantage of this concession. The words 'in connection with' can also apply where the CGT event occurs sometime before or after retirement.

Application to your circumstances

You are over 55 years old. You recently sold your business and are transitioning into full retirement. By the time the property is sold you expect to be fully retired.

Accordingly, the sale can be considered to be in connection with your retirement and you will satisfy the conditions for the 15 year exemption to disregard any capital gain you make on the sale of the property.


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