Edited version of private ruling

Authorisation Number: 1011597782036

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Ruling

Subject: Capital gains tax: small business roll-over/replacement active asset/main residence

Question

Whether the property you intend to purchase to carry on a business satisfies the meaning of an active asset under section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997) for the purpose of choosing the small business roll-over under section 152-410 of the ITAA 1997?

Answer: Yes.

This ruling applies for the following period

1 July 2010 to 30 June 2011

The scheme commenced on

February 2008

Relevant facts

In early 2008, the taxpayer sold assets used by his trust in carrying on a business and nominated to use the small business replacement asset rollover concession for the resulting capital gain.

Taxpayer is eligible for the small business rollover concession.

Taxpayer's intention at the time of selling the assets was to start another business enterprise with the assets acquired for the new business to satisfy the criteria for replacement assets.

Taxpayer spent considerable time researching to determine what industry might be suitable to his skills and experience. The taxpayer submitted to the Tax Office an application for Private Ruling seeking the Commissioner's discretion for extension of time to acquire a replacement asset. The Commissioner exercised his discretion under subsection 104-190(2) of the ITAA 1997 and granted an extension.

An opportunity has now arisen for the taxpayer to purchase a property that would provide him with a personal residence and a business premises. The taxpayer has estimated t 50% of the property will be utilised for their business and 50% for their residence.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-20

Income tax Assessment Act 1997 section 104-185

Income tax Assessment Act 1997 Paragraph 104-185(1)(a)

Income tax Assessment Act 1997 by section 104-190

Income tax Assessment Act 1997 subsection 104-190(2)

Income tax Assessment Act 1997 section 104-197

Income tax Assessment Act 1997 section 104-198

Income tax Assessment Act 1997 Subdivision 152-E

Income tax Assessment Act 1997 section 152-40 and

Income tax Assessment Act 1997 section 152-410

Reasons for decision

Summary

The property you intend to purchase to carry on a business satisfies the meaning of an active asset under section 152-40 of the ITAA 1997 for the purpose of choosing the small business roll-over under section 152-410 of the ITAA 1997.

Detailed reasoning

The conditions which must be met in order to obtain capital gains tax roll-over relief under the small business roll-over provisions in Subdivision 152-E of the ITAA 1997 are set out in section 152-410 of the ITAA 1997, which states:

You can choose to obtain a roll-over under this Subdivision for a capital gain if the basic conditions in Subdivision 152-A are satisfied for the gain.

As per note 1 below a further condition is the replacement asset must be an active asset.

The main issue is whether the replacement asset, which is the property you intend to purchase, is an active asset. The meaning of active asset is explained in section 152-40 of the ITAA 1997. The property that you intend to purchase as a replacement asset has to be an active asset in order for you to obtain the CGT small business roll-over relief contained in Subdivision 152-E of the ITAA 1997.

The relevant provision here is paragraph 152-40(1)(a) which states:

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

(a) you own the asset (whether the asset is tangible or intangible) and it is used, or held ready for use in the course of carrying on a business that is carried on (whether alone or in partnership) by you, your affiliate or another entity that is connected with you, or

(b) if the asset ….

The property you intend to purchase will qualify as an active asset. You intend to use the property to carry on a business. The fact that you intend to reside in the property does not affect the property's standing as an active asset. The definition of "active asset" does not require exclusive use of the asset for business purposes.

Based on the information provided, you may therefore choose to use the small business CGT roll-over and treat the property you intend to purchase as a replacement asset.

Note:

A capital gain or loss can only arise if a CGT event happens (section 102-20 of the ITAA 1997).

(1) CGT event J5 will happen under section 104-197 of the ITAA 1997 if, by the end of the replacement asset period, a replacement asset is not acquired or the replacement asset is not an active asset.

Paragraph 104-185(1)(a) of the ITAA 1997 states that, unless modified or extended (by section 104-190), the "replacement asset period" starts one year before and ends two years after the last CGT event in the income year for which the taxpayer obtains the roll-overs.

(2) Further, CGT event J2 will happen under section 104-185 of the ITAA 1997 if, there is a change in relation to the replacement asset chosen under a previous small business roll-over after the end of the replacement asset period.

(3) CGT event J6 will happen under section 104-198 of the ITAA 1997 if, the cost of the replacement asset is less than the amount of the capital gain the taxpayer disregarded.