Edited version of private ruling

Authorisation Number: 1011663179716

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Ruling

Subject: CGT - small business concessions - active asset - 15-year exemption

1. Can a portion of a principal residence used to derive business income be an "active asset" for the capital gains tax (CGT) small business concessions?

Yes.

2. If the portion of the principal residence is an "active asset" and the taxpayer is a small business entity, is the taxpayer eligible for the 15 year exemption?

Yes.

3. If the portion of the principal residence is an "active asset", and the taxpayer is a small business entity, is the taxpayer eligible for the retirement exemption?

No.

This ruling applies for the following period:

1 July 2009 to 30 June 2010.

The scheme commences on:

1 July 2009.

Relevant facts and circumstances

You purchased your home more than 15 years ago. The home was on a standard house block, much less than two hectares. More than eight years ago you commenced a business from your home. You are a small business taxpayer as provided in Subdivision 328-C of the Income Tax Assessment Act 1997 (ITAA 1997) and you therefore satisfy paragraph 152-10(1)(c) of the ITAA 1997.

You used 25% of your home to carry on the business and claimed home office expenses for the years which you operated the business.

Due to ill health you decided to cease the business, sell the home and buy a smaller property in which to reside. The contract for sale of your home was signed and settlement took place recently.

Although you no longer carried on the business there were some payments from outstanding debtors paid at a later date. You cancelled your Australian business number and goods and services tax registration.

You were aged over 55 years at the time of the event and you did not roll the amount over into a superannuation fund.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 152.

Income Tax Assessment Act 1997 Subdivision 152-B.

Income Tax Assessment Act 1997 Subdivision 152-E.

Income Tax Assessment Act 1997 Section 152-10.

Income Tax Assessment Act 1997 Subsection 152-10(1).

Income Tax Assessment Act 1997 Paragraph 152-10(1)(c).

Income Tax Assessment Act 1997 Section 152-35.

Income Tax Assessment Act 1997 Section 152-40.

Income Tax Assessment Act 1997 Subsection 152-40(4).

Income Tax Assessment Act 1997 Section 152-330.

Income Tax Assessment Act 1997 Section 118-110.

Income Tax Assessment Act 1997 Subsection 118-110(1).

Income Tax Assessment Act 1997 Subsection 118-110(2).

Income Tax Assessment Act 1997 Section 118-190.

Income Tax Assessment Act 1997 Subdivision 328-C.

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 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 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.

Reasons for decision

A taxpayer's assessable income includes any capital gain made by the taxpayer for an income year. A taxpayer can only make a capital gain or loss if a CGT event happens.

A CGT asset is any kind of property, or a legal or equitable right that is not property. CGT assets include part of, or an interest in, property or a legal or equitable right that is not property.

Division 152 of the ITAA 1997 contains a number of CGT concessions available to small business. There are a number of basic requirements in subsection 152-10(1) of the ITAA 1997 that must be satisfied before any of the concessions apply.

The basic conditions in section 152-10 of the ITAA 1997 require that a CGT event had to happen in relation to a CGT asset of a taxpayer in an income year, that the CGT event resulted in a capital gain at least one of the following apply:

· you are a small business entity

· you satisfy the maximum net asset value test

· you are a partner in a partnership that is a small business entity, and the CGT asset is an asset of the partnership, and

· the CGT asset satisfies the active asset test.

Section 152-35 of the ITAA 1997 sets out the active asset test that must be satisfied. The test requires the CGT asset that gave rise to the capital gain to be an active asset for half a particular period or at least seven and a half years if owned for more than 15 years.

Under section 152-40 of the ITAA 1997, a CGT asset is an active asset (subject to some exclusions) if it is owned by you and used or held ready for use by you in the course of carrying on a business. The definition of active asset does not require exclusive use of the asset for business purposes.

Since the property was used by you to carry on the business and does not fall within one of the exclusions under subsection 152-40(4) of the ITAA 1997, part of the property is an active asset.

Generally, a capital gain or loss from a dwelling is disregarded for CGT purposes if you are an individual and the dwelling is your main residence throughout the ownership period.

Subsection 118-110(1) of the ITAA 1997 clearly provides that a capital gain or loss is disregarded when one of the CGT events specified in subsection 118-110(2) of ITAA 1997 happens to a taxpayer's main residence. Section 118-110 of the ITAA 1997 does not provide a choice, so a taxpayer cannot choose for the main residence exemption not to apply.

However, under section 118-190 of the ITAA 1997 only a partial main residence exemption is available if the dwelling was used for income producing purposes during all or a part of the ownership period.

The amount of the capital gain or capital loss will depend on the extent and the period for which the house was used for the purpose of gaining or producing assessable income.

Conclusion

The portion of the capital gain that remains after applying the main residence exemption will be an active asset that can be used when applying the CGT small business concessions.

Small business 15 year exemption

The rules covering the small business 15-year exemption are contained in Subdivision 152-B of the ITAA 1997.

Interaction with other concessions

If you qualify for the small business 15-year exemption, you can entirely disregard the capital gain and do not need to apply any other concessions. Further, you do not have to apply capital losses against your capital gain before applying the 15-year exemption.

If the conditions are satisfied and you make a capital loss from the CGT event, you may use the capital loss to reduce other capital gains.

Conditions to be satisfied

You can disregard a capital gain from a CGT event happening to a CGT asset you have owned for at least 15 years if you:

· satisfy the basic conditions for the small business CGT concessions (the active asset test requires the asset to have been an active asset for at least seven and a half years of the whole period of ownership), and

· continuously owned the CGT asset for the 15-year period ending just before the CGT event happened  

If you are an individual:  

· you are at least 55 years old at the time of the CGT event and the event happens in connection with your retirement, or

· you were permanently incapacitated at the time of the CGT event.

You satisfy the basic conditions as a CGT event happened to a CGT asset that you owned and the CGT event resulted in a gain. You state that you are a small business entity. The asset has also qualified as an active asset.

In your case you have owned the asset, the house, for more than 15 years. The business was conducted from the house for more than seven and a half years. You were over 55 years old at the time of the CGT event and the event happened in connection with your retirement. You will be able to qualify for the 15 year exemption.

Retirement exemption

The conditions for the retirement exemption are found in Subdivision 152-E of the ITAA 1997. Specifically section 152-330 of the ITAA 1997 states that if Subdivision 152-B of the ITAA 1997 applies to the gain the then retirement exemption will not apply.

In your case you are eligible for the 15-year exemption and therefore the retirement exemption will not apply.