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Ruling

Subject: capital gains tax

Question 1

Do you satisfy the basic conditions for relief under subdivision 152-A of the Income Tax Assessment Act 1997 (ITAA 1997) on the sale of your property?

Answer

Yes

Question 2

Will the Commissioner allow extra time for you to make a choice under section 103-25 of the ITAA 1997 to apply the small business CGT concessions?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 2010

Year ending 30 June 2011

Year ending 30 June 2012

The scheme commences on:

7 May 2010

Relevant facts and circumstances

You acquired a property jointly with your former spouse.

At the time the property was purchased, you and your husband were each 50% shareholders and directors of a company.

The company relocated their existing business to the property and continued to operate their business from these premises until the property was sold.

You were divorced on xxxx. Under the terms of the divorce settlement you received your husband's 50% share of the property and your shares in the company were transferred to your husband. You also resigned as a director of the company.

You are over 55 years of age.

You have not exceeded your CGT retirement exemption lifetime limit.

When you lodged your 2009-10 income tax return you were unaware of the concessions available under small business relief. You did not therefore make a choice at that time.

You advise that you satisfy the maximum net asset test.

Relevant legislative provisions

Income Tax Assessment Act 1997 subdivision 103-25(1)

Income Tax Assessment Act 1997 subdivision 103-25(1)(b)

Income Tax Assessment Act 1997 subdivision 126-A

Income Tax Assessment Act 1997 subsection 126-5(5)

Income Tax Assessment Act 1997 subdivision 152-A

Income Tax Assessment Act 1997 subdivision 152-D

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152-40

Income Tax Assessment Act 1997 section 152-40(1)

Income Tax Assessment Act 1997 section 152-40(4)

Income Tax Assessment Act 1997 subsection 152-305(1)

Question 1

Summary

The active asset test is satisfied.

Detailed reasoning

Marriage breakdown roll-over is available if the conditions set out in subdivision 126-A of the ITAA 1997 are satisfied.

Under subsection 126-5(5), if a CGT asset is transferred between spouses because of a court order under the Family Law Act 1975 , the first element of the cost base in the hands of the transferee (taxpayer) is the asset's cost base in the hands of the transferor (former spouse) at the time the taxpayer acquired it. The first element of the asset's reduced cost base (if applicable) is calculated similarly.

The effect of you acquiring the property as a result of the property settlement is that you have also acquired your former spouses cost base in respect of his 50% ownership.

Small business concessions

To qualify for the small business CGT retirement exemption you must satisfy 'basic conditions' for relief. They are listed under section 152-10. The relevant ones are the active asset and the maximum net asset value test.

Active Asset

The active asset test in section 152-35 is satisfied if:

(a) 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 period detailed below or

(b) 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 ½ years during the period detailed below:

The period:

(a) begins when you acquired the asset and

(b) ends at the earlier of:

(i) the CGT event and

(ii) if the relevant business ceased in the 12 months before the CGT event (or such longer time as the Commissioner allows) when the business ceased.

Section 152-40 discusses the meaning of the term 'active asset', and at subsection 152-40(1) states, in part, that a CGT asset is an active asset at a time if, at that time, you own the asset and it is used, or held ready for use, in the course of carrying on a business that is carried on by you or your affiliate, or another entity that is connected with you.

An entity is connected with another entity that is a company if it owns, or has the right to acquire beneficial ownership of at least 40% of the voting power in the company.

Section 152-40(4) provides that certain CGT assets cannot be active assets. In particular, an assets whose main use is to derive rent cannot be an active asset, unless that use is only temporary.

Maximum net asset value test

You advise that you satisfy this test under section 152-15 of the ITAA 1997.

In your case, the issue at hand is whether the property satisfies the active asset test.

Under the marriage breakdown provisions, you owned the property for a period of 10-11 years.

The property was used by the company in the course of carrying on its business for essentially the whole of the ownership period.

For the period from purchase until you surrendered your company shares under the divorce settlement, it is considered that you were 'connected with' the company. This is because your ownership interest exceeded 40%.

For the period you were not considered to be 'connected with' the company. the use of the property was to derive rent. This is a period of less than 5 years.

Therefore, the property was used by an entity connected with you for a period of more than half of the ownership period, and to derive rent for a lesser period. The main use is therefore accepted as being in the course of business.

The active asset test is therefore satisfied.

Question 2

Summary

The Commissioner will exercise the discretion under paragraph 103-25(1)(b) of the ITAA 1997 to allow an extension of time.

Detailed reasoning

50% active asset reduction

Only the basic conditions need to be satisfied.

Retirement exemption

The small business retirement exemption (subdivision 152-D of the ITAA 1997) provides that if you are over 55 year of age and the basic conditions for relief are met, you can choose to disregard all or part of the gain up to the CGT retirement exemption limit (currently $500,000).

The CGT exempt amount must be specified in writing.

As you are over 55 years of age, and have not exceeded the retirement exemption limit, you may choose to apply this concession, providing the Commissioner allos you further time to make the choice.

Choice

The general rule is that a choice available under the CGT provisions, once made, can not be changed. Generally, such a choice must be made by the time the income tax return is lodged, or within such further time as the Commissioner allows under subsection 103-25(1) of the ITAA 1997 and is evidenced by the way that you prepared your income tax return. A taxpayer who has considered the application of the CGT concessions and chosen a particular concession has made a choice which cannot later be changed. However, a taxpayer who did not consider the CGT concessions and accordingly included a capital gain in their income tax return has not made a choice and can, if the Commissioner allows further time, later make a choice for a CGT concession and amend their return to reduce or disregard the capital gain.

Under paragraph 103-25(1)(b) of the ITAA 1997, the Commissioner can allow further time for a choice to be made.

We have considered:

§ The granting of an extension in these circumstances would not give rise to any prejudice towards the Commissioner, as the circumstances are not the result of any intent on your part to avoid any form of taxation.

§ In your circumstances, the granting of an extension would not cause any unsettling of any persons other than the Commissioner, nor would it unsettle any established practices as the granting of an extension of time to you, dependent upon the facts, is itself an established practice.

§ The granting of an extension of time in the circumstances would not result in any amount of unfairness to people in similar circumstances or like positions to you. The ability to apply for an extension of time, in the same manner as you, is available to all people with similar circumstances as well as to the wider taxpaying public.

§ There is no mischief involved in the circumstances which have resulted in the request for an extension of time.

§ The consequences of granting the extension of time, is that you will be eligible for the small business retirement exemption in subsection 152-305(1) of the ITAA 1997. If the extension is not granted, then you will not be eligible for the small business retirement exemption.

§ If you were not granted an extension of time in relation to paragraph 103-25(1)(b) of the ITAA 1997 the result would be to deny you the benefit of the small business concessions because you had failed to choose the small business retirement exemption in subsection 152-305(1) of the ITAA 1997.

Having considered the relevant factors, the Commissioner will exercise the discretion under paragraph 103-25(1)(b) of the ITAA 1997 to allow an extension of time for you to choose to apply the small business concessions.