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Ruling

Subject: Capital gains tax small business concessions

Questions and answers:

1. Can you disregard any capital gain on the sale of your original 50% share in a property under the small business concessions?

Yes.

2. Can you disregard any capital gain on the sale of the 50% share in a property which has been acquired by you as joint tenant on the death of your spouse under the small business concessions?

No.

3. Are you eligible for the main residence exemption on up to 2 hectares of land on the sale of the property?

Yes.

This ruling applies for the following period:

Year ending 30 June 2012

The scheme commenced on:

1 July 2011

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are the sole proprietor of a property in excess of 2 hectares.

Your sole principal residence is also situated on this property.

The property was purchased by you and your late spouse as joint tenants after 20 September 1985 following the sale of a previous farming property.

You became the sole proprietor of the property after the death of your spouse.

The property was cultivated for primary production purposes continually with a final partnership return being submitted several years ago.

No primary production activities or income has been received in respect of the property since the lodgment of final partnership taxation return.

The property is not zoned for subdivision and therefore cannot be sold other than as a whole property.

You have owned the property for in excess of 15 years.

The property exceeding the sole principal residence and adjacent two hectares has been an active asset of you and your deceased spouse for a period for approximately nine years.

You and your deceased spouse were a small business entity for capital gains tax purposes with a turnover of less than $2m.

You satisfy the $6m assets test.

Your spouse satisfied the asset test prior to their death.

You have had the property on the market at times after your spouse's death with no success in selling.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section118-10

Income Tax Assessment Act 1997 section 118-20

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 section 152-80

Reasons for decision

You can only make a capital gain or loss if a capital gains tax (CGT) event happens. Most CGT events involve a CGT asset.

Under section 108-5 of the Income Tax Assessment Act 1997 (ITAA 1997) 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.

Small business CGT concessions

The CGT provisions provide four small business CGT concessions, namely:

o the small business 15-year exemption which reduces a gain to nil;

o the small business 50% active asset reduction;

o the small business retirement exemption; and

o the small business roll-over.

Any capital gain that results from a CGT event may be reduced or disregarded under the small business concessions if you satisfy certain conditions. All of these concessions require that the basic conditions in subsection 152-10(1) of the ITAA 1997 are satisfied. Some of the concessions also require that other conditions are also satisfied.

The basic conditions to be satisfied for the gain are:

A CGT event happens in relation to a CGT asset of yours in an income year. This condition does not apply in the case of CGT event D1.

The event would (apart from Division 152 of the ITAA 1997) have resulted in the gain.

At least one of the following applies:

· you are a small business entity for the income year

· you satisfy the maximum net asset value test (section 152-15)

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

· the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997.

Small business entity

In this case you satisfy the basic conditions.

You and your late spouse purchased the property as joint tenants after 20 September 1985. Your spouse died and their share reverted to you upon their death as joint tenants.

The property was used for cultivation for more than X years.

When a person dies, their assets devolve (that is, are transferred) to their legal personal representative (LPR) or are acquired by a surviving joint tenant where the deceased owned those assets as joint tenant with another person. In effect, there is a change of ownership of the assets and therefore a CGT event (being a disposal) happens. However, any capital gain or capital loss from this CGT event is disregarded, as is any capital gain or loss that:

· the LPR makes when the asset passes to a beneficiary in the estate, or

· that is made as a result of the asset being acquired by a surviving joint tenant.

The LPR, beneficiary or surviving joint tenant is taken to have acquired the assets on the date of death. Generally the cost base of the assets is transferred to the assets in the hands of the LPR, beneficiary or joint tenant (however market value is used if the deceased acquired the assets before 20 September 1985).

In effect, with the disregarding of any capital gain upon death and transferring the cost base upon death of the asset owner, any unrealised capital gain is deferred until a later sale of the asset by the LPR, beneficiary or joint tenant.

Section 152-80 of the ITAA 1997 provides that you will be eligible for the small business capital gains tax (CGT) concessions in Division 152 of the ITAA 1997 if:

 (a)   the land would have qualified for the small business CGT concessions if the deceased had disposed of the land immediately before his or her death; and

(b)     the land is disposed of within two years of the date of death (paragraph 152-80(1)(d) of the ITAA 1997). The Commissioner may extend this time limit (subsection 152-80(3) of the ITAA 1997).

Provided these conditions are satisfied, the CGT small concessions are also available to the trustee of a trust established by the will of the deceased, a beneficiary of such a trust, and a surviving joint tenant.

Land disposed of within two years of date of death

The land would have qualified for the small business concessions just before your spouse died. 

As you have not disposed of the land within two years of the date of death of the deceased, the Commissioner would need to exercise his discretion under subsection 152-80(3) of the ITAA 1997 to extend the time limit.

To determine if the time limit should be extended, we consider factors such as whether:

· you have an acceptable explanation for not disposing of the land by the time it should have been disposed of

· it would be fair and equitable in the circumstances to allow further time to dispose of the land

· prejudice to the Commissioner may result from additional time being allowed to you

· it would be fair and equitable to people in similar positions and the wider public interest and

· any mischief is involved.

Each case is decided on its own merits.

In your case the property is required to be sold in its entirety. You have had the property on the market on and off for several years and have refused sales due to the conditions not being appropriate.

The property was taken off the market.

After considering the above factors against your circumstances, and in particular the fact that the delay in selling the land is not caused by factors beyond your control, the Commissioner will not exercise the discretion under subsection 152-80(3) of the ITAA 1997 to extend the time limit in paragraph 152-80(1) (d) of the ITAA 1997 within which you can dispose of the land.

Although the land would have qualified for the small business concessions if the deceased had disposed of the land immediately before your spouse's death, the requirement in paragraph 152-80(1)(d) of the ITAA 1997 that the land is disposed of within two years of the date of death has not been satisfied. Section 152-80 of the ITAA 1997 will therefore not apply in your case to enable the small business concessions to be applied to the capital gain from the sale of the 50% share of you spouse's land transferred to you under the will as joint tenants.

The 50% you owned from the purchase of the land will b eligible for the small business concessions.

Main residence exemption

Under section 118-110 of the ITAA 1997 a capital gain or loss made from the sale of a main residence is generally exempt from CGT if you are an individual and the dwelling was your main residence throughout your ownership period. Subsection 118-120(2) of the ITAA 1997 extends the area of adjacent land that is used primarily for private or domestic purposes (including the land on which the building is situated) to a maximum of 2 hectares.

A capital gain or capital loss you make from the land is only disregarded under the main residence exemption if it is used primarily for private or domestic purposes in association with your dwelling.

If your selected area of land can be separately valued, you calculate your capital gain or capital loss on the remainder of your land by apportioning the capital proceeds and the cost base or reduced cost base (if applicable) on the basis of the valuation. This is relevant if the value of the remainder of the land is of a greater or lesser value than your selected area of land.

If your selected area of land cannot be separately valued, your capital gain or loss on the remainder of your land may be calculated by apportioning the capital proceeds and the cost base or reduced cost base (if applicable) on an area basis.

The amount of the capital gain or capital loss attributable to the remainder of your land must be reasonable in the circumstances. However, you cannot get the full main residence exemption if you:

· acquired your dwelling on or after 20 September 1985 and used it as your main residence;

· used any part of it to produce income during all or part of the period you owned it; and

· would be allowed a deduction for interest had you incurred it on money borrowed to acquire the dwelling (the interest deductibility test).

The interest deductibility test in section 118-190 of the ITAA 1997 is a hypothetical test that is applied regardless of whether you in fact incurred an interest expense from borrowing. You are entitled to a deduction for interest to the extent to which you use a dwelling as a place of business.

You are eligible for a main residence exemption on 2 hectares of the property.