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Ruling

Subject: CGT small business concessions

Question 1

Is the acquisition date of the property for capital gains tax purposes the date your interest in remainder was registered?

Answer

Yes

Question 2

Do you satisfy the basic conditions for the small business concessions in relation to the property?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 2013

Year ending 30 June 2014

The scheme commences on:

1 July 2012

Relevant facts and circumstances

You own a property (the property). The property was originally owned by X and it passed to Y upon your X's death.

Subsequent to X's death, you and Y engaged the services of a solicitor to change the title of the property. The property was registered in Y's name for life and you were registered as having the remainder interest in the property. The title change was registered.

Y died and as such the title of the property was transferred to you in accordance with the remainder interest.

A business has been conducted on the property. The business has been run through a partnership which you have a 50% interest in since the passing of X.

The partnership has an aggregated turnover of less than $2million and is running a business.

You are considering selling the property, with thoughts of retirement.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 109-5(2)

Income Tax Assessment Act 1997 Section 152-10

Income Tax Assessment Act 1997 Section 152-35

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

Income Tax Assessment Act 1997 Subsection 328-125(2)

Reasons for decision

Acquisition date

Taxation Ruling TR 2006/14 contains the Commissioner's views on the treatment of life and remainder interests.

The ruling makes a distinction between legal and equitable life and remainder interests. In this case, as the life and remainder interests were registered on the certificate of title of the dwelling, it is considered that the life and remainder interests are legal interests.

TR 2006/14 states that the disposal of the legal life and remainder interests in a property result in CGT event A1 happening as there is a change in the ownership of the property. Paragraph 94 of TR 2006/14 provides that the life interest and remainder owners acquire their interests in the property at the time capital gains tax (CGT) event A1 happens to the original owner in accordance with subsection 109-5(2) of the ITAA 1997.

Additionally the death of the life interest owner has no CGT consequences for the remainder owner. The remainder owner does not acquire any asset from the life interest owner; their existing interest is merely enlarged (TR 2006/14 paragraph 103).

In your case, the title of the property was registered in Y's name for life and you were registered as having the remainder interest in the property. This title change was registered. On the date of registration, CGT event A1 occurred as Y disposed of the remainder interest of the property. Accordingly you are taken to have acquired your interest in the property on the date of the registration of your interest in remainder.

Small business concessions - basic conditions

In order to be eligible for the CGT small business concessions, a number of basic conditions must be satisfied. The basic conditions for the small business CGT concessions are outlined in subsection 152-10(1) of the ITAA 1997:

(a) a CGT event happens in relation to an asset that the taxpayer owns

(b) the event would otherwise have resulted in a capital gain

(c) one or more of the following applies

i. the taxpayer satisfies the maximum net asset value test

ii. the taxpayer is a "small business entity" for the income year

iii. the asset is an interest in an asset of a partnership which is a small business entity for the income year, and the taxpayer is a partner in that partnership, or

iv. the special conditions for passively held assets in sub-sections 152-10(1A) or 152-10(1B)are satisfied in relation to the CGT asset in the income year and

(d) the asset satisfies the active asset test.

Special conditions for passively held assets

The special condition under sub-section 152-10(1A) of the ITAA 1997 is satisfied if you do not carry on business (other than as a partner) but your asset is used in a business carried on by a small business entity that is your affiliate or an entity connected with you.

The basic rule is that an entity is connected with another entity if either entity 'controls' the other, or both entities are controlled by a common third entity.

Where the other entity is not a discretionary trust, subsection 328-125(2) of the ITAA 1997 states you have direct control of another entity if you and your affiliates have the right to receive a percentage (the control percentage) that is at least 40% of any distribution of either the income or the capital by the other entity.

You have a 50% interest in the partnership that runs the business on the property. You are therefore considered to control the partnership and the partnership is an entity that is connected with you for the purposes of sub-section 152-10(1A) of the ITAA 1997.

You have indicated that the partnership is a small business entity. Accordingly, you satisfy the special conditions under sub-section 152-10(1A) of the ITAA 1997.

Active asset test

Under section 152-35 of the ITAA 1997, a CGT asset satisfies the active asset test 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 specified in subsection (2); 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 7½ years during the period specified in subsection (2).

As per subsection 152-35(2) of the ITAA 1997, 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 to be carried on in the 12 months before that time or any longer period that the Commissioner allows - the cessation of the business.

The term 'active asset' is defined in subsection 152-40(1) of the ITAA 1997 as an asset you own and use (or hold ready for use) in the course of carrying on a business; or in the course of carrying on a business by a connected entity under paragraph 152-40(1)(c) of the ITAA 1997.

In your case, the property will be considered an active asset because it has been used a business carried on by a small business entity that is connected with you. The active asset test will be satisfied as property was used in the course of carrying on a business from the date you acquired it.

Therefore, provided the CGT event when you dispose of the property results in a gain, you will satisfy the basic conditions in 152-10(1) of the ITAA 1997.