Edited version of your written advice

Authorisation Number: 1013073174549

Date of advice: 18 August 2016

Ruling

Subject: Maximum net asset value test

Question

Will any part of the property be included in the net value of your capital gains tax (CGT) assets for the purposes of the maximum net asset value test under sections 152-15 and 152-20 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2016

Year ending 30 June 2017

Year ending 30 June 2018

The scheme commences on:

1 July 2015

Relevant facts and circumstances

The property has been in your family for many decades.

The property is approximately 20,000 square metres.

Several years ago the property was subdivided and a portion (Property B) was gifted to you by your relative on which you built your main residence.

The house you built sits directly adjacent to the main house on the property.

There is no dividing fence between the property and Property B.

You decided to build a swimming pool for use by your family members. The pool was placed on the property, and not on Property B.

A few years ago you and your sibling inherited the property.

Since that time your sibling has lived in the main house on the property.

You use the property in the following way:

- Pick fruit from the orchard

- Keep animals in the paddock and stables

- Play tennis on the tennis court

- Swim in the pool

- Maintain the gardens

- General maintenance of the property

You have never derived any income from the property.

You and your sibling jointly hold a bank account to pay all expenses relating to the property.

You have a key and regularly access the residence on the property. You use the house for social gatherings. You are in and out of the house most days.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 118-120.

Income Tax Assessment Act 1997 Section 152-15.

Income Tax Assessment Act 1997 Subsection 152-20(2).

Income Tax Assessment Act 1997 Section 328-125.

Income Tax Assessment Act 1997 Section 328-130.

Reasons for decision

The maximum net asset value (MNAV) test contained in section 152-15 of the ITAA 1997 requires that the net value of a taxpayer's capital gains tax (CGT) assets must not exceed $6 million just before the relevant CGT event.

You must include the net value of CGT assets owned by:

• you

• any entities connected with you (as per the definition contained in section 328-125 of the ITAA 1997); and

• any of your affiliates (as per the definition contained in section 328-130 of the ITAA 1997) and entities connected to your affiliates.

The assets to be included in the calculation of the MNAV test are not restricted to business assets. All CGT assets of the relevant entities need to be included unless they are specifically excluded by the legislation. Subsection 152-20(2) of the ITAA 1997 provides that in working out the net value of the CGT assets of an entity:

a) disregard shares, units or other interests (except debt) in another entity that is connected with the first-mentioned entity or with an affiliate of the first-mentioned entity, but include any liabilities related to any such shares, units or interests; and

b) if the entity is an individual, disregard:

I. assets being used solely for the personal use and enjoyment of the individual, or the individual's affiliate (except a dwelling, or an ownership interest in a dwelling, that is the individual's main residence, including any adjacent land to which the main residence exemption can extend because of section 118-120); and

II. except for an amount included under subsection (2A), the market value of a dwelling, or an ownership interest in a dwelling, that is the individual's main residence (including any relevant adjacent land); and

III. a right to, or to any part of, any allowance, annuity or capital amount payable out of a superannuation fund or an approved deposit fund; and

IV. a right to, or to any part of, an asset of a superannuation fund or of an approved deposit fund; and

V. a policy of insurance on the life of an individual.

Subparagraph 152-20(2)(b)(i) of the ITAA 1997 states that assets being used for the personal use and enjoyment of the individual or the individual's affiliate, are disregarded in working out the net value of the CGT assets of an entity.

ATO ID 2011/40 discusses a situation where the taxpayer is not the only individual using the property for personal use and enjoyment. In this example the taxpayer owned a holiday house which friends and family also used and paid no rent. This ID concluded:

It is considered that the personal use of the holiday house by the individual's friends and relatives for which no rent is paid is still nevertheless a part of the personal use and enjoyment of the holiday house by the individual.

In this case, the property was inherited jointly by you and your sibling. Your sibling lives on the property. You have stated that you regularly use the property (that is, pick fruit from the orchard, play tennis on the tennis court, swim in the pool, maintain the gardens, etc.). The property has never been used to produce assessable income. The property has been used for personal use and enjoyment for both yourself and your friends and family.

The Commissioner accepts that your interest in the property has been utilised for your personal use and enjoyment during your ownership. Therefore the exclusion from the MNAV test under subparagraph 152-20(2)(b)(i) of the ITAA 1997 will apply unless the property is also excluded under subparagraph 152-20(2)(b)(ii) of the ITAA 1997.

It is arguable whether the property is excluded from the MNAV test under subparagraph 152-20(2)(b)(ii) of the ITAA 1997 as being adjacent land to your main residence. However, it is not considered necessary to conclusively determine whether this exclusion applies because if it did not, the property would nevertheless be excluded under subparagraph 152-20(2)(b)(i) of the ITAA 1997.

In conclusion, no part of the market value of the property will be included in the net value of your CGT assets for the purposes of the MNAV test due to it be excluded by subparagraph 152-20(2)(b)(i) and/or subparagraph 152-20(2)(b)(ii) of the ITAA 1997.