Edited version of private advice

Authorisation Number: 1052023192256

Date of advice: 1 December 2022

Ruling

Subject: Sale of property

Issue 1: main residence

Question 1

Will the Commissioner exercise his discretion to allow a period longer than four years to make the choice under section 118-150 of the ITAA 1997 to treat the property as your main residence while it was being built?

Answer

Yes.

Question 2

Are Person A and Person B eligible for the main residence exemption under Subdivision 118-B of the ITAA 1997 in respect of the residential portion of the property?

Answer

Yes.

Issue 2: small business concessions

Question 3

Will Person A and Person B satisfy the basic conditions under section 152-10 of ITAA 1997?

Answer

Yes.

Question 4

Will Person A satisfy the requirements of section 152-105 of the ITAA 1997 to apply the small business 15 year exemption?

Answer

Yes.

Question 5

Will Person B satisfy the requirements of section 152-105 of the ITAA 1997 to apply the small business 15 year exemption?

Answer

No.

Question 6

Is Person A eligible to contribute a share of the capital proceeds in respect of the remaining portion into superannuation under section 292-100(2) of the ITAA 1997?

Answer

No.

Question 7

Is Person B eligible to contribute a share of the capital proceeds in respect of the remaining portion into superannuation under section 292-100(2) of the ITAA 1997?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 19XX

Relevant facts and circumstances

Person A and Person B are husband and wife, they have three children together

They purchased property A which was approximately 14 hectares of vacant land as joint tenants

They sold their previous main residence (Property B) to fund the purchase of this land. They also sold another property (Property C) they owned to help fund the build of the dwelling.

About a year after purchasing Property A, they build a shed on the property to store building materials and their personal belongings as they were living at Person B's parent's house.

After building the shed, they built a house on property A to live in. the house took 6 years to build and became their main residence.

The build of the house on Property A was funded by their own wages, borrowed funds from Person B's mother, and sale proceeds from Property C. Person A did most of the construction work themselves, only hiring contractors when necessary. Construction slowed at the property when Person A broke their hip.

The main residence portion of the property is 1.19 hectares and was only used for residential purposes and not for income generating during their ownership period. The remaining hectares of the property is utilised by Person A's earthmoving business.

Four years after the purchase of Property A, Person A started their own earth moving sole trader business. They purchased a second hand tip truck (the tip truck) and was hired by customers, builder and agents to carry materials between locations. The tip truck was parked and stored on Property A when not in use.

The shed was used to store parts, tools and consumables for the maintenance of the truck. Person A stored materials such as rubble, soil, concrete, rock from building site jobs until it could be moved. Initially, Person A did not have the equipment to move the materials back into the truck and was required to hire specific machinery.

Around six years after starting the business, Person A changed the structure from a sole trader to a company (the Company).

Person A was the sole director and shareholder of the Company and was a full time salaried employee from that point until retirement.

Person B completed all the book keeping and business activity statement preparation for the business but was not remunerated.

A few years after becoming a company, the Company purchased a tag-along trailer for the tip truck and a 7.5 tonne excavator.

Person A purchased a 40 foot shipping container and two 20 foot shipping containers to store tools, parts, oils, other business consumables and locked the bobcat in the container. The company also purchased a truck, a sorting bucket, an auger and a breaker.

To store the company equipment, Person A built a shed. This shed is 8 metres by 20 metres long by 4.6 metres high.

During the years of operation, the company has used the property in the following ways:

(a)        Asset storage- sheds to hold equipment including maintenance consumables

(a)        Training purposes- equipment operators trained themselves and completed licencing at the property

(a)        Material storage- storing excess materials

Person A took around 6 months leave off work during later years of the company operation due to a medical condition

After the period of person A's illness, the company purchased an 8.5 tonne excavator.

Later that year, Person A and B were approached by a developer to sell the land.

In that same year, they entered a contract to sell the Property

The following year, Person A's periods of illness became more frequent and later that year Person A retired from the business and appointed their sons as directors but remained sole shareholder of the company.

Person A received a payment of income protection monthly

The following year, the sons decided not to continue with the business and the business was wound up. The equipment was sold or listed for sale in the period between winding up and the time of the private ruling application.

The developer executed their right to substitute the purchaser's details on the contract of sale from the original Group to a company which is the Trustee of Unit Trust A.

In the same month, the settlement of the property occured and the contract of sale was executed.

Relevant legislative provisions

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 section 102-25

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 104-60

Income Tax Assessment Act 1997 section 108-7

Income Tax Assessment Act 1997section 118-110

Income Tax Assessment Act 1997 section 118-115

Income Tax Assessment Act 1997 section 118-120

Income Tax Assessment Act 1997 section 118-125

Income Tax Assessment Act 1997 section 118-150

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 section 152- 35

Income Tax Assessment Act 1997 section 152- 40

Income Tax Assessment Act 1997 section 152- 47

Income Tax Assessment Act 1997 section 152- 49

Income Tax Assessment Act 1997section 152- 105

Income Tax Assessment Act 1997 section 292-100

Income Tax Assessment Act 1997 section 328-110

Income Tax Assessment Act 1997 section 328-125

Income Tax Assessment Act 1997 section 328-130

Reasons for decision

Issue 1

Main residence exemption

Question1

Will the Commissioner exercise his discretion to allow a period longer than four years to make the choice under section 118-150 of the ITAA 1997 to treat the property at xxxx as your main residence while it was being built?

Detailed reasoning

Paragraph 118-150(4)(a) gives the Commissioner discretion to extend the period where the taxpayer does not build, repair or renovate a dwelling and establish it as their main residence within four years.

The Commissioner can take into account a number of factors when determining whether to exercise the discretion.

Application to your circumstances

After purchasing the property, it took a period of six years to construct the dwelling and for Person A and B and their children to move into the residential property.

Person A and B built the house themselves after working hours and on weekends. They had minimal finances available to build the house and were funding the build with wages they could contribute and the money from the sale of Property C. There was also a period of delay when Person A broke their hip.

Person A and B satisfy subsection 118-150(3) to make the choice to treat the land as if it was their main residence from the time they acquired the ownership interest as they moved into the property and treated it as their main residence as soon as practicable after the work was finished and has continued to be their main residence until the date of sale.

Therefore, the Commissioner will allow for a longer period under paragraph 118-150(4)(a) of the ITAA 1997 to have the main residence exemption apply from the date the land was acquired.

Question 2

Are Person A and Person B eligible for the main residence exemption under Subdivision 118-B of the ITAA 1997 in respect of the residential portion of the property?

Detailed Reasoning

Under section 118-110 of the ITAA 1997, a capital gain or capital loss you make from a CGT event that happens in relation to a CGT asset that is a dwelling or your ownership interest in it is disregarded if:

•         you are an individual, and

•         the dwelling was your main residence throughout your ownership period, and

•         the interest did not pass to you as a beneficiary in, and you did not acquire it as a trustee of, the estate of a deceased person.

Subsection 118-110(2) includes CGT event A1 as a relevant event.

Application to your circumstances

A CGT event occurred to the property. The property was owned equally by Person A and Person B, the dwelling was their main residence throughout their ownership period, and the interest did not pass to them as a beneficiary or trustee of the estate of a deceased person.

The property is Person A and Person B's main residence and satisfies the conditions in section 118-110 of the ITAA 1997. As the Commissioner will exercise their discretion to allow for a longer period under paragraph 118-150(4)(a) of the ITAA 1997 to have the main residence exemption apply from the date the land was acquired, the capital gain from the dwelling that was Person A and Person B's main residence, and the adjacent land of 1.19 hectares is disregarded under section 118-110 of the ITAA 1997.

Issue 2

Small business concessions

Question 3

Will Person A and Person B satisfy the basic conditions under section 152-10 of ITAA 1997?

Detailed Reasoning

Basic conditions

Section 152-10 of the ITAA 1997 contains the basic conditions that must be satisfied to be eligible to apply the CGT small business concessions. These conditions are:

(a) a CGT event happens in relation to a CGT asset in an income year.

(b) the event would (apart from this Division) have resulted in the gain.

(c) at least one of the following applies:

(i) you are a small business entity for the income year

(ii) you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997

(iii) 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 or

(iv) you do not carry on a business, but your CGT asset is used in a business carried on by a small business entity that is your affiliate, or an entity connected with you.

(d) the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997.

Passively held asset

The basic conditions allows you to access the concessions for a CGT asset you own where you are not carrying on a business, but that CGT asset is used in the business of your affiliate or an entity connected with you. The basic condition can also apply where your asset is held ready for use in, or is inherently connected with, the business of your affiliate or entity connected with you.

Meaning of when an entity is connected with you

Section 328-125 of the ITAA 1997 provides the meaning of connected with an entity. An entity is connected with another entity if:

•         either entity controls the other entity; or

•         both entities are controlled by the same third entity.

An entity controls another entity if it or its affiliate (or all of them together) when:

•         owns, or has the right to acquire ownership of, interests in the other entity that give the right to receive at least 40% (the control percentage) of any distribution of income or capital by the other entity, or

•         if the other entity is a company - owns, or has the right to acquire ownership of, equity interests in the company that give at least 40% of the voting power in the company.

Meaning of affiliate

Section 328-130 of the ITAA 1997 explains that an affiliate is an individual that, in relation to their business affairs, acts or could reasonably be expected to act in accordance with your directions or wishes, or in concert with you. Whether a person acts, or could reasonably be expected to act, in accordance with the taxpayer's directions or wishes, or in concert with the taxpayer is a question of fact dependent on all the circumstances of the particular case. No single factor will necessarily be determinative. In certain circumstances an individual can be taken to be your affiliate. A spouse or a child is not automatically your affiliate. You must consider whether they are acting according to your directions or wishes, or in concert with you, in relation to their business affairs.

Joint tenants

Section 108-7 of the ITAA 1997 explains individuals who own a CGT asset as joint tenants are treated as if they each owned a separate CGT asset constituted by an equal interest in the asset and as if each of them held that interest as a tenant in common.

Application to your circumstances

CGT event A1 triggered, when Person A and Person B entered the contract to sell the property. The capital proceeds are more than the assets costs base resulting in a gain. Person A is the sole director and shareholder of the company and is connected with the entity that uses the larger portion of the property in business. The company is a small business entity with an annual turnover of less than $2 million. Person A and Person B own the property as joint tenants. Person B satisfies the condition of not carrying on a business, but the property is used in a business carried on by a small business entity that is an affiliate. Neither Person A or Person B satisfy the maximum net asset value test.

The property was held for more than 15 years. To satisfy the active asset test, the property must be used as an active asset for at least 7.5 of those years. Person A used a large portion of the property as an active asset in his earthmoving business for at least 7.5 years. Subsequently, the active asset test has been satisfied and the basic conditions are met for both Person A and Person B under section 152-10 of the ITAA 1997.

Questions 4 & 5 - 15 year exemption

Will Person A and Person B satisfy the requirements of section 152-105 of the ITAA 1997 to apply the small business 15 year exemption?

Detailed reasoning

15-year exemption

Section 152-105 of the ITAA 1997 states you can disregard a capital gain from a CGT event happening to a CGT asset if you:

•         satisfy the basic conditions for the CGT small business concessions

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

If you are an individual, you must have been:

•         at least 55 years old and the CGT event happened in connection with your retirement, or permanently incapacitated at the time of the CGT event.

Whether a CGT event happens in connection with an individual's retirement depends on the particular circumstances of each case. There would need to be at least a significant reduction in the number of hours the individual works or a significant change in the nature of their present activities to be regarded as a retirement. However, it isn't necessary for there to be a permanent and everlasting retirement from the workforce. A CGT event may be in connection with your retirement, even if it occurs at some time before retirement. Whether particular cases satisfy the conditions depends very much on the facts of each case.

Application to your circumstances

Both Person A and Person B satisfy the basic conditions and the property has been held for more than 15 years prior to the CGT event happening.

Person A and Person B own the property as joint tenants and are required to satisfy the individual's additional conditions of being 55 years or older and the CGT event happens in connection with retirement.

Person A is entitled to apply the 15 year exemption as they were over 55 at the time of the CGT event and the disposal of the property was connected with their retirement.

Person B was connected with the business but was not 55 years old at the time of the CGT event and is therefore not entitled to apply the small business 15 year exemption.

Issue 3

Superannuation

Question

Is Person A eligible to contribute their share of the capital proceeds in respect of the remaining proportion into superannuation under subsection 292-100(2) of the ITAA 1997?

Detailed reasoning

Section 292-100 covers contributions relating to some CGT small business concessions.

A contribution is covered under subsection 292-100(1) if:

(a) the contribution is made by you to a complying superannuation plan in respect of you in a financial year; and

(b) the requirement in subsection (2), (4), (7) or (8) is met; and

(c) you choose, in accordance with subsection (9), to apply this section to an amount that is all or part of the contribution.

Under 292-100(2) the requirement in this subsection is met if:

(a) the contribution is equal to all or part of the capital proceeds from a CGT event for which you can disregard any capital gain under section 152-105 (or would be able to do so, assuming that a capital gain arose from the event); and

(b) the contribution is made on or before the later of the following days:

(i) the day you are required to lodge your income tax return for the income year in which the CGT event happened;

(ii) 30 days after the day you receive the capital proceeds.

CGT Event

Section 104-60 of the ITAA 1997 explains a CGT event E2 happens if you transfer a CGT asset to an existing trust. The time of the event is when the asset is transferred. You make a capital gain if the capital proceeds from the transfer are more than the assets costs base.

Section 104-10 of the ITAA 1997 explains CGT event A1 happens if you dispose of a CGT asset if a change of ownership occurs from you to another entity whether because of some act or event or by operation of law. The time of the event is when you enter into the contract for the disposal.

Section 102-25 of the ITAA 1997 explains more than one event can happen, the one you use is the one that is most specific to your situation. ATO Interpretative Decision ATO ID 2003/559: Income tax: Disposal of a CGT asset to a trust: application of CGT event A1 or CGT event E2 states CGT event A1 is the most specific event that happens when a taxpayer disposes of an asset to a trust that is not connected with the taxpayer in any way.

CGT event A1 happens if the ownership of a CGT asset changes. CGT event E2 happens if a CGT asset is transferred to an existing trust. If more than one CGT event happens in respect of a transaction, the most specific event is to be used.

Subsection 104-60(5) of the ITAA 1997 states a CGT event E2 does not happen if you are the sole beneficiary of the trust, and you are absolutely entitled to the asset as against the trustee and the trust is not a unit trust. The exception looks to the connection between the transferor and transferee. When the vendor is completely unconnected with the purchaser, there is no way of knowing in what capacity the property will be transferred or disposed. CGT event A1 is the most specific event where the parties are completely unconnected and are dealing with each other at arm's length.

Application to your circumstances

Person A and Person B, as the vendors, entered the contract to sell the property, this is the date CGT event A1 occurs. As the capital proceeds from the transfer are more than the assets cost base, there will be a capital gain from CGT event A1 as the more specific event. The agreed settlement date was approximately four years after the contract was signed.

Near the time of settlement, the purchaser in its capacity as trustee substituted the purchaser details under the contract of sale. There was no way the vendors could know that the property would be disposed to a trust. The purchaser is not related or connected to Person A or Person B.

CGT event E2 is the most specific event if the vendor does not know whether the asset will be disposed of to a person acting in a trustee capacity. Subsequently, it is inappropriate for a different CGT event to apply depending on whether the vendor knew the capacity in which the purchaser was acquiring the asset. Accordingly, CGT event A1 is the most specific event that happens where an asset is sold to the trustee of a trust that has no connection with the vendor.

The relevant CGT event occurred on the date the contract was signed. The contribution is required to be made on or before the later of the following days:

(i) the day you are required to lodge your income tax return for the income year in which the CGT event happened;

(ii) 30 days after the day you receive the capital proceeds.

Person A was found to be entitled to apply the 15 year exemption under section 152-105.

The contribution to the superannuation fund has not yet occurred as Person A wished to make the contribution by the day he is required to lodge his tax return for the income year in which the settlement occurred.

As the relevant CGT event occurred on the date the contract was signed (which is in a previous income year) and no contribution has yet been made, the requirement under subsection 292-100(2)(b)(i) has not been met.

The requirement under subsection 292-100(b)(ii) also has not been met as settlement occurred and no contribution has been made in the 30 days after receiving the capital proceeds.

Subsection 292-100(4) is not applicable in this case as it relates to an entity that is a company or trust.

Subsection 292-100(7) is not applicable in this case as it relates to subsection 152-305(1) of Subdivision 152-D. Section 152-330 states that this Subdivision does not apply to a capital gain to which Subdivision 152-B (15 year exemption) applies. As Person A is eligible to apply the 15 year exemption, subsection 152-305(1) of Subdivision 152-D is not applicable.

Subsection 292-100(8) is not applicable in this case as it relates to an entity that is a company or trust.

Person A will not be eligible to make a contribution to super under section 292-100 and have it not counted as a non-concessional contribution under subsection 292-90(c)(iii).

Question 7 Superannuation contributions

Is Person B eligible to contribute their share of the capital proceeds in respect of the remaining proportion into superannuation under subsection 292-100(2) of the ITAA 1997?

Section 292-100 covers contributions relating to some CGT small business concessions.

A contribution is covered under subsection 292-100(1) if:

(a) the contribution is made by you to a complying superannuation plan in respect of you in a financial year; and

(b) the requirement in subsection (2), (4), (7) or (8) is met; and

(c) you choose, in accordance with subsection (9), to apply this section to an amount that is all or part of the contribution.

Under 292-100(2) the requirement in this subsection is met if:

(a) the contribution is equal to all or part of the capital proceeds from a CGT event for which you can disregard any capital gain under section 152-105 (or would be able to do so, assuming that a capital gain arose from the event); and

(b) the contribution is made on or before the later of the following days:

(i) the day you are required to lodge your income tax return for the income year in which the CGT event happened;

(ii) 30 days after the day you receive the capital proceeds.

Subsection 292-100(4) is not applicable in this case as it relates to an entity that is a company or trust.

The requirement under subsection 292-100(7) is met if:

(a) the contribution is equal to all or part of the capital gain from a CGT event that you disregarded under subsection 152-305(1); and

(b) the contribution is made on or before the later of the following days:

(i) the day you are required to lodge your income tax return for the income year in which the CGT event happened;

(ii) 30 days after the day you receive the capital proceeds from the CGT event.

152-305(1)

Subsection 152-305(1) states if you are an individual, you can choose to disregard all or part of a capital gain if:

(a) the basic conditions in Subdivision 152-A are satisfied for the gain; and

(b) if you are under 55 just before you make the choice - you contribute an amount equal to the asset's CGT exempt amount to a complying superannuation fund or an RSA; and

(c) the contribution is made:

(i) if the relevant CGT event is CGT event J2, J5 or J6 - when you made the choice; or

(ii) otherwise - at the later of when you made the choice and when you received the proceeds.

Subsection 103-25 states a choice you can make under this Part or Part 3-3 must be made:

(a) by the day you lodge your income tax return for the income year in which the relevant CGT event happened; or

(b) within a further time allowed by the Commissioner.

Application to your circumstances

Person B is not entitled to apply the small business 15 year exemption concession. As Person B is not entitled to apply the small business 15 year exemption concession, they does not meet the requirement under subsection 292-100(2)(a).

As Person B has not made a contribution, Person B did not make a choice to disregard all or part of a capital gain under subsection 152-305(1). As a result, Person B has not met the requirement under subsection 292-100(7).

Subsection 292-100(8) is not applicable in this case as it relates to an entity that is a company or trust.

Person B will not be eligible to make a contribution to super under section 292-100 and have it not counted as a non-concessional contribution under subsection 292-90(c)(iii).