Edited version of private advice

Authorisation Number: 1052199620323

Date of advice: 6 December 2023

Ruling

Subject: CGT - small business concessions

Question 1

Is the cash held in Offset Account No 1 and the cash held in Offset Account No 2 each a CGT asset within the meaning of the term in section 108-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Is the cash held in Offset Account No 1 an asset being used solely for your personal use and enjoyment and therefore disregarded in determining the net value of your Capital Gains Tax (CGT) assets under section 152-20 of the ITAA 1997?

Answer

No.

Question 3

Is the cash held in Offset Account No 2 an asset being used solely for your personal use and enjoyment and therefore disregarded in determining the net value of your CGT assets under section 152-20 of the ITAA 1997?

Answer

No.

This ruling applies for the following period:

Income year ended 30 June 20YY

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The Taxpayer and their spouse operated a business through a partnership (the Partnership).

The Taxpayer and their spouse are partners of the Partnership, and each have 50% partnership interests.

The business was sold during 20YY under a Contract of Sale of Business to an otherwise unrelated party for consideration of $XXX plus the value of the stock.

The annual turnover of the business for both the income years ended 30 June 20XX and 20YY was more than $X million.

Offset Account No 1 and the linked Home Loan Account No 1

Offset Account No 1 is held by the Taxpayer and their spouse as joint account holders.

Immediately prior to the sale of the business, Offset Account No 1 had a balance of $XXX.

Offset Account No 1 is not an interest-bearing account and derived no interest income during the income year ending YY June 20YY.

Offset Account No 1 is linked to the Home Loan Account No 1 that is also jointly held by the Taxpayer and their spouse.

The interest charged on the loan is reduced due to the balance in the linked Offset Account No 1.

Home Loan Account No 1 has been reported as a liability related to the business in both the financial statements of the Partnership for the income year ended 30 June 20YY and the calculations of the net value of the CGT assets just prior to the sale of the business, on the basis that the loans were used in the course of the business of the Partnership.

Immediately prior to the sale of the business, Home Loan Account No 1 had a loan balance of $XXX.

Offset Account No 2 and the linked Home Loan Account No 2

Offset Account No 2 is held by the Taxpayer and their spouse as joint account holders.

Immediately prior to the sale of the business, Offset Account No 2 had a balance of $XXX.

Offset Account No 2 was previously an interest-bearing account and converted to a loan offset account in a recent year. Interest income was derived on this account in a previous income year.

Offset Account No 2 is linked to Home Loan Account No 2 that is jointly held by the Taxpayer and their spouse. The interest charged on the loan is reduced due to the linked offset account.

Home Loan Account No 2 has been reported as a liability related to the business in both the financial statements of the Partnership for the income year ended 30 June 20YY and the calculations of the net value of the CGT assets just prior to the sale of the business, on the basis that the loans were used in the course of the business of the Partnership.

Immediately prior to the sale of the business, Home Loan Account No 2 had a loan balance of $XXX.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 section 152-15

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 section 152-20

Income Tax Assessment Act 1997 section 152-47

Income Tax Assessment Act 1997 section 108-5

Reasons for decision

All legislative references contained in the reasons for decision are to the ITAA 1997.

Question 1

Summary

Cash held in both Offset Account No 1 and Offset Account No 2 are CGT assets within the meaning of the term in section 108-5.

Detailed reasoning

A CGT asset is defined in section 108-5 as 'any kind of property or a legal or equitable right that is not property'.

It was held in Excellar Pty Ltd v FC of T [2015] AATA 282 that cash held in a bank account is a chose in action for the depositor, i.e., a debt owed by the bank to the depositor and, accordingly, a CGT asset.

In the Taxpayer's circumstances, the credit balance in the offset accounts indicates that there is a debtor and creditor relationship between the Taxpayer and the bank. The Taxpayer has a legal right to request payment from the bank. Therefore, the cash held in Offset Account No 1 and Offset Account No 2 are separate CGT assets under section 108-5.

Question 2

Summary

Cash held in Offset Account No 1 is not an asset being used solely for personal use and enjoyment and therefore will not be disregarded from the calculations of the net value of the Taxpayer's CGT assets under section 152-20.

Detailed reasoning

The basic conditions for relief under the small business CGT concessions are outlined in subsection 152-10(1). These conditions are:

(a)  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.]

(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 CGT small business entity for the income year;

(ii)   you satisfy the maximum net asset value test (see section 152-15);

(iii)  you are a partner in a partnership that is a CGT small business entity for the income year and the CGT asset is an interest in an asset of the partnership;

(iv)  the conditions mentioned in subsection (1A) or (1B) are satisfied in relation to the CGT asset in the income year;

(a)  the CGT asset satisfies the active asset test (see section 152-35).

To qualify for being a CGT small business entity, subsection 152-10(1AA) and section 328-110 require that the Taxpayer carry on a business in the current year and have an aggregated turnover for the previous year or the current year of less than $2 million.

Section 152-15 outlines the requirements to satisfy the maximum net asset value (MNAV) test. It provides that the Taxpayer satisfy the MNAV test if, just before the CGT event, the sum of the following amounts does not exceed $6,000,000:

(a)  The net value of the CGT assets of the Taxpayer's;

(b)  The net value of the CGT assets of any entities connected with the Taxpayer;

(c)   The net value of the CGT assets of any affiliates of the Taxpayer's or entities connected with the Taxpayer's affiliates (not counting any assets already counted under paragraph (b)).

Additionally, paragraph 152-20(2)(b)(i) states that an asset of the Taxpayer's is disregarded for the purposes of the MNAV test if the asset is being used solely for the Taxpayer's, or their affiliate's, personal use and enjoyment (except a dwelling, or an ownership interest in a dwelling, that is your main residence).

In terms of the requirement for the asset to be used solely for the personal use or enjoyment of a taxpayer or their affiliate, the asset must have been so used over its entire ownership period.

The "solely" requirement also means that any income producing use of the asset, no matter how trivial, will disqualify it from being excluded from the MNAV test.

In Bell v FCT (2012) AATA 45 (Bell 1), the Tribunal found that two accounts in the name of the Taxpayer's spouse, an offset account with a credit balance of $1.25 million and a loan account with a debit balance of $1.09 million were linked. Although it was held that the balance of the loan account was excluded as a liability related to the spouse's principal place of residence (an asset excluded from the MNAV calculation), the balance of the offset account was correctly included in the MNAV calculations.

On subsequent appeal in Bell v FCT (2012) FCA 1042 (Bell 2) and Bell v FCT (2013) FCAFC 32 (Bell 3), each Court refused to disturb the AAT's findings in relation to the bank accounts

In the Federal Court decision of Bell 2, it was stated at [71] that:

...the Offset Account and the Loan Account were linked, by the Bank, to enable interest earned on the Offset Account to be offset against interest owing on the Loan Account: AAT Decision at [32].

In the Full Federal Court decision of Bell 3, it was stated at [12] that:

...However, that advice showed that the balance comprised a Loan Balance and an Offset Balance, an amount of interest that would have accrued and an Offset benefit (interest saved) and a net interest accrual for a month....

Pursuant to the Court decisions in Bell 2 and Bell 3, an offset bank account will not qualify for the exclusion of paragraph 152-20(2)(b)(i) as the offset account is regarded as an interest earning account that provides an offset benefit in the form of interest savings.

Application to your circumstances

On the specific facts in the Taxpayer's case, it is observed that Account No 1 has delivered offset benefit in the form of interest savings to both the Taxpayer and the Partnership.

The Partnership has used the loans from Home Loan Account No 1 in its business and claimed the interest expenses as a deduction. Thus, the offset benefit earned from Offset Account No 1 had a positive impact on the net profits of the Partnership as well as the share of such net profits (i.e., assessable income) for each partner. Such offset benefit earned from the balance in Offset Account No 1 was not directly reflected in the offset accounts but was indirectly reflected by way of reduced interest in the linked loan account.

Accordingly, Offset Account No 1 held by the Taxpayer and their spouse was not being used solely for personal use and enjoyment and will not be a disregarded CGT asset under paragraph 152-20(2)(b)(i).

Therefore, the Taxpayer will not be able to disregard the cash balance in Offset Account No 1 from the calculations of the net value of their CGT assets under section 152-20.

Question 3

Summary

Cash held in Offset Account No 2 is not an asset being used solely for personal use and enjoyment and therefore will not be disregarded from the calculations of the net value of the Taxpayer's CGT assets under section 152-20.

Detailed reasoning

For the same reasons outlined in Question 2, Offset Account No 2 held by the Taxpayer and their spouse was not being used solely for personal use and enjoyment and will not be a disregarded CGT asset under paragraph 152-20(2)(b)(i).

Further, Offset Account No 2 was an interest-bearing account previously and interest had been derived from this account. Although it is trivial, the 'solely' requirement will disqualify it from being excluded from the MNAV test.

Therefore, the Taxpayer will not be able to disregard the cash balance in Offset Account No 2 from the calculations of the net value of their CGT assets under section 152-20.