Capital Gains Tax: small business concessions - small business CGT affiliate - permanently separated spouse

Is a person, who is legally married to another person but permanently separated from them, a 'spouse' for the purpose of the definition of small business CGT affiliate in paragraph 152-25(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. A person, who is legally married to another person but permanently separated from them, is a 'spouse' and therefore a small business CGT affiliate under paragraph 152-25(1)(a) of the ITAA 1997.

Two legally married people were permanently separated and living independently but not divorced. They were both partners in a partnership, which carried on a business.

A parcel of rural land (an active asset) owned by the partnership was sold and a capital gain realised. Both partners also owned other assets.

Section 152-15 of the ITAA 1997 (maximum net asset value test) sets out one of the basic conditions for small business relief. Under this test, the net value of the CGT assets of certain related entities, including certain assets of any small business CGT affiliates, are taken into account in determining if a taxpayer has exceeded the $5 million limit.

Paragraph 152-25(1)(a) of the ITAA 1997 includes an individual's spouse in the meaning of a small business CGT affiliate.

In relation to the meaning of the word 'spouse', The Macquarie Dictionary, 2001, rev. 3rd edn, The Macquarie Library Pty Ltd, NSW contains the following definitions: • Spouse, '...either member of a married pair in relation to the other; one's husband or wife.' • Married, '...relating to marriage or married persons.' • Marriage, '...the legal union of a man with a woman for life; state or condition of being married; the legal relationship of spouses to each other.'

As such, the ordinary meaning of the word 'spouse' does not indicate that spouses must be living together. It is enough that they are legally married and that the marriage has not been dissolved.

Certain provisions of the ITAA 1997 specifically exclude a permanently separated spouse. For example, subsection 118-170(1) of the ITAA 1997, in respect of spouses having different main residences, states: If during a period a dwelling is your main residence and...... of your spouse (except a spouse living permanently separately and apart from you), .....

This supports the view that the word 'spouse' would normally be understood to include a person who is legally married to another person but permanently separated from them.

Accordingly, such a person is a small business CGT affiliate under paragraph 152-25(1)(a) of the ITAA 1997.

Note 1: The assets of a small business CGT affiliate are only included in a taxpayer's maximum net asset value test if those assets are used, or held ready for use, in a business carried on by the taxpayer or by an entity connected with the taxpayer (not being an entity connected with the taxpayer only because of a small business CGT affiliate).

Note 2: There is an additional test where a partnership disposes of an asset. The net value of the CGT assets of the partnership also must not exceed $5 million (paragraph 152-15(b) of the ITAA 1997).