CGT small business concessions: maximum net asset value test - disregarded assets - asset being used solely for personal use and enjoyment

Is the use of an asset over its ownership period taken into account in determining whether the asset is being used solely for personal use and enjoyment and therefore disregarded from the net value of an individual's CGT assets under subparagraph 152-20(2)(b)(i) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The use of an asset over its ownership period is taken into account in determining whether the asset is being used solely for personal use and enjoyment and therefore disregarded from the net value of an individual's CGT assets under subparagraph 152-20(2)(b)(i) of the ITAA 1997.

An individual taxpayer makes a capital gain from the sale of a business asset. The individual also owns a dwelling (separate from their business). The dwelling has been leased to tenants for a period of 5 years from the time of acquisition until one month before the sale of the business asset. From the time the leasing of the dwelling ceased until after the sale of the business asset, the dwelling was used solely for the personal use and enjoyment of the individual (but not as a main residence).

The individual is not a small business entity within the meaning of section 328-110 of the ITAA 1997 at any time.

For the purpose of determining whether they qualify for the small business CGT concessions, the individual must determine the net value of their CGT assets and in particular, whether the value of the dwelling is included in the calculation.

To qualify for the small business CGT concessions, a taxpayer must generally satisfy either the maximum net asset value test or, for CGT events happening in the 2007-08 or later income years, be a small business entity ($2 million turnover test) (paragraph 152-10(1)(c) of the ITAA 1997).

A taxpayer satisfies the maximum net asset value test if, just before the CGT event, the net value of their CGT assets and of certain related entities does not exceed a threshold (section 152-15 of the ITAA 1997).

In working out the net value of the CGT assets of an individual, 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 relevant adjacent land) are disregarded (subparagraph 152-20(2)(b)(i) of the ITAA 1997).

The question arises as to whether subparagraph 152-20(2)(b)(i) of the ITAA 1997 requires only a consideration of the use of an asset immediately before the relevant CGT event or requires a consideration of the use of the asset throughout its ownership period to determine whether it is an asset being used solely for personal use and enjoyment.

It is considered that if regard was had only to an asset's use at a single point in time, that is, immediately before the relevant CGT event, the result would not necessarily reflect the true nature of the use of the asset. Accordingly, it is considered that regard must be had to the use of an asset over its ownership period in order to ascertain whether the asset is being used solely for personal use and enjoyment. As the provision refers to sole personal use, any non-personal use of an asset over its ownership period will mean the asset is not disregarded under subparagraph 152-20(2)(b)(i) of the ITAA 1997.

In this case, the individual has used their dwelling for non-personal use for nearly the entire period of ownership up to the time of the sale of the business asset. Accordingly, the dwelling is not an asset being used solely for the personal use and enjoyment of the individual and is not disregarded under subparagraph 152-20(2)(b)(i) of the ITAA 1997. The dwelling must be included in the net value of the individual's assets under section 152-15 of the ITAA 1997.