Maximum net asset value test: is the ATO’s stance on previously rented holiday homes justified?

Practitioners are well aware that in order to qualify for access to any of the small business CGT concessions, taxpayers must first satisfy certain basic conditions. One such condition is the maximum net asset value (MNAV) test, which is a point in time test applied “just before the CGT event”. This legal principle is affirmed by the judiciary in for example FCT v Byrne Hotels Qld Pty Ltd [2011] FCAFC 127.

When determining the assets that should be included as part of a taxpayer’s net asset value (or that of connected entities or affiliates of, the taxpayer), certain assets owned personally by individuals can be excluded from the calculation; one category of which is assets being used solely for the personal use and enjoyment of the individual or their affiliate(s) (s.152-20(2)(b)(i)).

The term “being used solely for the personal use and enjoyment” means the asset must be used only or exclusively for this purpose at the moment in time which is just before the CGT event. Therefore, if an individual taxpayer uses their property as a family holiday home just before the CGT event, that property should be excluded from their MNAV calculation – even if it had been rented out in the past.

The application of the “point in time test” was explored in Altnot Pty Ltd and Commissioner of Taxation [2013] AATA 140. The AAT examined whether a Queensland property (jointly owned by husband and wife) could be excluded from the MNAV calculation by virtue of s.152-20(2)(b)(i). Although the property had been leased for a significant part of its ownership period, it had ceased being used as a rental property for three or four months before the CGT event. The AAT noted “To make a decision about what was happening at a particular point in time, I must first ask what was happening in the time surrounding that particular point in time so that I look at the point of time in its context.” Relevant factors include the pattern of use by the owners and others leading up to the ‘just before CGT event’ test time, duration of use as a holiday house, and how the owners view it.

The AAT concluded that a holiday house which had ceased being used for rental purposes but had not yet been used as a holiday house did not meet the test of ‘…being used solely for the personal use an enjoyment of the individual…’. This conclusion implies (in our view) that if the taxpayers had actually begun using the Queensland property once more as their holiday house, it might have qualified as being used for personal use and enjoyment just before the CGT event.

In contrast to judicial interpretation, the ATO’s approach considers the asset’s use over its entire ownership period, not “just before the CGT event” and so arguably goes beyond what the section requires. Under the ATO’s approach, any non-personal use no matter how minor or how long ago it occurred would prevent the asset from being disregarded (see ATO ID 2011/37 which pre-dates the Altnot decision). This differing interpretation could prevent taxpayers from satisfying the MNAV test if their holiday house was previously rented but is now being used solely for their personal use and enjoyment leading up to just before the CGT event. At the very least, it flags taxpayers may face challenges from the ATO’s broader interpretation of that subsection.

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