Edited version of private ruling

Authorisation Number: 1011416443152

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Ruling

Subject: Capital gains tax (CGT)

1. Is the land you own and use for share farming an active asset under section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes.

2. Is the water licence that was used for share farming at the property an active asset under section 152-40?

Yes, provided all the basic conditions are met.

This ruling applies for the following period

Year ending 30 June 2009.

Year ending 30 June 2010.

The scheme commenced on

1 July 2008.

Relevant facts and circumstances

You purchased some farming land, a water licence and entered into a share farming arrangement with your adult child and partner for the farming of this land.

The water license has been sold, however the property is yet to sell. The share farming arrangement was in place for the period of ownership.

Every quarter, you spend at least two weeks actively involved with the business on the property so that the total amount of time would amount to ten to twelve weeks per year of direct involvement in the business. Included in the involvement by you were discussions of crops being planted and capital improvements that were being made. Activities undertaken when you are at the property include:

· inspected property including fences, pastures, crops and stock

· discussed what crops to be planted and areas involved

· cattle work - including mustering, branding, marking, tagging, weighing drafting, trucking away and feeding hay and putting licks out when dry

· operating equipment including crawler tractor dozer to clean out ground tanks, pushing in old head ditches

· cleaning out head ditches and road work using grader

· tractor driving and ripping paddocks, ploughing, slashing, planting and fertilizing

· shifting field bins and loading grain trucks during harvest

· irrigating crops

· repairing equipment and machinery

· laying pipes in irrigation channels to control water and provide crossovers for vehicles, placing fluming to fill dams

· poisoning box thorns in pastures.

You have recognised all income and expenses in relation to the business as primary production income and expenses.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 152-40.

Income Tax Assessment Act 1997 Section 152-10.

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA of the ITAA 1936 applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA of the ITAA 1936 may apply.

For more information on Part IVA of the ITAA 1936, go to our website and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

All legislative references referred to herein are from the ITAA 1997 unless otherwise stated.

Subsection 152-10(1) sets out some basic conditions for the CGT small business concession provisions. If the basic conditions are satisfied, then a small business entity may be able to reduce its capital gains using the small business concessions in Division 152.

The basic conditions in section 152-10 to be satisfied for the gain 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 Division 152) 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 (section 152-15)

(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;

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

d) the CGT asset satisfies the active asset test in section 152-35.

You have advised that you satisfy the maximum net asset value test. You will also satisfy the active asset test provided the property is an active asset.

Taxation Determination 95/62 gives the Commissioner's view on whether landowners who allow their land to be used in share farming are considered to be engaged in a business of primary production.

Many arrangements do not amount to the carrying on of a business in partnership. In such cases, the fact that the land is used for cultivation in a business of primary production does not necessarily mean that the owner of the land is also carrying on that business.

To be carrying on a business, the taxpayer must be involved in the activities that make up that business. This would be evidenced by an element of control over, and/or an ongoing participation in, the business. The involvement should be direct or immediate, rather than passive. The payment of expenses relating to the ownership of the land would not, without more, be sufficient.

You have advised that you are actively involved with the business on the property. You have provided a list of activities that you undertake whilst at the property and your involvement includes discussions on what crops to be planted and any capital improvements being made to the property.

Your active involvement in the farming activities would indicate that you have more than a passive interest in the business. You therefore satisfy the active asset test and will be eligible for the small business 50% reduction.

Water Rights

Water rights, such as licences and water allocations are CGT assets as defined in section 108-5. They are legal rights existing by the terms of the prevailing State legislation and therefore satisfy the definition.

Where a water right has been acquired after 19 September 1985 any disposal of that right will have CGT consequences. The capital gain on each disposal will equal the excess of the consideration over the cost base.

Under paragraph 152-40(1)(a), a CGT asset is an active asset at that time, you own the asset and it is used, or held ready for use, in the course of carrying on a business that is carried on by you; or your affiliate; or another entity that is connected with you.

You will satisfy the active asset test if you have owned the asset for 15 years or less and the asset was an active asset of yours for a total of at least half of the period beginning when you acquired the asset and ending at the earlier of the CGT event and if the relevant business ceased to be carried on in the 12 months before that time or any longer period that the Commissioner allows - the cessation of the business.

As mentioned above the water licence is a CGT asset, therefore, provided the licence meets the requirements of Division 152 and satisfies the active asset test, the small business 50% reduction will be available to you.

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