Edited version of private ruling

Authorisation Number: 1011531801083

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Ruling

Subject: CGT - small business concessions

Are you eligible to apply the small business 15-year exemption under Subdivision 152-B of the Income Tax Assessment Act 1997 (ITAA 1997) to the capital gain arising from the gifting of property to your son?

Yes.

This ruling applies for the following periods:

1 July 2009 - 30 June 2010

1 July 2010 - 30 June 2011

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You carry on a business of beef cattle grazing.

You are planning to retire.

As part of your retirement plan you have agreed to allow your son the future exclusive use of a significant amount of your other land, for which you will in return receive passive rental income.

You will also transfer half of your cattle to this son.

You will also gift a block of farm land to your other son (the block). To do this you will arrange a land title transfer.

As a consequence of the arrangements and the transfer of assets your business will no longer be viable. Your average weekly hours worked will drop to between 12 and 15 hours.

The only delay in this arrangement commencing is the issue of a National Vendor Identification Code (NVIC) for your son, without which he cannot be a beef cattle producer. The NVIC is pending.

You will continue to run a herd of cattle as a retirement interest.

You inherited the block after September 1985 and have used it exclusively during your ownership period to carry on your business.

You satisfy the maximum net asset value test.

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 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 may apply.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 152-10

Income Tax Assessment Act 1997 Section 152-105

Income Tax Assessment Act 1997 Section 152-35

Income Tax Assessment Act 1997 Section 152-15

Income Tax Assessment Act 1997 Subparagraph 152-40(1)(a)(i)

Income Tax Assessment Act 1997 Subparagraph 152-105(d)(i)

Reasons for Decision

Subdivision 152-B of the ITAA 1997 provides the small business 15 year exemption as part of the CGT small business relief provisions. Under this exemption you can disregard a capital gain from a CGT event happening to a CGT asset you have owned for at least 15 years if:

· you satisfy the basic conditions for the small business CGT concessions set out in section 152-10 of the ITAA 1997

· you continually owned the CGT asset for the 15 year period ending just before the CGT event happened, and

· if you are an individual you are at least 55 years old at the time of the CGT event and the event happened in connection with your retirement.

These three requirements are set out in section 152-105 of the ITAA 1997.

Condition (a)

The basic conditions to be satisfied for the gain are:

a) a CGT event happens in relation to a CGT asset of yours in an income year, and

b) the event would have resulted in the gain (apart from Division 152 of the ITAA 1997), and

c) at least one of the following applies

(i) you are a small business entity, or

(ii) you satisfy the maximum net asset value test, or

(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, and

d) the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997.

Basic condition (a)

This condition requires a CGT event to happen in relation to your CGT asset. A CGT asset includes any kind of property or legal or equitable right. The relevant CGT event would be the disposal of the asset which would trigger a CGT event A1.

For the purpose of the ruling it is expected that you will gift the property to your son and dispose of the property by arranging a land title transfer. In this case, a CGT event would happen in relation to your CGT asset therefore this condition would be satisfied.

Note - the capital gain derived from the disposal of the CGT asset is the capital proceeds less the cost base. If you gift the CGT asset and receive no proceeds the market substitution rule under section 116-30 of the ITAA 1997 applies and you are taken to have received the market value of the asset for the disposal.

Basic condition (b)

For the purpose of the ruling it is expected that the CGT event would result in a capital gain. Therefore, this condition would be satisfied.

Basic condition (c)

The maximum net asset value test is set out in section 152-15 of the ITAA 1997. You state that you satisfy the maximum net asset value test. Therefore as you satisfy one of the requirements this condition is satisfied.

Basic condition (d)

This condition requires the active asset test in section 152-35 of the ITAA 1997 to be satisfied in relation to the asset. You satisfy the active asset test if you have owned the asset for 15 years or more and the asset was an active asset of yours for a total of at least 7½ years during the ownership period.

Under subparagraph 152-40(1)(a)(i) of the ITAA 1997 a CGT asset is an active asset at a time if you own the asset and you use it or hold it ready for use, in the course of carrying on a business.

You have owned the asset for more than 15 years. During your entire ownership period you have used the asset to carry on a business of beef cattle grazing. Therefore, you satisfy the active asset test.

You satisfy all of the basic conditions for relief under Division 152 of the ITAA 1997, therefore you satisfy Condition (a).

Condition (b)

Under this condition you must have continually owned the CGT asset for the 15 year period ending just before the CGT event happened. You have continually owned the asset for a period greater than 15 years. Therefore, you satisfy Condition (b).

Condition (c)

This condition applies to individuals; you must be at least 55 years old at the time of the CGT event and the event happened in connection with your retirement.

You are over 55 years of age. Whether a CGT event happens in connection with an individual's retirement depends on the particular circumstances of each case. There would need to be at the very least a significant reduction in the number of hours worked, or a significant change in the nature of their present activities to be regarded as retirement. However, it is not necessary for there to be a permanent and everlasting retirement from the workforce.

In your case, there will be a significant change in you activity. You will gift a block to one son and you will transfer more than half of your cattle to your other son and allow this son exclusive use of more than half of your land. As a result your business will become non viable, though you will now receive passive income (rent) from the land. You intend to continue some activity as a retirement interest. This would require 12-15 hours per week as opposed to 30 hours per week while running the business and will probably not amount to carrying on a business.

On the basis of the facts we consider that the proposed CGT event, that is, the gifting of the land to your son, will be connected with your retirement for the purposes of subparagraph 152-105(d)(i) of the ITAA 1997.

Conclusion

You satisfy the requirements of section 152-105 of the ITAA 1997; as a result you are eligible to apply the small business 15-year exemption.

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