Edited version of private ruling

Authorisation Number: 1011548156364

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Ruling

Subject: Capital gains tax - small business concessions - water rights

1. Are you eligible to access small business capital gains concessions on the proposed sale of your water rights?

Yes.

2. Will the water rights qualify as small business active assets where there has been a temporary transfer of part of the annual water entitlement?

Yes.

This ruling applies for the following periods

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commences on:

1 July 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You purchased a farming property after 1985.

The property has been used in your farming business continuously from the date of purchase.

Attached to the property is a water allocation.

A valuation of the property was undertaken and attached a nil value to the water allocation.

The water rights are transferable on either a permanent of temporary basis.

The water allocation has been owned continuously for more that 15 years.

During the period of ownership a small part of the annual water entitlement has been sold on an irregular basis.

The remainder of the water entitlement has been retained and used on the property to irrigate crops.

In the years when no transfer of water entitlement was made the water was used exclusively for your farming business.

You now wish to sell your water allocation on a permanent basis.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 108-5.

Income Tax Assessment Act 1997 Subsection 112-25(3).

Income Tax Assessment Act 1997 Section 152-10.

Income Tax Assessment Act 1997 Section 152-35.

Income Tax Assessment Act 1997 Section 152-40.

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 1936applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA of the ITAA 1936, go to our website www.ato.gov.au 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

Small Business concessions - Basic Conditions

To qualify for any of the small business concessions there are basic conditions that must be satisfied under section 152-10 of the ITAA 1997.

You must first satisfy at least one of the following conditions:

· you are a small business entity

· you satisfy the maximum net asset value test, or

· you are a partner in a partnership that is a small business entity and the CGT asset is an asset of the partnership.

In addition to satisfying one of the above conditions the asset must also pass the active asset test.

Small business entity

You will be a small business entity if you are an individual, partnership, company or trust that:

· is carrying on a business, and

· has less than $2 million aggregated turnover.

Aggregated turnover is your annual turnover plus the annual turnovers of any businesses that are connected with you or your affiliates.

Paragraph 13 of Taxation Determination TD 97/11sets out the following indicators that are relevant to determining whether you are carrying on a business:

· whether the activity has a significant commercial purpose or character

· whether the taxpayer has more than just an intention to engage in business

· whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

· whether there is repetition and regularity of the activity

· whether the activity is carried on in a similar manner to that of the ordinary trade in that line of business

· whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit

· the size, scale and permanency of the activity, and

· whether the activity is better described as a hobby, a form of recreation or a sporting activity.

The active asset test

According to section 152-35 if the ITAA 1997 the active asset test is satisfied 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 test period outlined below, or

· you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of at least 7 ½ years during the test period.

The test period:

· begins when you acquired the asset, and

· ends at the earlier of:

o the CGT event, and

o if the business in question ceased in the 12 months before the CGT event (or such longer time as the Commissioner allows) when the business ceased.

Meaning of active asset

Section 152-40 provides that a CGT asset is an active asset if it is owned by you and is:

· used or held ready for use by you, your affiliate, your spouse or child under 18 years, or an entity connected with you, in the course of carrying on a business, or

· an intangible asset that is inherently connected with a business you, your affiliate, your spouse of child under 18 years, or another entity that is connected with you carries on for example, goodwill.

Application to your circumstances

Your water rights can be disposed of separately to the land and therefore the land and water rights are separate assets. The application of the small business concessions need to be considered separately with regard to any sale of the land or water access licence.

The water rights

You are the owner of a farming property purchased after 1985. Attached to the property at the time of purchase was a water allocation. This water allocation is a separate CGT asset from the land.

You advise that the water entitlement is used exclusively to irrigate crops on your property for your farming business, apart from some periods where you temporarily transferred a small part of your water rights by selling a part of the annual water entitlement.

To satisfy the active asset test:

· you need to have owned the asset for 15 years or less and the asset needs to have been an active asset of yours for a total of at least half the test period as previously outlined, or

· you need to have owned the asset for more than 15 years and the asset has been an active asset for a total of at least 7 ½ years during the test period.

You purchased the water rights after 1985 and have owned the asset for more than 15 years.

Although you have temporarily transferred a part of the annual water entitlement on irregular occasions, the water rights have been an active asset for at least 7 ½ years.

Therefore, the water rights still qualify as small business active assets.

The size and scale of this activity is sufficient to give your activities the required commercial character as required by Taxation Ruling TR 97/11, to be carrying on a business. The water rights are being used by you in the course of carrying on a business and are therefore an active asset.

The small business concessions apply to the disposal of the water rights providing the various conditions relating to the small business CGT concessions are met at the time of sale.

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