Edited version of your private ruling

Authorisation Number: 1012157882892

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Ruling

Subject: CGT- small business concessions

Questions and answers:

Is your share of profits from the sale of subdivided land the mere realisation of a capital asset?

Yes.

 Will any amounts from the sale of the subdivided land be assessable under subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997), or the capital gains tax provisions under Part 3-1 of the ITAA 1997?

Yes.

Are you entitled to the 15 year CGT small business concession?

Yes.

This ruling applies for the following periods:

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

The scheme commences on:

1 July 2011

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 own property which you acquired more than 15 years ago but after 19 September 1985.

The title deed to the property is in your individual names.

You own 50% of the shares and are a director of the company which used the land.

The land was used for a number of years by your company.

The land was acquired with the purpose and intent that is was to be used by your business.

The land has a run down old house on it which has been rented out for most of the time and the rent went towards covering insurance, rates, land tax and maintenance.

The land is being sold to pay for land tax, rates and to reimburse your savings for your retirement which have been used to maintain the property.

The proceeds of the sales will be used to sustain your retirement.

You sold your business which used the land. Since then the land was used by a relatives company.

The land has been used by you, your affiliates and related entities since its purchase. You have stated that the asset will therefore always be an active asset under section 152-35 of the Income Tax Assessment Act 1997.

You have stated that you satisfy the $6 million net value of CGT assets threshold as well as the $2 million aggregate turnover threshold.

It is anticipated that the subdivision will create a number of allotments.

You have not subdivided or developed any other properties.

The majority of the initial funding will come from you and some from the bank. You anticipate that the sale of the first batch of subdivided lots will then provide sufficient funds to help pay for the rest of the subdivisions.

You do not have any business plan for this subdivision.

You would like to complete this process in as few stages as possible, however you are restricted by financial resources.

No clearing of the land is required and you will only be doing the minimum infrastructure required by the authorities.

No site office has been erected on the land.

Due to your age and lack of knowledge in the area you will have little to do with the actual development.

You anticipate only a small number of contractors to be involved and they will be managed by the engineering firm who prepared the plans.

You have no business organisation in place in relation to this project.

An adjoining property owner has expressed interest in one of the blocks. The others will be sold by one agent.

You will have minimal involvement in the sale of the blocks.

Transaction and minimum records will be kept.

You will not be using any other entity and all aspects will be done in your individual names.

No buildings have been erected on the land.

No applications have been made to local government to date.

You do not have a projected cash flow statement.

You believe the CGT events will occur in connection with your retirement.

You are over the age of 55.

You have not used any of your CGT retirement exemption limit.

You believe the sale of the subdivided blocks will result in a capital gain.

You have not declared any salary and wages income in your income tax return for a number of years.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 subsection 152-10(1)

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section102-20

Income Tax Assessment Act 1997 Section 112-25

Income Tax Assessment Act 1997 Section 152-105

Income Tax Assessment Act 1997 Section 15-15

Income Tax Assessment Act 1997 Section 152-35

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Are the profits from the sale of the subdivided land from the mere realisation of a capital asset? 

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) includes in the taxpayer's assessable income, where the taxpayer is an Australian resident, all ordinary income derived by the taxpayer both in and out of Australia during an income year.

Ordinary income is defined as income according to ordinary concepts. An amount which is not assessable under section 6-5 of the ITAA 1997 may be assessable under section 15-15 of the ITAA 1997, if the profit or gain arises from the carrying on or carrying out of a profit making undertaking or plan.

In determining whether an isolated transaction amounts to a business operation or commercial transaction, paragraph 13 of Taxation Ruling TR 92/3 Income Tax: whether profits on isolated transactions are income outlines a number of factors which must be considered including.

(a) The nature of the entity undertaking the operation or transaction; 

(b) The nature and scale of other activities undertaken by the taxpayer; 

(c) The amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained; 

(d) The nature, scale and complexity of the operation or transaction; 

(e) The manner in which the operation or transaction was entered into or carried out; 

(f) The nature of any connection between the relevant taxpayer and any other party to the operation or transaction; 

(g) If the transaction involves the acquisition and disposal of property, the nature of that property; and 

(h) The timing of the transaction or the various steps in the transaction.

Applying these factors to your circumstances:

You are undertaking the transaction in your own names as individuals, and are not relating it to any other entity.

The nature and intention of the activity differs from the intention you had when you purchased the land. You originally acquired the land so that you could use it to store items relating to your business on. You are now subdividing and selling off the land and you no longer have your business.

You are borrowing money to carry out the subdivision and will be relying on the sale of the initial blocks to complete the rest of the works necessary to subdivide the remainder of the land.

Although the scale of the operation is quite large given the size of the land, you are only doing the minimum amount of work necessary to be able to sell of each block as required by the local authorities.

In relation to the manner in which the operation will be carried out, you will not be involved in the sale of the blocks. This will all be handled by an agent to unknown parties (with the potential exception of one block which may be sold to an adjoining neighbour).

You have engaged an independent third party to carry out the works required and intend to use an agent to sell the blocks, as mentioned above

The transaction includes the subdivision and disposal of property, the property was purchased for use by your company, and you sold your company.

You are subdividing and selling the land in stages as you are not able to fund the whole process at once. You believe the sale of the first batch will cover the costs involved in subdividing the rest of the land.

In considering the factors against your facts, the proceeds of sale of the subdivided blocks are not income according to ordinary concepts, but represent the mere realisation of a capital asset, carried out in an enterprising way so as to secure the best return.

CGT Event

Section 102-20 if the ITAA 1997 provides that you make a capital gain or loss as a result of a CGT event. The most common event is CGT event A1 which happens when a person disposes of a CGT asset to someone else.

Under section 108-5 of the ITAA 1997 a CGT asset is any kind of property, or a legal or equitable right that is not property. CGT assets include part of or an interest in property or a legal or equitable right that is not property.

Subdivision

Section 112-25 of the ITAA 1997 states that the subdivision of land into a number of lots is not in itself a CGT event. The original block of land is deemed to have been split into a number of new assets as a result of the subdivision (Tax Determination TD 97/3: Income tax: capital gains: if a parcel of land acquired after 19 September 1985 is subdivided into lots ('blocks'), do Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 treat a disposal of a block of the subdivided land as the disposal of part of an asset (the original land parcel) or the disposal of an asset in its own right (the subdivided block)?).

Therefore, although the subdivision of your land will not trigger a CGT event the subsequent sale of the blocks will.

Small Business CGT Concessions

The CGT provisions provide four small business CGT concessions, namely:

· the small business 15-year exemption which reduces a gain to nil

· The small business 50% active asset reduction

· The small business retirement exemption and

· The small business roll-over.

Any capital gain that results from a CGT event may be reduced or disregarded under the small business concessions if you satisfy certain conditions. All of these concessions require that the basic conditions in subsection 152-10(1) of the ITAA 1997 are satisfied. Some of the concessions also require that other conditions are also satisfied.

The basic conditions to be satisfied for the capital 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 of the ITAA 1997) 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

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

In applying these basic conditions to your circumstances:

· a CGT event will happen to your asset when the subdivided blocks are sold

· the sale of the blocks will result in a gain

· you have stated that you satisfy the maximum net asset test, and

· you have stated that the asset satisfies the active asset test

Therefore, you satisfy the basic conditions for the small business CGT concessions.

The small business 15-year exemption takes priority over the other small business concessions and the CGT discount. If the small business 15-year exemption applies, you are eligible to entirely disregard the capital gain so there is no need to apply any further concessions.

15 Year exemption

You may disregard a capital gain arising from a CGT event if the CGT asset was owned for at least 15 years, if you are over 55 years of age and the CGT event occurs in connection with your retirement (Section 152-105 of the ITAA 1997).

You purchased the block of land more than 15 years ago but after 19 September 1985 and are over the age of 55. You therefore satisfy the first two requirements for the 15 year exemption.

'In connection with your retirement'

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 least a significant reduction in the number of hours the individual works or a significant change in the nature of their present activities to be regarded as a retirement. However, it is not necessary for there to be a permanent and everlasting retirement from the workforce.

A CGT event may be in connection with an individual's retirement even if it occurs at sometime before retirement.  

The Explanatory Memorandum (EM) to the New Business Tax System (Capital Gains Tax) Bill 1999 makes the following comments about the requirement to be permanently incapacitated or retiring as one of the conditions for the concession:

1.68 One of the requirements of this concession for an individual small business taxpayer is that they must be either permanently incapacitated at the time of the CGT event, or at least 55 years old and using the capital proceeds for their retirement.

You have ceased full time work and have not declared any salary and wages income in your income tax returns for a number of years. It is considered that the subdivision and sale of your land is a divesting of your assets as part of the process of your retirement.

As stated above retirement does not need to be an everlasting or permanent retirement from the workforce, a small number of working hours undertaken by you in an unrelated industry does not affect your status for this concession.

You are over the age of 55, you sold your business and ceased full time work and you intend to use the proceeds from the sale of the subdivided blocks to fund your retirement. You are therefore eligible for the 15 year exemption to CGT under the small business CGT concessions.

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