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Ruling
Subject: CGT - Small business concessions
Question
Are you eligible for the small business 15-year exemption in relation to the sale of the farming land?
Answer
No.
This ruling applies for the following period:
Year ended 30 June 2012
The scheme commenced on:
1 July 2011
Relevant facts and circumstances
You are a sole trader who conducts two businesses, a primary production business and a non-primary production business. You are over 55 years old.
You are contemplating selling a farming property and ceasing all primary production activities. You have owned this property for over 15 years and advised it was an active asset in your farming business.
The property is divided into three lots.
You have the option of structuring the sale of the land in two ways:
· Scenario 1: Lots 1, 2 and 3 are to be sold now - all referred to under the one contract for sale.
· Scenario 2: Lots 1 and 2 are to be sold now. Lot 3 will be sold under a separate contract in the future.
You will continue operating your non-primary production business for three days a week.
You satisfy all of the basic conditions required to apply the capital gains concessions for small businesses.
In you application for this ruling you state that the disposal of the primary production business is part of your retirement plans and constitutes a reduction in your hours dedicated to all of your business activities.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 152-105
Reasons for decision
Small business 15-year exemption
Section 152-105 of the ITAA 1997 provides a small business 15-year exemption for individuals. Under this section, you can disregard the capital gain from the disposal of your farming property, being CGT event A1 happening to the assets, if you:
· satisfy the basic conditions in Subdivision 152-A of the ITAA 1997 for the small business CGT concessions
· continuously owned the CGT asset for the 15-year period ending just before the CGT event happened and
· you are;
· at least 55 years old at that time and the event happened in connection with their retirement or
· permanently incapacitated at that time.
You have advised in your application that you satisfy the basic conditions in Subdivision 152-A of the ITAA 1997 and that you have continuously owned the assets of the business for at least 15 years. The first two of the above conditions are therefore satisfied.
Condition (c)
Whether a CGT event happens in connection with an individual's retirement depends on the particular circumstances of each case. A CGT event may be in connection with your retirement even if it occurs at some time before retirement. Whether particular cases satisfy the conditions depends very much on the facts of each case.
The Advanced guide to capital gains tax concessions for small business 2010-11 (the guide) states that if it can be shown that the reason for disposing of the assets is connected to retirement and that the sale is integral to your retirement plan; the sale may be accepted as happening in connection with your retirement.
The guide also gives a number of examples to help identify the likely scope of the term. These examples appear to suggest the following;
· That any reduction in working hours must be significant - in the first example the retiree reduces his working works to a few hours per week.
The examples suggest that there needs to be some temporal connection between a person's retirement and the CGT event. A six month time limit is used in a number of the examples.
Application to your circumstances
You are over 55 years old and have stated that you are contemplating disposing of the farming property as a part of your retirement plans. You are contemplating ceasing all primary production activities but will continue your other business activity of non-primary production business for three days a week.
You are not currently significantly reducing your hours of work to the extent that you can be considered retiring at this time. You also have not indicated a timeframe for a further reduction in your hours of work to suggest that the CGT event was in connection with your retirement. The sale of your property is therefore not in connection with your retirement and therefore you do not satisfy this condition.
Conclusion
You are not eligible to apply the 15 year exemption to the capital gain you will make on the disposal of your farming property for either scenario.
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