Edited version of your private ruling

Authorisation Number: 1012569313006

Ruling

Subject: Capital gains tax

Question 1

Is the land considered to be an active asset for the purposes of the CGT concessions for small business?

Answer

Yes

Question 2

Are you eligible to disregard any capital gain made on renewal of the lease under the CGT 15-year exemption concession for small business?

Answer

Yes

This ruling applies for the following period

Year ended 30 June 2014

The scheme commences on:

1 July 2013

Relevant facts and circumstances

You own some land on which you run a business in partnership. You each hold a 50% interest in the land.

The land was purchased in the early 90's and has been used in the business since this time.

The main source of assessable income for the business is from livestock sales.

You also receive annual lease income from an unrelated company for use of part of your land. The original lease commenced in the late 90's.

The company now wish to acquire an easement, with compensation paid up front.

You state the business is a small business entity.

You are both aged over 55 years.

You state that the event will happen in connection with your retirement.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 152-105

Income Tax Assessment Act 1997 Section 152-35

Income Tax Assessment Act 1997 Section 152-40

Income Tax Assessment Act 1997 Section 328-125

Reasons for decision

Summary

The land is considered an active asset as it has been used in the course of carrying on a business by an entity that is 'connected with' you and, it has been used for this purpose for more than 7 ½ years of your ownership period.

You are eligible to disregard any capital gain made on the granting of the easement under the 15-year exemption concession as the event happens in relation to an active asset (the land) and you satisfy all the necessary conditions.

Detailed reasoning

Active asset test

Section 152-40 of the Income Tax Assessment Act 1997 ITAA 1997 provides the meaning of 'active asset'. A CGT asset will be an active asset at a time if, at that time, you own the asset and the asset was used or held ready for use by you, an affiliate of yours, or by another entity that is 'connected with' you, in the course of carrying on a business.

However, subsection 152-40(4) explains that an asset whose main use is to derive rent can not be an active asset. Paragraph 152-40(4A)(b) of the ITAA 1997 provides that to determine the main use of an asset, treat any use by your affiliate, or an entity that is connected with you, as your use.

Subsection 328-125(1) of the ITAA 1997 explains that an entity is connected with another entity if:

(a) either entity controls the other entity in a way described in this section; or

(b) both entities are controlled in a way described in this section by the same third entity.

Subsection 328-125(2) of the ITAA 1997 provides that an entity (the first entity) controls another entity if the first entity, its affiliates, or the first entity together with its affiliates: beneficially owns, or have the right to acquire the beneficial ownership of, interests in the other entity that give the right to receive a least 40% (the control percentage) of any distribution of income or capital by the other entity:

Subsection 152-35(1) of the ITAA 1997 states that a CGT asset satisfies 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 of ownership, 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 and a half years.

Taxation Determination TD 2006/78 considers, amongst other issues, the situation where there is part business and part rental use of an asset. It states that an asset owned by the taxpayer and used partly for business purposes and partly to derive rent can be an active asset under section 152-40 of the ITAA 1997 where it is considered that the main use of the asset is not to derive rent. In deciding if the property was mainly used to earn rent the Commissioner will consider a range of factors such as:

· the comparative areas of use of the premises (between rent and business)

· the comparative levels of income derived from the different uses of the asset.

The use of the asset to derive rent from a third party will be considered to be used to derive rent, even if that entity uses the asset in their business. This is because the use of the asset by the asset owner is to derive rent.

However, use of the asset by a relevant entity is treated as being used by the asset owner, even if the asset owner receives rent from the relevant entity for the use of that asset.

This means, if the relevant entity uses the asset:

· in its business, that use is treated as use by the asset owner to carry on business

· to derive interest, rent, royalties, or foreign exchange gains from an entity that is a third party, that use is treated as use by the asset owner to derive passive income.

In your case, you each hold a 50% interest in some land that you acquired in the early 90's. The land has been used by a partnership in the course of carrying on a business since you acquired it. The partnership is an entity that is 'connected with' you as you each hold a 50% controlling interest in the partnership.

The lease to an unrelated third party, means that there was part business use (that part used by the partnership for farming) and part rental (that part leased to the unrelated third party). In determining whether the asset's main use was to derive rent, it can be noted that:

· the main source of income from the use of the land is primary production income

· of the xxx.x hectares that make up the land, only 0.5 hectares is used to earn lease income.

Therefore, based on the information provided, the main use of the land is not to derive rent, accordingly, the land will satisfy the active asset test.

Small business 15-year exemption

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 entirely disregard the capital gain so there is no need to apply any further concessions. Further, you do not reduce the capital gain by any capital losses before you apply the 15-year exemption concession.

Subsection 152-105 of the ITAA 1997 provides that an individual can entirely disregard any capital gain if all of the following conditions are satisfied:

(a) you satisfy the basic conditions

(b) you continuously owned the CGT asset for the 15-year period ending just before the CGT event

(c) you are either:

i. 55 or over at the time of the CGT event and the event happens in connection with your retirement; or

ii. permanently incapacitated at the time of the CGT event.

In your case:

· you satisfy the basic conditions

· you have owned the asset for over 15 years

· you are aged over 55

· the event will happen in connection with your retirement

Accordingly, you satisfy all the conditions necessary to be eligible for the small business 15-year exemption concession.

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