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Edited version of private advice
Authorisation Number: 1012650920899
Ruling
Subject: Small business concessions
Question 1
Are you a small business entity under section 328-110 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
Yes.
Question 2
Are you eligible for the small business 15-year exemption under section 152-105 of the ITAA 1997?
Answer
Yes.
This ruling applies for the following period:
Year ended 30 June 2013
The scheme commences on:
1 July 19XX
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 are over 55 years of age.
In the late 1980's you acquired a property (the property) with the intention of carrying out a commercial farming activity.
There is a house on the property which is rented out to a third party for nominal rent.
At the time of acquisition, the property was not suitable for commercial livestock farming. You spent the first few years on the property improving the natural feed grown on the property.
Income tax returns have been lodged each year since the inception of the business disclosing the earnings as income derived from conducting a livestock farming business.
The property was sold in late 20XX.
You retired after the sale of the property.
You derived less than $2 million of aggregated turnover in the year the property was sold.
Relevant legislative provisions
Income Tax Assessment Act 1997 Division 152.
Income Tax Assessment Act 1997 Section 152-10.
Income Tax Assessment Act 1997 Section 152-35.
Income Tax Assessment Act 1997 Paragraph 152-40(4)(e).
Income Tax Assessment Act 1997 Section 328-110.
Reasons for decision
Summary
You are a small business entity. You are entitled to apply the small business 15 year exemption to the capital gain that arose from the sale of your farming property.
Detailed reasoning
To qualify for the small business capital gains tax (CGT) concessions, you must satisfy several conditions that are common to all the concessions. These are called the basic conditions.
A capital gain that you make may be reduced or disregarded under Division 152 of the ITAA 1997 if the following basic conditions are satisfied:
• A CGT event happens in relation to a CGT asset of yours in an income year,
• The event would have resulted in a gain,
• The CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997, and
• At least one of the following applies;
• you are a small business entity for the income year,
• you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997,
• you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an interest in an asset of the partnership, or
• you do not carry on a business, but your CGT asset is used in a business carried on by a small business entity that is your affiliate or an entity connected with you.
Active asset test
A CGT asset is an active asset if it is owned by you and is:
• used or held ready for use in a business carried on (whether alone or in partnership) by you, or
• an intangible asset that is inherently connected with a business carried on (whether alone or in partnership) by you, for example; goodwill.
A capital gains tax (CGT) asset will satisfy the active asset test if:
a) 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, or
b) 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 7½ years during the test period.
The test period begins when you acquired the asset and ends at the earlier of the CGT event and if the relevant business ceased to be carried on in the 12 months before that time - the cessation of the business.
However, paragraph 152-40(4)(e) of the ITAA 1997 states that an asset whose main use in the course of carrying on the business is to derive rent cannot be an active asset unless the main use for deriving rent was only temporary. This exclusion generally does not apply to a CGT asset leased to an affiliate or connected entity.
In your case, although you have a rental house on your property, it is rented out to a third party and for nominal rent. Therefore, the majority of the property is dedicated to the farming activity. You satisfy the active asset test as you have owned the property for more than 15 years and the asset was an active asset for the entire ownership period.
Small business entity
You will be a small business entity (in accordance with section 328-110 of the ITAA 1997) if you are an individual, partnership, company or trust that:
• is carrying on a business, and
• has an aggregated turnover of less than $2 million.
Based on the information you have provided you were carrying on a business, in your own capacity. Your aggregated turnover is less than $2 million in the year the property was sold. As such you are a small business entity.
Therefore, you have satisfied the basic conditions for the small business concessions.
15 year exemption
Subdivision 152-B of the ITAA 1997 provides a small business 15 year exemption as part of the capital gains tax (CGT) small business relief provisions. If you qualify for the small business 15 year exemption, the capital gain is entirely disregarded and it is unnecessary to apply any other concessions.
If you are an individual, you can disregard any capital gain arising from a CGT event if all of the following conditions are satisfied:
(a) the basic conditions are satisfied
(b) you continuously owned the CGT asset for the 15 year period ending just before the CGT event
(c) if the CGT asset is a share in a company or an interest in a trust, the company or trust had a significant individual for a total of at least 15 years
(d) either:
(i) you are 55 or over at the time of the CGT event and the event happens in connection with your retirement, or
(ii) you are permanently incapacitated at the time of the CGT event.
As discussed above, the basic conditions have been satisfied. You have continuously owned the CGT asset since the business commenced operations in the late 1980's. You are over 55 years of age and you retired following the sale of the property. As you have satisfied each of the conditions you are entitled to apply the 15 year exemption to the capital gain.
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