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Edited version of your written advice
Authorisation Number: 1012796300415
Ruling
Subject: Capital gains tax
Question 1
Will the granting of a right by you give rise to a capital gain under capital gains tax (CGT) event D1?
Answer
Yes.
Question 2
Do you satisfy the basic conditions required to claim the small business CGT concessions in relation to the CGT event D1?
Answer
Yes.
This ruling applies for the following period:
Year ending 30 June 2015
The scheme commences on:
1 July 2014
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.
The property has been used in the partnership business of primary production for the whole ownership period.
The partnership is a small business entity.
During the 2014-15 financial year you sold rights relating to the property.
Relevant legislative provisions
Income Tax Assessment Act 1997 Subsection 104-35(1).
Income Tax Assessment Act 1997 Subsection 108-5(1).
Income Tax Assessment Act 1997 Section 115-25(3).
Income Tax Assessment Act 1997 Subsection 140-40(1).
Income Tax Assessment Act 1997 Division 152.
Income Tax Assessment Act 1997 Section 152-10.
Income Tax Assessment Act 1997 Section 152-12.
Income Tax Assessment Act 1997 Section 152-35.
Reasons for decision
Summary
The sale of the rights is CGT event D1.
As you satisfy the basic conditions, the small business concessions will be available for the capital gain.
Detailed reasoning
CGT event
Subsection 108-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) defines a CGT asset as:
(a) any kind of property; or
(b) a legal or equitable right that is not property.
It is commonly understood that a right in relation to land is a right conferred, to the legal, commercial or other benefit, to exploit carbon sequestered by trees.
It is a legal right and falls within the definition of CGT asset in subsection 108-5(1) of the ITAA 1997.
CGT event D1 happens if a taxpayer creates a contractual right or other legal or equitable right in another entity (subsection 104-35(1) of the ITAA 1997).
In your case, CGT event D1 happened when you entered into the agreement to sell the right. You will make a capital gain under subsection 104-35(3) of the ITAA 1997 if the capital proceeds received for granting the right exceeded the incidental costs incurred.
Small business concessions
For the capital gain to qualify for the small business concessions contained in Division 152 of the ITAA 1997, the four basic conditions in subsection 152-10(1) of the ITAA 1997 must generally be satisfied:
(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 in section 152-15 of the ITAA 1997 or
(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.
Section 152-12 of the ITAA 1997 relates to special conditions required for CGT event D1 to satisfy the basic conditions. For CGT event D1 paragraphs 152-10(1)(a) and (d) of the ITAA 1997 do not apply. Instead, it is a basic condition that the right you create that triggers the CGT event must be inherently connected with another CGT asset of yours that satisfies the active asset test.
You are an individual and do not carry on a business. You are a partner in a partnership and you own the land that is used by the partnership (a connected entity) in carrying on a primary production business.
The land has been used in the business of primary production for the entire ownership period. Therefore the land satisfies the active asset test under section 152-35 of the ITAA 1997.
The right that you granted is an interest in the land and will be binding on future owners of the land. The right exists only in relation to the land and is permanent and inseparable from the land for the duration of the agreement. This satisfies the ordinary meaning of 'inherently connected', which is not otherwise defined in the ITAA 1997.
Therefore, the carbon sequestration right is inherently connected with the land which is an active asset and satisfies the condition in subsection 152-12(2) of the ITAA 1997.
As you satisfy the basic conditions, the small business concessions will be available for the capital gain. You must also then satisfy any additional conditions that apply specifically to the individual concessions.
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