| Disclaimer This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law. You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4. |
Edited version of your written advice
Authorisation Number: 1012910352384
Date of advice: 19 November 2015
Ruling
Subject: Capital Gains Tax
Question 1
Is the Trustee for the estate carrying on a business of sharefarming?
Answer
No.
Question 2
Was the property being used in the course of a business being carried on by an entity connected with the estate?
Answer
No.
This ruling applies for the following period
Year ended 30 June 2014
The scheme commences on
1 July 2013
Relevant facts and circumstances
The deceased entered into a sharefarming agreement on the XXXX.
The agreement was entered into with A and B (the sharefarmers) as trustees of the Family Trust.
The deceased was aged X at the time they entered into the agreement and was a resident of a nursing home.
A was a relative of the deceased and is a beneficiary of the estate.
The Will of the deceased provides that the residue of their estate is to be divided equally between A and X other persons.
The deceased died on the XXXX.
The deceased inherited the land from a relative prior to September 1985.
Probate was granted to the executors, A and C on the XXXX.
The land was valued as at the date of death at X.
A contract of sale was entered into on the XXXX for the sum of X.
The grant of probate in favour of the executors was revoked with effect on the XXXX and a new grant was made to C solely on the XXXX.
The agreement provided the deceased was to supply to the sharefarmers:
• land,
• livestock
• plant and equipment .
The deceased during the course of the agreement, was to supply:
• livestock,
• crop seed,
• retained grain seed,
• seed for pasture,
• fertiliser and gypsum.
In addition, the deceased was to meet certain ongoing business costs namely:
• the hire of a gypsum spreader and cartage of fertiliser,
• fuel costs for fruit picking,
• the hire of earth moving equipment
• one half of the costs of spray and one half the cost of cartage of grain.
The sharefarmers were to supply labour with respect to livestock activities.
The proceeds of the sale were to be divided on an equal basis.
The agreement did not expressly deal with who would meet the expenses relating to the ownership of the land such as rates and taxes and in practice these expenses were met by the deceased.
The executors assumed the rights and responsibilities and thereby effectively stood in the shoes of the deceased from the date of death.
In practice A being both an executor and one of the sharefarmers was the executor who took primary responsibility on behalf of the Executors for the meeting of the responsibilities of the deceased with respect to the sharefarming activities.
The agreement gave the sharefarmers a right of renewal for a further period which the sharefarmers exercised so that the agreement came to an end on the XXXX.
Relevant legislative provisions
Income Tax Assessment Act 1997 Division 152
Income Tax Assessment Act 1997 Section 152-35
Income Tax Assessment Act 1997 Paragraph 328-125(2)(a)
Reasons for decision
Question 1
Taxation Determination TD 95/62 focuses specifically on sharefarming, and whether these activities amount to the carrying on of a business.
In regards to sharefarming arrangements, paragraphs 5 to 7 of TD 95/62 state:
5. To be carrying on a business, the taxpayer must be involved in the activities that make up that business. This would be evidenced by an element of control over, and/or an ongoing participation in, the business. The involvement should be direct or immediate, rather than passive. The payment of expenses relating to the ownership of the land would not, without more, be sufficient.
6. In the absence of such an involvement, the landowner would not be regarded as being engaged in the business of primary production. The receipt by the landowner of a payment from the farmer for the use of the land would be in the nature of income from property rather than from the carrying on of a business of primary production.
7. Similar reasoning would apply if the sharefarming agreement was for the provision of machinery or items of plant.
In this case, the deceased and the sharefarmers entered into a sharefarming agreement regarding the property. The deceased and subsequently the executor were not directly involved in the business activities. The deceased involvement included supplying land, seed and livestock. The sharefarming agreement specifically states that the farmers are to do all the work. Consequently, the deceased and the executors are not carrying on a business of sharefarming.
Question 2
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.
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.
An entity controls another entity if it or its affiliates owns, or has the right to acquire ownership of, interests in the other entity that give the right to receive at least 40%of any distribution of income or capital by the other entity.
In this case, the estate does not carry on a business of sharefarming and consequently in order to access the concessions the property needs to be used in a business carried on by a small business entity that is your affiliate or an entity connected with you. The property is used by the Family Trust in carrying on a farming business. Trusts cannot be your affiliate (section 328-130 of the ITAA 1997) and therefore the family trust needs to be connected to the estate in order to satisfy this requirement and access the concessions.
ATO ID 2010/106 considers whether beneficiaries or executors can control an unadministered deceased estate.
ATO ID 2010/106 states that:
A beneficiary of an unadministered estate does not own, or have the right to acquire ownership of, interests in the unadministered estate which carry rights to receive any distributions of income or capital. The beneficiary therefore does not control (and hence is not connected with) the estate under paragraph328-125(2)(a) of the ITAA 1997.
The executor of an unadministered deceased estate also does not own, or have the right to acquire ownership of, interests which carry rights to receive distributions of income or capital. The executor therefore also does not control (and hence is not connected with) the estate under paragraph 328-125(2)(a) of the ITAA 1997.
Accordingly, there is no entity that controls an unadministered deceased estate under paragraph 328-125(2)(a) of the ITAA 1997.
We do not consider that determining whether the deceased estate is administered or unadministered is a tax law issue. However, even if we considered that the estate was administered in XXXX, and the property was held in a testamentary trust, A is only entitled to receive X amount of the property and consequently does not have the right to receive at least 40% of any distribution.
Consequently, regardless of whether the estate is administered or unadministered, at the time of the sale, the executors did not control, and hence are not connected with, the estate under section 328-125(2)(a) of the ITAA 1997.
As neither A nor the executors are connected with the estate, it follows that the Family Trust is not an entity the can be 'connected with' the estate. Accordingly, as the property is not used in a business carried on by an entity that is 'connected with' the estate, the estate will not be able to access the small business concessions on the disposal of the property.
Copyright notice
© Australian Taxation Office for the Commonwealth of Australia
You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).
