Edited version of your written advice

Authorisation Number: 1051253152167

Date of advice: 24 July 2017

Ruling

Subject: Small business 15 year CGT asset exemption

Question 1

Is Company A (with XY as 100% shareholder) able to access the small business 15 year CGT asset exemption in relation to the sale of farming land if XY continues to operate a significantly smaller business after the sale?

Answer

Yes.

This ruling applies for the following periods:

1 July 2016 to 30 June 20ZZ

The scheme commences on:

1 July 2016

Relevant facts and circumstances

1. Company A owns a farming land (including a residence) with a total land area of XXX hectares for over 15 years. Company A’s only business activity is to lease the farming land to XY.

2. XY is a 100% shareholder and the sole director of Company A.

3. 100% of the farming land owned by Company A has been leased to XY and XY conducts a primary production business since before 1990 with turnover of less than $2 million.

4. The farming land holds approximately XYZ cattle and plant and equipment owned by XY which will also be sold.

5. In June 20ZZ, XY in their capacity as director of Company A signed a sale contract to sell all the farming land owned by Company A.

6. XY has been a significant individual of Company A for over 15 years and is more than 60 years of age.

7. After the sale of the farming land in Company A, XY will farm a property and live in the residence on that property, both held in their own name. XY owns the farm with the residence for a number of years and has always been used in their current farming operation. The total land area of this property held under their name is ABC hectares.

8. There will be a significant reduction in the land area farmed by XY as the property in their own name is only X% of the total land (XXX hectares of farming land owned by Company A and ABC hectares of land that they owns individually) farmed by XY.

9. The number of livestock held by XY will also reduce considerably to approximately YZ cattle (X% of the total held prior to the sale) and XZ sheep.

10. The total number of hours worked by XY will also reduce considerably in line with the reduction in land area farmed as well as livestock held by XY.

11. The sale of the assets is connected with their retirement given that the small business that he will continue to operate in their own name moving forward represents only a fraction of the size of the previous business operation, land area held and hours worked.

12. Company has no other affiliates and connected entities apart from XY and XY has no other affiliates and connected entities as well.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 152-A.

Income Tax Assessment Act 1997, Subsection 152-10(1)

Income Tax Assessment Act 1997, Subsection 152-10(1AA)

Income Tax Assessment Act 1997, Subsection 152-10(1A)

Income Tax Assessment Act 1997, Section 152-35

Income Tax Assessment Act 1997, Section 152-40

Income Tax Assessment Act 1997, Paragraph 152-40(4)(e)

Income Tax Assessment Act 1997, Subsection 152-40(4A)

Income Tax Assessment Act 1997, Section 152-48

Income Tax Assessment Act 1997, Section 152-55

Income Tax Assessment Act 1997, Subsection 152-110(1)

Income Tax Assessment Act 1997, Section 328-125

Note: All subsequent legislative references are to the ITAA 1997 unless otherwise stated.

Reasons for decision

Question 1

Is Company A (with XY as 100% shareholder) able to access the small business 15 year CGT asset exemption in relation to the sale of farming land if XY continues to operate a significantly smaller business after the sale?

Summary

Company A is eligible for the small business 15 year CGT asset exemption in relation to the sale of its farming land.

Detailed reasoning

To be eligible for the small business 15 year CGT asset exemption, Company A has to meet the basic conditions for the small business relief under subdivision 152-A as well as the conditions for small business 15 year exemption under section 152-110.

Basic conditions

Basic conditions for the relief pursuant to subdivision 152-A specifically subsection 152-10(1) and subsection 152-10(1A) are as follows:

Basic conditions for relief

(1) A * capital gain (except a capital gain from *CGT event K7) you make may be reduced or disregarded under this Division if the following basic conditions are satisfied for the gain:

(a) a *CGT event happens in relation to a *CGT asset of yours in an income year;

(b) the event would (apart from this Division) have resulted in the gain;

(c) at least one of the following applies:

(i) you are a *CGT small business entity for the income year;

(ii) you satisfy the maximum net asset value test (see section 152-15);

(iii) you are a partner in a partnership that is a CGT small business entity for the income year and the CGT asset is an interest in an asset of the partnership;

(iv) the conditions mentioned in subsection (1A) or (1B) are satisfied in relation to the CGT asset in the income year;

(d) the CGT asset satisfies the active asset test (see section 152- 35).

Passively held assets – affiliates and entities connected with you

(1A) The conditions in this subsection are satisfied in relation to the * CGT asset in the income year if:

(a) your * affiliate, or an entity that is * connected with you, is a * CGT small business entity for the income year; and

(b) you do not carry on a * business in the income year (other than in partnership); and

(c) if you carry on a business in partnership--the CGT asset is not an interest in an asset of the partnership; and

(d) in any case--the CGT small business entity referred to in paragraph (a) is the entity that, at a time in the income year, carries on the business (as referred to in subparagraph 152-40(1)(a)(ii) or (iii) or paragraph 152-40(1)(b)) in relation to the CGT asset.

Company A is considered to have met the above basic conditions due of the following reasons:

(a) The farming land is a CGT asset and the sale of the farming land is CGT event A1.

(b) The sale has resulted in a gain.

(c) Company A has met the conditions mentioned in subsection 152-10(1A).

This subsection applies because XY is carrying on a business and their aggregated turnover for the FY 2015/116 was less than $2 million therefore they are a CGT small business entity for the income year pursuant to subsection 152-10(1AA). No other entities apart from XY’s turnover were considered for the calculation of aggregated turnover pursuant to section 152-48 because as noted under item number 12 of the “Relevant facts and circumstances” section above, both Company A and XY had no other affiliates nor connected entities.

Company A is not carrying on a business as the farm land it owns is considered passively held asset and the land is used in the business by XY who is considered a connected entity of Company A under section 328-125, as David owns 100% of the shares in Company A.

(d) The farming land satisfies the definition of an active asset pursuant to section 152-40 because Company A owns the land and it is used in the course of carrying on a business by XY, a connected entity of Company A. The exclusion under paragraph 152-40(4)(e) does not apply even if Company A leases the farming land to XY due to the fact that Company A’s “main use” is considered to be conducting a primary production business because as defined under subsection 152-40(4A) Company A can treat the use of a connected entity (which is XY) as its own use for the purposes of determining the land’s main use.

Company A is also considered to meet the active asset test under section 152-35 because Company A has owned the land for over 15 years and has been an active asset of Company A for over 7 ½ years because XY has been farming the land owned by Company A for approximately 30 years (from 1987 up until before it was sold in June 20ZZ).

Small business 15 year CGT asset exemption conditions

The small business 15 year CGT asset exemption conditions pursuant to subsection 152-110(1) are as follows:

(1) An entity that is a company or trust can disregard any * capital gain arising from a *CGT event if all of the following conditions are satisfied:

(a) the basic conditions in Subdivision 152-A are satisfied for the gain;

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

(c) the entity had a * significant individual for a total of at least 15 years (even if the 15 years was not continuous and it was not always the same significant individual) during which the entity owned the CGT asset;

(d) an individual who was a significant individual of the company or trust just before the CGT event either:

(i) was 55 or over at that time and the event happened in connection with the individual's retirement; or

(ii) was permanently incapacitated at that time.

Company A is considered to have met the above conditions due to the following reasons:

(a) The basic conditions in Subdivision 152-A are satisfied as discussed under “Basic Conditions” above;

(b) Company A continuously owned the farming land for over 15 years just before it was sold in June 20ZZ;

(c) Company A has XY as a significant individual for over 15 years which is the period that it owned the farming land. XY is a significant individual because XY is a 100% shareholder of Company A;

(d) XY was more than 60 years of age when Company A sold the farming land and the sale happened in connection with their retirement as noted under item number 11 of the “Relevant Facts and Circumstances” section above.

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