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Edited version of your written advice
Authorisation Number: 1051321699997
Date of advice: 31 January 2018
Ruling
Subject: Small business capital gains tax concessions
Question 1
Are you able to access the 15-year exemption under section 152-105 of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the sale of farming land if you continue to operate a significantly smaller business after the sale?
Answer
Yes
Question 2
Will property sale instalment proceeds paid to an individual over a period of time, meet the definition of capital proceeds for the purposes of CGT small business contributions under section 292-100 of the ITAA 1997?
Answer
Yes
This ruling applies for the following period:
Year ending 30 June 2018
The scheme commences on:
1 July 2017
Relevant facts and circumstances
You and your spouse have a signed contract to sell your current farming property comprising approximately X000 acres.
You and your spouse are over 55-years-old.
Half of this property was acquired by you approximately 55 years ago with the other half acquired jointly with your spouse in 199X.
You and your spouse operated the farming business (sheep farming and cereal grain growing) conducted on this land in a partnership. More recently the business was operated by a trust in which you are both trustees and beneficiaries.
The current annual turnover of the trading trust is below $2 million and the land is an active asset of the business.
Following the settlement of the property you and your spouse will lease the house on the property you are currently living in and approximately XXX acres of land from the purchaser.
You and your spouse will continue to a run a sheep farming business on this leased property and the estimated carrying capacity of this land will be approximately 100 sheep.
You and your spouse’s farming activities and working hours will significantly diminish following the sale.
At settlement of the property sale you and your spouse will receive approximately 69% of the total sale proceeds with an amount of $X.XXX million to be paid under a vendor finance agreement over 5 years with 5 equal payments of $XXX,000 per year.
A second mortgage will be held by you and your spouse over the property in respect of this vendor finance arrangement.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 103-10
Income Tax Assessment Act 1997 section 152-105
Income Tax Assessment Act 1997 section 152-110
Income Tax Assessment Act 1997 section 116-20
Income Tax Assessment Act 1997 section 292-90
Income Tax Assessment Act 1997 section 292-100
Income Tax Assessment Act 1997 section 292-105
Reasons for decision
Question 1
Summary
You are able to claim the 15-year exemption under section 152-105 of the Income Tax Assessment Act 1997 (ITAA 1997), while continuing to operate a significantly smaller business after the sale of the land.
Detailed reasoning
Section 152-105 of the ITAA 1997 provides that an individual can disregard any capital gain arising from a CGT event if the following conditions are met:
● the basic conditions for relief in Subdivision 152-A of the ITAA 1997 are satisfied;
● the entity continuously owned the asset for the 15-year period leading up to the CGT event; and
● if the entity is an individual, the individual retires or is permanently incapacitated.
You satisfy the basic conditions as you are a small business entity, carrying on a business with an aggregated turnover of less than $2 million, and the asset in question satisfies the active asset test.
You have continuously owned the asset for more than 15 years. At the time of the event you were aged over 55-years and the event happened in connection with your retirement.
This is evidenced by the significant reduction in land size, livestock held and hours worked. Therefore you are eligible for the 15-year exemption under section 152-105 of the ITAA 1997, while continuing to operate a significantly smaller business after the sale of the land.
Question 2
Summary
If you and your spouse contribute an amount equal to all or part of the ‘capital proceeds’ for which you can disregard any capital gain under section 152-105 or 152-110 of the ITAA 1997, then you will satisfy the condition of paragraph 292-100(2)(a) or 292-100(4)(b).
Detailed reasoning
Small business owners disposing of commercial property may be eligible for one or more small business CGT concessions. They may then also be able to contribute eligible proceeds of the sale to superannuation and have them counted towards the lifetime CGT cap under section 292-105 of the ITAA 1997, rather than the non-concessional or concessional contributions caps.
Section 292-90 of the ITAA 1997 provides for certain types of contributions to be excluded from being considered a non-concessional contribution. One such contribution is a contribution covered under section 292-100 relating to certain CGT-related payments.
Subsection 292-100(1) of the ITAA 1997 states that a contribution is covered under this section if it is; a) a contribution made by an individual to a fund in respect of the individual; b) the requirement in subsections (2), (4), (7) or (8) are met; and c) the individual chooses to apply this section to an amount that is all or part of the contribution.
Where an individual intends to disregard any capital gain resulting from a CGT event under section 152-105 of the ITAA 1997 (15 year exemption for individuals), subsection 292-100(2) is the appropriate subsection to consider. Paragraph 292-100(2)(b) requires an individual to make a contribution to their superannuation fund before the later of:
● the day they are required to lodge their income tax return for the income year in which the CGT event happened;
● 30 days after the day they receive the capital proceeds
Where the capital proceeds are received and contributed in instalments, each instalment is a separate contribution that must be made in the above timeframes.
Where an individual intends to disregard any capital gain resulting from a CGT event under section 152-110 of the ITAA 1997, (15 year exemption for companies and trusts), subsection 292-100(4) is the appropriate subsection to consider. Paragraph 292-100(4)(b) requires the entity to make a payment to the individual before the later of:
● 2 years after the CGT event; and
● if the CGT event happened because the entity disposed of the relevant CGT asset - 6 months after the latest time possible a financial benefit becomes or could become due under a look- through earn out right relating to that CGT asset and the disposal.
Paragraph 292-100(4)(d) of the ITAA 1997 then requires the contribution is made to the fund within 30 days after the payment mentioned in paragraph (b).
If the individual does not make the instalment contribution within the designated timeframe then it will not be excluded from being a non-concessional contribution. There is no discretion for the Commissioner within section 292-100 of the ITAA 1997 to extend the time limits under subsections 292-100(2) and 292-100(4).
Capital proceeds
Paragraph 292-100(2) (a) of the ITAA 1997 states that the contribution to the fund is to be equal to all or part of the ‘capital proceeds’.
Paragraph 292-100(4)(c) of the ITAA 1997 states that the contribution to the fund is to be equal to all or part of the stakeholder's participation percentage (within the meaning of subsection 152-125(2)) of the ‘capital proceeds’ from the CGT event (but not exceeding the amount of the payment mentioned in paragraph (b)).
The ‘capital proceeds’ from a CGT event are defined in subsection 116-20(1) of the ITAA 1997 as the total of:
(a) the money you have received, or are entitled to receive, in respect of the event happening; and (b) the market value of any other property you have received, or are entitled to receive, in respect of the event happening (worked out as at the time of the event). |
An entitlement to the receipt of money or property is defined in section 103-10 of the ITAA 1997. Paragraph 103-10(2)(b) states that if a taxpayer will not receive money or other property in relation to a CGT event until a time after the CGT event, including a situation where money is payable by instalments, then the taxpayer is treated as if they are entitled to receive that money or property.
Subsequently, where it is determined that you are entitled to receive instalment payments for the sale of your property, it will satisfy the purposes of section 103-10 of the ITAA 1997. This will in turn form part of the ‘capital proceeds’ as per subsection 116-20(1).
If you and your spouse contribute an amount equal to all or part of the ‘capital proceeds’ for which you can disregard any capital gain under section 152-105 or 152-110 of the ITAA 1997, then you will satisfy the condition of paragraph 292-100(2)(a) or 292-100(4)(b).
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