Edited version of private advice

Authorisation Number: 1051823440145

Date of advice: 15 April 2021

Ruling

Subject: Small business CGT concessions - disposal of property

Question 1

Will CGT event A1 occur in relation to the disposal of the property?

Answer

Yes. The disposal of the property by you to a related entity will be a CGT Event A1. Further information on CGT Events can be found by searching 'QC 22154' on ato.gov.au.

Question 2

Does the disposal of the property meet the requirements of subparagraph 152-105(1)(d)(i) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes. After considering the facts and circumstances the Commissioner considers that the disposal of the property is in connection with your retirement as you will significantly reduce your employment hours worked and will totally cease your primary production activities. Further information about whether a CGT event is in connection with retirement can be found by searching 'QC 52288' on ato.gov.au.

Question 3

Would the gain from the disposal of the property be included in your assessable income as income according to ordinary concepts under section 6-5 of the ITAA 1997?

Answer

No. After considering the facts and circumstances the Commissioner does not consider that the disposal of the property by you to a related entity at market value would amount to the carrying on of a business or an isolated commercial transaction whereby any gains made would be assessable as ordinary income. The disposal of the property by you is considered the mere realisation of a capital asset. Further information on the tax consequences of disposal of land can be found by searching 'QC 45084' on ato.gov.au. Information on whether an activity amounts to the carrying on of a business can be found by searching 'QC 31733' on our website.

This ruling applies for the following periods:

Income year ended 30 June 202A

Income year ended 30 June 202B

Income year ended 30 June 202C

The scheme commences on:

DDMM19XX

Relevant facts and circumstances

You are an individual who over 65 years old.

For many years you have conducted a primary production business and another professional business.

Your aggregated turnover (including entities connected with or affiliated to you) for both the 20XX and 20XX income years is under $X million in each year.

The primary production business was conducted on land you acquired on DDMM19XX and has been used in the primary production business since acquisition.

The land is able to be zoned for industrial use.

You spend around XX hours per week employed in your primary production business.

The turnover from the primary production business was over $100,000 in the 20XX income year.

You have conducted your professional business since 196A. This is conducted at a separate premises.

You spend in excess of YY hours per week employed in the professional business.

The turnover of the professional business in the 20XX income year was over $1million.

You received an annual income of $ZZZ from your professional business during the 20XX income year pursuant to the Personal Services Income rules.

You are seeking to transition to retirement, which includes ceasing all primary production business activities, and significantly reducing the number of hours you spend within the professional business.

Concurrently with the cessation of the primary production business, you are seeking to dispose of the land as part of your transition to retirement.

You propose to cease the primary production business and transfer all, or nearly all of the land to a newly incorporated Australian private company.

The balance of the land that is not sold to this new company (if any), will be sold to a third-party developer or investor ("JV Partner"). The sale of a portion of the land to the JV Partner (if any) would broadly occur concurrently with the sale to the new company.

Under the proposed transaction the purchase price for the land acquired by the new company will not be paid in cash by the new company but will be by way of a loan payable by the new company to you. To the extent that some of the land is sold to the JV Partner, this will be paid in cash.

In addition, the shares in the new company are to be initially held by a discretionary trust, controlled by your family. Whilst the officers of the new company are yet to be determined, we understand that you, together with some of your children will be directors of the new company.

Following the transfer of the land, the new company (and the JV Partner) will seek out an appropriately qualified property developer, to undertake the required development works on the land, to construct an industrial and commercial, investment grade asset.

As outlined above, it is your intention that all, or nearly all of the land will be retained by the new company, with passive rental income being derived by the new company following the successful completion of the development. We note that the development of the land may require significant external funding. Following the transfer of the land to the new company, the new company may either issue additional shares to a third-party e.g. developer or investor, or dispose of a portion of the land, for example, once the land had been subdivided into separate lots.

As part of your transition to retirement, you intend to take the following steps:

•         Completely cease any employment or involvement with the primary production business to ease the physical strain of farming labour activities, and to enable you to pursue social interests.

•         Progressively wind down the amount of time you spend in your professional business to no more than 20 hours per week, such that you are only engaged in an advisory capacity as required; and

•         Dispose of all, or nearly all of the land to the new company as outlined above (with the balance, if any, being sold concurrently to the JV Partner).

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 section 152-105

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