Edited version of private advice

Authorisation Number: 1051828903229

Date of advice: 20 April 2021

Ruling

Subject: Small business capital gains tax relief

Question 1

Is entity A a small business entity for the purposes of the small business capital gains tax relief provisions in Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Is entity B an affiliate of entity A for Division 152 of the ITAA 1997 purposes?

Answer

Yes.

Question 3

Is the subdivided land an active asset used in carrying on a business?

Answer

Yes.

Question 4

Does entity A satisfy the basic conditions under subdivision 152-A of the ITAA 1997 for the small business relief?

Answer

Yes.

Question 5

Does entity B satisfy the basic conditions under subdivision 152-A of the ITAA 1997 for the small business relief?

Answer

Yes.

This ruling applies for the following periods

Year ended 30 June 20xx

Year ended 30 June 20xx

Year ended 30 June 20xx

Year ended 30 June 20xx

Year ended 30 June 20xx

Year ended 30 June 20xx

Year ended 30 June 20xx

The scheme commenced on

1 July 20xx

Relevant facts

Entity A (you) and your spouse, entity B acquired a property as joint tenants for a purchase price of $xxxx.

A condition of the offer to purchase the property was that a safer entrance be obtained by negotiation with the vendor's son (the owner of another lot). When these negotiations failed, you and entity B acquired the adjoining property.

The adjoining property was settled in xxxx but used from about xxxx. The purchase price was $xxxx.

You had use of the original property from xxxx prior to settlement in xxxx.

A Business Plan was drafted for the property. A business has been conducted from this property by entity A as a sole trader registered for GST. You intended to make a profit. You have kept financial records of your business activities.

The intention from the outset was to carry on farming. There existed, at time of purchase, no intention to carry out subdivision of the land for sale and the configuration of the lot precluded any consideration of subdivision. You intended to increase the land value by improving its agricultural capacity.

Work on the land was carried out to enable the establishment of a dwelling. The property became your main residence in xxxx.

The relevant authority undertook construction of a road. Following completion of this road in xxxx, safe access to the property was available.

A $xxxx line-of-credit was applied for, to develop the business in xxxx.

Neighbours pursued the idea of a subdivision, and as result a joint rezoning proposal was prepared in xxxx. Without your knowledge, the neighbours submitted the rezoning proposal to the local government in xxxx. Subsequently you and entity B joined with the Application.

The Council subsequently requested that the application be withdrawn as they intended to proceed with an overall rezoning of the area which was finalised and Gazetted in xxxx.

In early xxxx you experienced several issues in relation to your health and employment. Based on medical advice, you took extended leave. During this time, a neighbour looked after the business.

During the years you were employed, your worked on the farm in the mornings before going to work. You also did farming activities during the weekends. Other than in xxxx when you had health issues, you spent about xx hours a week on the farm work.

Upon retirement, you remained intent on further developing the farm and the farming business. The line of credit had not been used due to the global financial crisis.

On xxxx, entity C, a firm engaged by you, applied for subdivision of xx lots to fund your living and farming costs. The application was refused by the relevant authority.

In xxxx, you engaged entity D who recommended that you accept the subdivision.

The Plan was approved on xxxx.

You also applied for subdivision of the adjoining property on xxxx.

Based on the endorsed Plan, a subdivision application was made for the property on xxxx which was approved on xxxx.

In xxxx, you engaged entity E to manage the subdivision process, identify engineering issues, prepare a preliminary design and provide an estimate of costs.

The property was subdivided into xx lots.

Throughout the above events, you continued the farming business on the property. Each lot was used only for farming, other than the xxxx square metres for your living quarters, until xxxx, when parts of the farm were being sold progressively.

You lodged Business Activity Statements showing farming income and expenditure.

The net profit/(loss) position from the farming business was provided for the relevant years.

The aggregated turnover for entity A and entity B is under $X million for each of the relevant years.

Some lots have been sold.

You and entity B have claimed the small business 50% active asset concession in some years.

You have also claimed the retirement exemption in some years.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 Section 152-10

Income Tax Assessment Act 1997 Section 152-35

Income Tax Assessment Act 1997 Section 152-40

Income Tax Assessment Act 1997 Section 328-110

Income Tax Assessment Act 1997 Section 328-130

Income Tax Assessment Act 1997 Section 995-1

Detailed reasoning

The capital gains tax (CGT) provisions provide some small business relief in Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997).

Basic conditions

To qualify for the small business CGT concessions, the basic conditions as contained in subdivision 152-A of the ITAA 1997 must be satisfied.

The basic conditions are:

•         A CGT event happens in relation to a CGT asset of yours in an income year,

•         The event would have resulted in a gain (apart from Division 152),

•         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.

Small business entity

You are a CGT small business entity for an income year if you carry on a business in the current year and have an aggregated turnover of less than $X million (subsections 152-10(1AA) and 328-110(1) of the ITAA 1997).

In your case, you were carrying on a farming business in the relevant years and you satisfy the aggregated turnover requirement. Therefore you are regarded as a small business entity for Division 152 of the ITAA 1997 purposes.

Affiliate

Under section 328-130 of the ITAA 1997, an individual is an affiliate of yours if the individual acts, or could reasonably be expected to act, in accordance with you directions or wishes, or in concert with you, in relation to the affairs of the business of the individual.

Relevant factors that may support a finding that a person acts in such a manner include:

•         the existence of a close family relationship between the parties;

•         the lack of any formal agreement or formal relationship between the parties dictating how the parties are to act in relation to each other;

•         the likelihood that the way the parties act, or could reasonably be expected to act, in relation to each other would be based on the relationship between the parties rather than on formal agreements or legal or fiduciary obligations; and

•         the actions of the parties.

A spouse is not automatically your affiliate. However, where you own an asset that your spouse uses in a business they carry on as an individual, they will be taken to be your affiliate for the purposes of the active asset test and the aggregated turnover test. In your circumstances, it is considered that entity B is your affiliate for the relevant years.

Active asset test

As outlined in subdivision 152-A of the ITAA 1997, the CGT asset must satisfy the active asset test.

Under subsection 152-35(1) of the ITAA 1997, a CGT asset will satisfy the active asset test if:

(a) you have owned the asset for 15 years or less and the asset was an active asset of yours for a total of at least half of the test period, or

(b) you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of at least 7½ years during the test period.

Subsection 152-40(1) of the ITAA 1997 provides that a CGT asset is an active asset at a time if it is used, or held ready for use, in the course of carrying on a business that is carried on by you, or your affiliate, or another entity that is connected with you.

Subsection 152-40(4) of the ITAA 1997 provides some exclusions. None of the exclusions are relevant in your circumstances.

In your case, the land, which has subsequently been subdivided, was used for your farming business for the relevant period. The land satisfies the active asset test.

Application to your circumstances

You and your spouse have sold some and are selling other lots of your land. CGT event A1 happens when you dispose of these CGT assets.

Where the CGT event has resulted in a gain (apart from Division 152), it is considered that you and your spouse have satisfied the basic conditions under subsection 152-A of the ITAA 1997.

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