Edited version of private advice

Authorisation Number: 1051839083390

Date of advice: 14 May 2021

Ruling

Subject: CGT and main residence

Question 1

Are you eligible to claim the main residence exemption for the dwelling and adjacent land up to two hectares located at the property?

Answer

Yes. The main residence exemption applies to disregard a capital gain or capital loss where an individual owns the dwelling and occupies it as their principal place of residence throughout their ownership period.

Question 2

Do you satisfy the conditions to apply the capital gains (CGT) small business 15 year exemption in section 152-105 of the Income Tax Assessment Act 1997 (ITAA 1997) to the gain made from the sale of the property in relation to the area of land used in the business?

Answer

Yes.

In your case, we consider that you satisfy the conditions to apply the small business 15 year exemption to the sale of the property. You were a small business entity in the income year in which the CGT event occurred, and the property satisfy the active asset test. You owned the property for over 15 years. The capital gain upon the sale of the property can therefore be disregarded.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

Month X 20XX

Relevant facts and circumstances

You were X years old at the time of this private ruling application.

You and your spouse are Australian tax residents.

You live on a residence on the property.

You purchased the property from Entity A on Month X 20XX and have owned it since then up to the sale to Entity C.

At the time of the purchase, your spouse was one of the shareholders in Entity A.

The property consists of X hectares of land. Out of this land, 2 hectares (or approximately 4.94 acres) has been used by you and your spouse as your primary residence while the remaining X acres was used by Entity B in its primary production business. During the entire period of ownership, the property has never been subdivided and the land has been used solely for the purpose of primary production.

Entity B, a company incorporated on Month X 20XX (of which you and your spouse are the only shareholders having equal shares), has run a primary production business on the property for the entire period that you and your spouse have owned the property.

Due to the commercial scale of the primary production, you and your spouse and your company (Entiy B) have to lease the adjoining lands for the whole duration of the operation of the business.

You and your spouse entered into a contract to sell the property to Entity C on Month X 20XX with settlement occurring on Month X 20XX for the purchase price of $X.

As per a special condition in the contract for sale, the purchaser warrants that primary production will continue to be carried out on the land. Therefore, you and your spouse through the company will continue to run your business on the property in accordance with the terms of the contract.

Although you still need to run the business, the on-site fulltime staff has taken over most of the work load and you and your spouse have and will continue to spend more time in other residential places away from the property. Prior to the sale of the property, the average weekly working hours of you and your spouse was X hours each which reduced to an average of X hours each per week after the sale of the property.

The sale to Entity C was on the grounds of hardship because in the event that the sale to Entity C was not entered into, Entity C would have compulsorily acquired parts of the land. Furthermore, the land could not be sold on the open market as there are plans for construction on the property.

You have a trucker, tools, hay, cattle and calves in various paddocks on the property. You have fulltime staff on site and incur expenditure such as fencing and veterinary expenses.

There are a number of entities connected to Entity B as there is more than 40% direct or indirect ownership.

The aggregated turnover of Entity B for the year ended 30 June 20XX (the previous financial year) was $X.

There is a small amount of rent derived from a residence on the property which comprised of about X% of all revenue. The land area used to derive this rent was about X square metres which is less than X% of the property's land with the remainder of it used for primary production business activities.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 section 118-120

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 section 152-105

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