Edited version of private advice

Authorisation Number: 1051972701580

Date of advice: 29 September 2022

Ruling

Subject: Small business 15 year exemption

Question 1

Is the Partnership a capital gains tax (CGT) small business entity for the purposes of section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Does the Property pass the active asset test under section 152-35 of the ITAA 1997?

Answer

Yes

Question 3

Will the basic conditions in Subdivision 152-A of the ITAA 1997 be satisfied in respect of the capital gain made by each of Individual A and Individual B on their respective 50% shares of the Property (on the sale of the Property), for the gain to be eligible for the Small Business CGT Concessions in Division 152 of the ITAA 1997?

Answer

Yes

Question 4

Will Individual A be entitled to the CGT small business 15 year exemption in Subdivision 152-B of the ITAA 1997 in respect of his 50% share of the Property, on the basis that the sale of his share is in connection with his retirements?

Answer

Yes

Question 5

Will Individual B be entitled to the CGT small business 15 year exemption in Subdivision 152-B of the ITAA 1997 in respect of her 50% share of the Property, on the basis that the sale is in connection with her retirement or alternatively that she is permanently incapacitated at the time her share is sold?

Answer

Yes

This ruling applies for the following period:

Income year ended 30 June 20XX

The scheme commences on:

1 July 20YY

Relevant facts and circumstances

Over 15 years prior, Individual A acquired and became the sole proprietor of a Property.

The Property is approximately XX acres in size.

Following the acquisition of the Property, it was used for both residential and primary production purposes as follows:

(a)          Part of the Property was used as Individual A and Individual B's main residence.

(b)          The remainder of the Property was used to operate a primary production business.

Over 15 years prior, Individual A transferred half of the Property to Individual B and were registered as joint tenants. This transfer was for natural love and affection.

The Property was held as joint tenants by Individual A and Individual B for approximately 5 years, where the joint tenancy over the Property was severed. Following the severance of the joint tenancy, Individual A and Individual B held the Property as tenants in common as to equal shares.

For over 10 years and until the signing of the contract of sale for the sale of the Property, the Property was held by Individual A and Individual B as tenants in common in equal shares.

Individual B has been assessed as physically incapacitated.

Individual A and Individual B conducted a primary production activity on the property since acquisition in partnership.

The primary production activity involved maintaining livestock for the purposes of sale. Individual A had a strong familiarity and expertise in livestock maintenance prior to establishing the business. Individual A and Individual B purchased the Property with the intention that to conduct the business on the Property to generate sufficient income to provide for their livelihoods.

Prior to acquiring the Property, Individual A ran a separate business. When acquiring the Property, his intention was to stop accepting contractual work under that business and it ceased completely over 15 years ago.

Individual A and Individual B had prior experience in the maintenance of livestock for the purposes of sale.

Prior to purchasing the Property, Individual A and Individual B owned a farm where they also maintained livestock.

Individual A had various knowledge and experience with animal husbandry and management and pasture management.

When the Property was purchased and the primary production activity commenced, Individual A undertook the following business related activities.:

A significant amount of time was put in by Individual A (and to some extent Individual B) on a regular basis in activity in respect of the following:

•                    the regular maintenance of the Property;

•                    the regular maintenance of the livestock including feeding and ensuring the healthcare and nutrition of livestock; and

•                    hay distribution, grain feeding and ensuring water availability.

Individual A kept up with the latest information on the farming activities conducted as part of the Business using various online resources.

Sales and purchases of livestock were made throughout the year. However, the regularity of sales and purchases of livestock were also dependent on growth, the timing and size of the season and potential earnings.

Breeding records were kept in separate breeding sales books.

As well as livestock, at times Individual A and Individual B grew, cut, baled and sold hay.

The business was conducted on a small scale and as operated at a loss for many income years but was profitable in some of the years.

The Partnership is not connected with or affiliated with any other entities, and its turnover has always been below $2 million.

Individual A and Individual B are well over 55 years old. Once the Property is sold, the Partnership will cease and Individual A will retire.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 paragraph 152-10(1)(d)

Income Tax Assessment Act 1997 section 152-15

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 subsection 152-35(1)

Income Tax Assessment Act 1997 paragraph 152-35(1)(a)

Income Tax Assessment Act 1997 subsection 152-35(2)

Income Tax Assessment Act 1997 subsection 152-40(1)

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 328-110

Income Tax Assessment Act 1997 subsection 328-125(1)

Income Tax Assessment Act 1997 paragraph 328-125(2)(b)

Income Tax Assessment Act 1997 subsection 328-125(3)

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision

Unless otherwise stated, all legislative references below are to the Income Tax Assessment Act 1997.

Question 1

Is the Partnership a CGT small business entity for the purposes of section 152-10?

Summary

The Partnership is a CGT small business entity for the purposes of section 152-10. The Partnership conducted a business of primary production on a small scale.

Detailed reasoning

To be a CGT small business entity you first need to be carrying on a business.

Section 995-1 defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'.

The question of whether you are carrying on a business is a question of fact and degree. There are no rigid rules for determining whether the activity amounts to the carrying on of a business. The facts of each case must be examined. In Martin v FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551, Webb J said:

The test is both subjective and objective; it is made by regarding the nature and extent of the activities under review, as well as the purpose of the individual engaging in them, and, as counsel for the taxpayer put it, the determination is eventually based on the large or general impression gained.

However, the courts have developed a series of indicators that can be applied to determine whether you are carrying on a business.

Taxation Ruling TR 97/11 (TR 97/11) provides the indicators established by the courts that need to be considered when determining whether a business is being carried on. It should be noted that TR 97/11 specifically deals with carrying on a business of primary production but the indicators established can be equally applied to most other activities. Paragraph 13 of TR 97/11 states that the following indicators are relevant:

•                    whether your activity has a significant commercial purpose or character.

•                    whether you have more than just an intention to engage in business.

•                    whether you have a purpose of profit as well as a prospect of profit from the activity.

•                    whether there is repetition and regularity of your activity.

•                    whether your activity is of the same kind and carried on in a similar manner to businesses in your industry.

•                    whether your activity is planned, organised and carried on in a businesslike manner.

•                    the size, scale and permanency of your activity.

•                    whether your activity is better described as a hobby, recreation or sporting activity.

Paragraph 15 of TR 97/11 states that no one indicator is decisive (Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922). In addition, paragraph 16 of TR 97/11 states that the indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the general impression gained from looking at all the indicators (Martin v. Federal Commissioner of Taxation (1953) 90 CLR 470 at 474; 5 AITR 548 at 551), and whether these factors provide the operations with a 'commercial flavour' (Ferguson v. Commissioner of Taxation (1979) 37 FLR 310 at 325; 79 ATC 4261 at 4271; (1979) 9 ATR 873 at 884).

In your situation it is accepted the Partnership conducted a business on the Property notwithstanding it was on a small scale. The activity was conducted with a commercial purpose and there was an intention for it to be profitable and it tended to be profitable in the later years. Considerable knowledge, experience and skill were used in the activities and resources used by those in the same industry were utilised. Although the scale of the activity was small and limited by the size of land available, it went beyond personal use and was conducted in a business-like manner.

Given the Partnership's turnover is under $2 million and it conducted a business, it is considered a CGT small business entity for the purposes of the small business CGT concessions.

Question 2

Does the Property pass the active asset test under section 152-35?

Summary

The Property does pass the active asset test.

Detailed reasoning

For a CGT asset of a business to be an active asset for the purposes of Subdivision 152-A, it must firstly satisfy one of the 'positive tests' in subsection 152-40(1), and then also not be excluded by one of the exceptions in subsection 152-40(4).

Under paragraph 152-40(1)(a) a CGT asset is an active asset (subject to the exclusions) if it is owned and used or held ready for use in the course of carrying on a business.

Under subsection 152-35(1) a CGT asset satisfies 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 period detailed below, 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 7.5 years during the period detailed below.

Subsection 152-35(2) identifies the period that has to be considered in applying the active asset test. It states the period:

(a)          begins when you acquired the asset; and

(b)          ends the earlier of:

the CGT event; and

if the relevant business ceased in the 12 months before the CGT event (or such longer time as the Commissioner allows) - when the business ceased.

Individual A and Individual B have each owned 50% (or had an interest of at least 50%) of the Property for over 15 years and the Property was an active asset as it was used in a business conducted by them both in partnership throughout the period of ownership. The Property therefore passes the active asset test under section 152-35.

Question 3

Will the basic conditions in Subdivision 152-A be satisfied in respect of the capital gain made by each of Individual A and Individual B on their respective 50% shares of the Property (on the sale of the Property), for the gain to be eligible for the Small Business CGT Concessions in Division 152 of the ITAA 1997?

Summary

Individual A and Individual B satisfy the basic conditions in Subdivision 152-A and are eligible for the Small Business CGT Concessions in respect of the capital gain made from selling each of their respective 50% interests in the Property.

Detailed reasoning

The basic conditions for eligibility to the Small Business CGT Concessions are found in section 152-10.

In particular, subsection 152-10(1) states:

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;

(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).

It is accepted that a CGT Event occurred to a CGT asset when the contract for sale was signed for the Property. This event has resulted in a capital gain. Individual A and Individual B are partners in a partnership which is a CGT small business entity and have equal interest in the Property which was used to conduct the Partnership business.

As discussed previously it is considered the Property passes the active asset test and so all basic conditions have been satisfied.

Question 4

Will Individual A be entitled to the CGT small business 15 year exemption in Subdivision 152-B in respect of their 50% share of the Property, on the basis that the sale of their share is in connection with their retirement?

Summary

Individual A will be entitled to the 15 year exemption in Subdivision 152-B in respect of their 50% share of the Property on the basis that the sale of their share is in connection with their retirement.

Detailed reasoning

Section 152-105 provides that an individual can entirely disregard any capital gain if all of the following conditions are satisfied:

(a)          The basic conditions

(b)          You continuously owned the CGT asset for the 15-year period ending just before the CGT event occurred

(c)           You are either:

(i)            55 years of age or over at the time of the CGT event and the event is in connection with your retirement, or

(ii)           Permanently incapacitated at the time of the CGT event.

As Individual A will be over 55 years old and retire once the Property has been handed over, they meet these conditions and are eligible to apply the 15 year exemption to the capital gain made from the sale of the Property.

Question 5

Will Individual B be entitled to the CGT small business 15 year exemption in Subdivision 152-B in respect of their 50% share of the Property, on the basis that the sale is in connection with her retirement or alternatively that she is permanently incapacitated at the time her share is sold?

Summary

Individual B will be entitled to the 15 year exemption in Subdivision 152-B in respect of their 50% share of the Property on the basis that the sale of her share is in connection with her retirement or because she was permanently incapacitated at the time the Property was sold.

Detailed reasoning

As per question 4 Individual B is over 55 years old and not intending to work but is also permanently incapacitated. It is considered Individual B is entitled to the 15 year exemption in respect of their 50% share of the Property on the basis that the sale of their share is in connection with their retirement or alternatively because they were permanently incapacitated at the time the Property was sold.

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