Edited version of private advice

Authorisation Number: 1052113043833

Date of advice: 2 May 2023

Ruling:

Subject: CGT - small business concessions

QUESTION 1

Does Company A meet the basic conditions set out in subsection 152-10(1) of the Income Tax Assessment Act 1997 (Cth) ('ITAA 97') to access the Small Business Capital Gains Tax ('CGT') concessions on the sale of Property X, and Property Y ('the Properties')?

ANSWER

Yes.

QUESTION 2

Does Company A qualify for the Small business 50% reduction as set out in section 152-205 of the ITAA 97?

ANSWER

No.

QUESTION 3a

Does Company A qualify for the Small Business 15-Year Exemption as set out in section 152-110 of the ITAA 97 on the sale of the properties?

ANSWER

Yes.

QUESTION 3b

If the answer to Question 3a is yes, will the funds transferred to Taxpayer A and Taxpayer B from the sale of the properties be non-assessable, non-exempt income in their hands?

ANSWER

Yes.

QUESTION 4a

Does Company A qualify for the Retirement Exemption as set out in section 152-305 of the ITAA 97 on the sale of the properties?

ANSWER

No.

QUESTION 4b

If the answer to Question 4a is yes, will the funds transferred to Taxpayer A and Taxpayer B from the sale of the properties be non-assessable, non-exempt income in their hands?

ANSWER

Not applicable.

This ruling applies for the following periods:

x XX 20XX to yy YY 20YY

RELEVANT FACTS AND CIRCUMSTANCES

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect, and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Background Company Information

1.      Company A is an Australian proprietary company incorporated in XYZ on xx YY 19XY.

2.      The directors of Company A are Taxpayer A and Taxpayer B.

3.      Company A's registered office is located at XYZ.

4.      Company A's principal place of business is situated at ZYX.

5.      For the financial year ending yy YY 20YY, Company A had a turnover of $xyz from business activities.

Purchase of the Properties

6.      Company A purchased Property X on xx YY 199X, with settlement occurring on y XX 199X. Property X is xx acres in size.

7.      The purchase price of Property X was $xxx. The cost base of the asset was $yyy after all incidentals.

8.      Company A purchased Property Y on yy XX 199X, with settlement occurring on yy XX 200X. Property Y is yy acres in size.

9.      The purchase price of Property Y was $yyy. The cost base of the asset was $xxx after all incidentals.

Use of the Properties

10.    Company A conducted primary production activities on Property X and Property Y from their settlement dates of x YY 199X and y XX 200X respectively. The primary production activities included the maintenance of cattle for the purposes of selling them.

11.    The property at Property Y settled on xx YY 202X. Company A sold all remaining cattle on hand to the purchaser. Upon sale of the cattle, Company A ceased carrying on a primary production business.

12.    The period of use of Property X in the cattle stud was x years, x months, and x days.

13.    The period of use of Property Y in the cattle stud was y years, y months, and y days.

14.    Company A has been registered for GST from x YY 200X and has been conducting an enterprise throughout that period. As evidenced in the contract of sale for both properties, the purchaser and vendor have agreed that the property will be sold in accordance with Section 38-480 of A New Tax System (Goods and Services Tax) Act 1999 with the land being 'land on which a farming business has been carried on for at least the period of 5 years preceding the supply':

Sale of the Properties

15.    A contract of sale was entered into on xx YY 202X for Property X. The property is due to settle on xx YY 202Y according to the Contract of Sale. The sale price of the property is $xyz.

16.    A contract of sale was entered into on xx YY 202X for Property Y. The property settled on xx YY202X. The sale price of the property was $zzz.

17.    Property X is contracted to settle on xx YY 202Y. On xx YY 202X, a contract was signed between Company A and the purchaser to allow the purchaser to take possession of the property prior to settlement to conduct their own farming enterprise.

18.    Both parcels of land were sold to the same purchaser and are adjoining properties.

19.    Following the sale of the cattle stud, Taxpayer A has significantly reduced his hours involved in working. As a director of the company, it is estimated that Taxpayer A was spending x-y hours of his week overseeing the farming activities.

Shareholdings

20.    Company A issued x ordinary shares at $y each. There are no other share classes on issue.

21.    Taxpayer A and Taxpayer B own x ordinary shares each of Company A's shares. These shares were purchased on xx YY 198X.

22.    Taxpayer A was born on xx YY 193X and was xx at the time of the CGT event A1.

23.    Taxpayer B was born on yy XX 193Y and was xx at the time of the CGT event A1.

24.    The group employs a person to act as Chief Financial Officer (CFO) and assist in the bookkeeping and management of business and investments across the family group.

25.    The family group consists of an unlisted unit trust (not carrying on a business), Company A and taxpayer A and Taxpayer B.

Investment Properties and Investments

26.    Company A also holds x investment properties with the view of long-term growth. These are not active assets, and the rental of these properties does not form part of Company A's business activities.

27.    Company A holds units in unlisted unit trusts to the value of $xyz as at xx YY 202X. These units are not active assets, and do not form part of the Company A's business activities. The unlisted trusts own commercial real property and do not conduct business activities, but merely hold properties for commercial lease.

28.    Company A holds a managed portfolio of investments valued at approximating $xyz as at xx YY 202X. These investments are not active assets, and do not form part of Company A's business activities.

29.    Company A's connected and affiliated entities do not carry on a business and therefore do not impact the aggregated turnover of Company A.

Information provided

30.    You have provided several documents containing detailed information in relation to Company A, including:

a.      Private Binding Ruling ('PBR') Application, dated x YY 202Y

31.    We have referred to the relevant information within these documents in applying the relevant tests to your circumstances.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 Subdivision 152-B

Income Tax Assessment Act 1997 Section 152-1

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 152-110

Income Tax Assessment Act 1997 Section 152-125

Income Tax Assessment Act 1997 Section 152-205

Income Tax Assessment Act 1997 Section 152-215

Income Tax Assessment Act 1997 Section 152-305

Income Tax Assessment Act 1997 Section 328-110

Income Tax Assessment Act 1997 Section 328-115

Income Tax Assessment Act 1997 Section 328-120

Income Tax Assessment Act 1997 Section 995-1

REASONS FOR DECISION

All legislative references are to the Income Tax Assessment Act 1997 ('ITAA 1997') unless otherwise stated.

SUMMARY - QUESTION 1:

Company A meets the basic conditions set out in subsection 152-10(1) of the ITAA 97 to access the Small Business CGT concessions on the sale of Property X and Property Y ('the Properties').

SUMMARY - QUESTION 2:

The Small business 50% reduction as set out in section 152-205 of the ITAA 97 does not apply as the 15-year exemption in Subdivision 152-B applies to the capital gains.

SUMMARY - QUESTION 3a:

Company A qualifies for the Small Business 15-Year Exemption as set out in section 152-110 of the ITAA 97 on the sale of the properties.

SUMMARY - QUESTION 3b:

The funds transferred to taxpayer A and Taxpayer B from the sale of the properties will be non-assessable, non-exempt income in their hands.

SUMMARY - QUESTION 4a and 4b:

Company A does not qualify for the Retirement Exemption as set out in section 152-305 of the ITAA 97 as the 15-year exemption in Subdivision 152-B applies to the capital gains.

DETAILED REASONING

QUESTION 1:

Basic conditions to access the Small Business CGT concessions

32.    As stated in section 152-1 of the ITAA 1997, subdivision 152-A of the ITAA 1997 sets out the 'basic conditions' which must be satisfied in order for small business entities to qualify for any of the CGT small business concessions to reduce their capital gain by the various concessions in Division 152 of the ITAA 1997.

Basic conditions for small business concessions

33.    Subsection 152-10(1) of the ITAA 1997 sets out the basic conditions which must be satisfied for a capital gain to be reduced or disregarded under this Division, as follows:

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 happened 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 (see section 152-15);

(iii)   you are a partner in a partnership that is a small business entity for the income year and the CGT asset is 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 in section 152-35.

CGT small business entity

34.    As defined in section 995-1 of the ITAA 1997, a CGT small business entity has the meaning given by subsection 152-10(1AA), as follows:

You are a CGT small business entity for an income year if:

(a) you are a small business entity for the income year; and

(b) you would be a small business entity for the income year if each reference in section 328-110 to $10 million were a reference to $2 million.

35.    As defined in section 995-1 of the ITAA 1997, a small business entity has the meaning given by subsection 328-110(1), as follows:

You are a small business entity for an income year (the current year) if:

(a) you carry on a business in the current year; and

(b) one or both of the following applies:

(i) you carried on a business in the income year (the previous year) before the current year and your aggregated turnover for the previous year was less than $10 million;

(ii) your aggregated turnover for the current year is likely to be less than $10 million.

36.    As defined in section 995-1 of the ITAA 1997, a 'business' includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

37.    As defined in subsection 328-115 of the ITAA 1997, 'aggregated turnover' is defined as the sum of all relevant annual turnovers. The relevant annual turnovers are outlined in subsection 328-155(2) and exclude any amounts covered by subsection 328-155(3).

38.    Section 328-120 of the ITAA 1997 sets out the meaning of 'annual turnover' as follows:

An entity's annual turnover for an income year is the total ordinary income that the entity derives in the income year in the ordinary course of carrying on a business.

39.    The term 'ordinary income' is defined in section 6-5 of the ITAA 1997 as 'income according to ordinary concepts'. An entity's annual turnover, therefore, includes all income according to ordinary concepts derived in the ordinary course of carrying on a business.

40.    The term 'in the ordinary course of carrying on a business' is not defined in the ITAA 1997. The term, therefore, takes its ordinary meaning.

41.    In Doutch v FC of T [2016] FCAFC 166, which was an appeal against the decision of the AAT in respect of small business entity concessions, the Full Federal Court confirmed the following reasoning provided by the Tribunal:

70 The phrase "in the ordinary course of carrying on a business", as it appears in

s 328-120(1) of the ITAA 1997, is not defined in the ITAA 1997 and it is necessary to construe those words. In engaging in the exercise of statutory construction, the Court is to consider the text of the statute in context. The High Court in Commissioner of Taxation v Consolidated Media Holdings Ltd (2012) 250 CLR 503 observed as follows at [39]:

"This Court has stated on many occasions that the task of statutory construction must begin with a consideration of the [statutory] text" [Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue [2009] HCA 41; (2009) 239 CLR 27 at 46 [47]]. So must the task of statutory construction end. The statutory text must be considered in its context. That context includes legislative history and extrinsic materials. Understanding context has utility if, and in so far as, it assists in fixing the meaning of the statutory text. Legislative history and extrinsic materials cannot displace the meaning of the statutory text. Nor is their examination an end in itself.

42.    The extrinsic materials to which the High Court referred includes an explanatory memorandum, as follows:

72 The definition of "annual turnover" in s 328-120(1) of the ITAA 1997 was inserted into the ITAA 1997 by Tax Laws Amendment (Small Business) Act 2007 (TLASBA 2007). The "Explanatory Memorandum" to the Tax Laws Amendment (Small Business) Bill 2007 (EM), which Bill was ultimately enacted as the TSLABA 2007, commencing from the 2008 income year, states:

What does 'in the ordinary course of carrying on a business' mean?

2.15 In general, income is derived in the ordinary course of carrying on a business if the income is of a kind that is regularly or customarily derived by the entity in the course of carrying on its business, arising out of no special circumstance or event. Similarly, the income is derived in the ordinary course of carrying on a business if the income although not regularly derived, is a direct result of the normal activities of the business.

43.    Therefore, according to the EM, income is derived in the ordinary course of carrying on a business where:

(a) the income is of a kind that is regularly or customarily derived by an entity in the course of carrying on its business, arising out of no special circumstance or unusual event; and

(b) the income, although not regularly derived, is derived as a direct result of the normal activities of the business.

CGT Events and Assets

44.    As defined in section 995-1 of the ITAA 1997, a CGT event means any of the CGT events described in Division 104 of the ITAA 1997. A CGT event described by number (eg. CGT event A1) refers to the relevant event in that Division.

45.    Subsection 108-5(1) of the ITAA 1997, outlines a CGT asset to be:

(a) any kind of property; or

(b) a legal or equitable right that is not property.

46.    To avoid doubt, subsection 108-5(2) lists the following as CGT assets:

(a) part of, or an interest in, an asset referred to in subsection (1);

(b) goodwill or an interest in it;

(c) an interest in an asset of a partnership;

(d) an interest in a partnership that is not covered by paragraph (c).

Active asset test

47.    Section 152-35 of the ITAA 1997 outlines the active assets test, as follows in 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 specified in subsection (2); 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 7.5 years during the period specified in subsection (2).

48.    Further, subsection 152-35(2) of the ITAA 1997 outlines that the period:

(a) begins when you acquired the asset; and

(b) ends at the earlier of:

(i) the CGT event; and

(ii) if the relevant business ceased to be carried on in the 12 months before that time or any longer period that the Commissioner allows - the cessation of the business.

49.    Section 152-40 of the ITAA 1997 outlines the meaning of active asset at subsection 152-40(1) as follows:

A CGT asset is an active assetat a time if, at that time:

(a) you own the asset (whether the asset is tangible or intangible) and it is used, or held ready for use, in the course of carrying on a business that is carried on (whether alone or in partnership) by:

(i) you; or

(ii) your affiliate; or

(iii) another entity that is connected with you; or

(b) if the asset is an intangible asset - you own it and it is inherently connected with a business that is carried on (whether alone or in partnership) by you, your affiliate, or another entity that is connected with you.

Primary production business

50.    Subdivision 995-1(1) of the ITAA 1997 defines a 'primary production business' as:

'you carry on a primary production business if you carry on a business of:

(a)  cultivating or propagating plants, fungi or their products or parts (including seeds, spores, bulbs and similar things), in any physical environment; or

(b)    maintaining animals for the purpose of selling themor their bodily produce (including natural increase); or

(c) manufacturing dairy produce from raw material that you produced; or

(d) conducting operations relating directly to taking or catching fish, turtles, dugong, bêche-de- mer, crustaceans or aquatic molluscs; or

(e) conducting operations relating directly to taking or culturing pearls or pearl shell; or

(f) planting or tending trees in a plantation or forest that are intended to be felled; or

(g) felling trees in a plantation or forest; or

(h) transporting trees, or parts of trees, that you felled in a plantation or forest to the place:

(i) where they are first to be milled or processed; or

(ii) from which they are to be transported to the place where they are first to be milled or processed.

51.    Paragraph 9 of Taxation Ruling TR 97/11: 'Income tax: am I carrying on a business of primary production' ('TR 97/11') provides that:

A person is carrying on a business of primary production for the purposes of the ITAA 1997 if:

a.      he/she produces 'primary production', as defined in subsection 995-1(1) of the ITAA 1997; and

b.      that activity amounts to the carrying on of a business.

52.   Paragraph 13 of TR 97/11 provides an overview of the Commissioner of Taxation's (the 'Commissioner') view of the factors used to determine if you are in business for tax purposes. Paragraph 13 notes that:

"The courts have held that the following indicators are relevant:

•           whether the activity has a significant commercial purpose or character; this indicator comprises many aspects of the other indicators;

•           whether the taxpayer has more than just an intention to engage in business;

•           whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity;

•           whether there is repetition and regularity of the activity;

•           whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business;

•           whether the activity is planned, organised and carried on in a business-like manner such that it is directed at making a profit;

•           the size, scale and permanency of the activity; and

•           whether the activity is better described as a hobby, a form of recreation or a sporting activity."

53.   The Commissioner notes in paragraphs 15 and 16 of TR 97/11 as follows:

"15. We stress that no one indicator is decisive (Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922), and there is often a significant overlap of these indicators. For example, an intention to make a profit will often motivate a person to carry out the activity in a systematic and organised way, so that the costs are kept down, and the production and the price obtained for the produce are increased."

"16. The indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the 'large or general impression gained' (Martin v. FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551) from looking at all the indicators, and whether these factors provide the operations with a 'commercial flavour' (Ferguson v. FC of T (1979) 37 FLR 310 at 325; 79 ATC 4261 at 4271; (1979) 9 ATR 873 at 884). However, the weighting to be given to each indicator may vary from case to case."

QUESTION 2:

Small Business 50% Reduction (section 152-205)

54.   Section 152-205 of the ITAA 1997 states that:

"The amount of a capital gain remaining after applying step 3 of the method statement in subsection 102-5(1) is reduced by 50%, if the basic conditions in Subdivision 152-A are satisfied for the gain."

55.   The basic conditions have been set out above in Question 1's detailed reasoning section.

56.   Section 152-215 of the ITAA 1997 outlines that the 15-year rule has priority, which states:

This Subdivision does not apply to a capital gain to which Subdivision 152-B (15-year exemption) applies.

Note: Under that Subdivision, such a gain is entirely disregarded, so there is no need for any further concession to apply.

QUESTION 3a:

Small Business 15-year Exemption (section 152-110)

57.   As stated in section 152-100 of the ITAA 1997, subdivision 152-B of the ITAA 1997 sets out that a CGT small business entity can disregard a capital gain arising from a CGT asset that it has owned for at least 15 years if certain conditions are met.

58.   Section 152-110 of the ITAA 1997 outlines the 15-year exemption for companies and trusts as follows:

(1)     An entity that is a company or trust can disregard any capital gain arising from a CGT event if all of the following conditions are satisfied:

(a) the basic conditions in Subdivision 152-A are satisfied for the gain;

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

Note: Section 152-115 allows for continuation of the period if there is an involuntary disposal of the asset.

(c) the entity had a significant individual for a total of at least 15 years (even if the 15 years was not continuous and it was not always the same significant individual) during which the entity owned the CGT asset;

(d) an individual who was a significant individual of the company or trust just before the CGT event either:

(i) was 55 or over at that time and the event happened in connection with the individual's retirement; or

(ii) was permanently incapacitated at that time.

(1A) For the purposes of paragraphs (1)(b) and (c), disregard subsection 149-30(1A) (which applies if an asset stops being a pre-CGT asset).

(2)   Any ordinary income or statutory income the company or trust derives from a CGT event that would be covered by subsection (1) (assuming the event gave rise to a capital gain, even if it didn't) is neither assessable income nor exempt income.

QUESTION 3b:

Funds from sale of properties - non-assessable, non-exempt income

59.   Section 152-125 of the ITAA 1997 determines that payments to the company's CGT concession stakeholders are exempt under certain circumstances.

60.   The term "CGT concession stakeholder" is defined in section 152-60(a) as:

"a significant individual in the company or trust'.

61.   Subsection 152-125(1) advises that the section applies if:

(a) one or more of the following apply:

(i)     under section 152-110 a capital gain (the exempt amount) of a company or trust is disregarded;

(ii)    under section 152-110 an amount of income (the exempt amount) is non-assessable non-exempt income of a company or trust•

(iii)   subparagraph (i) of this paragraph would have applied to an amount (the exempt amount) except that the capital gain was disregarded anyway because the relevant CGT asset was acquired before 20 September 1985;

(iv)   subparagraph (i) of this paragraph would have applied to an amount (the exempt amount) if subsection 149-30(1A) and section 149-35 had not applied to the relevant asset.

62.   Under paragraph 152-125(1)(b) the company must make one or more payments relating to the exempt amount to an individual (whether directly or indirectly through one or more interposed entities) before the later of:

(i)     2 years after the relevant CGT event; and

(ii)    if the relevant CGT event happened because the company or trust disposed of the relevant CGT asset--6 months after the latest time a possible financial benefit becomes or could become due under a look-through earnout right relating to that CGT asset and the disposal "

63.   Paragraph 152-125(1)(c) further requires that:

"the individual was a CGT concession stakeholder of the company or trust just before the relevant CGT event."

64.   Subsection 152-125(2) allows an amount to be disregarded where certain conditions are met and states that:

"In determining the taxable income of the company, the trust the individual or any of the interposed entities, disregard the total amount of the payment or payments made to the CGT concession stakeholder, up to the following limit"

Stakeholder's participation percentage x Exempt amount where:

"stakeholder's participation percentage"means:

in the case of a company or a trust referred to in item 2 of the table in subsection 152-70(1)-the stakeholder's small business participation percentage in the company or trust just before the relevant CGT event• or

in the case of a trust referred to in item 3 of that table--the amount (expressed as a percentage) worked out using the following formula:

100 / Number of CGT concession stakeholders of the trust just before the CGT event"

QUESTION 4a and 4b:

Small Business Retirement Exemption (section 152-210 and 152-215)

65.   Section 152-210 of the ITAA 1997 states that you may also get the small business retirement exemption and small business roll-over relief if:

(1)    The capital gain, as reduced under section 152- 205, may also qualify for:

(a)    the small business retirement exemption (see Subdivision 152-D); or

(b)    a small business roll-over (see Subdivision 152-E); or both.

(2)    If it qualifies for both of those concessions, you may choose which order to apply them in.

66.   Section 152-215 of the ITAA 1997 outlines that the 15-year rule has priority, which states:

This Subdivision does not apply to a capital gain to which Subdivision 152-B (15-year exemption) applies.

Note: Under that Subdivision, such a gain is entirely disregarded, so there is no need for any further concession to apply.

APPLICATION TO YOUR CIRCUMSTANCES

Question 1:

Basic conditions to access the Small Business CGT concessions

67.   As stated in section 152-1 of the ITAA 1997, subdivision 152-A of the ITAA 1997 sets out the 'basic conditions' which must be satisfied in order for small business entities to qualify for any of the CGT small business concessions to reduce their capital gain by the various concessions in Division 152 of the ITAA 1997.

68.   For the purpose of this private ruling, a determination is to be made whether the sale of Property X and Property Y ('the Properties') sold by Company A satisfy the 'active asset test' for the CGT small business concessions pursuant to section 152-35 of the ITAA 1997 when the Properties were sold in the 20XX financial year.

69.   As outlined in paragraphs 32 - 52 above in the Detailed Reasoning section, under subsection 152-10(1) of the ITAA 1997, the sale of the two Properties in the 20XX financial year constitute the CGT Event A1.

70.   Before the application of any small business exemptions, there would be a capital gain on the sale of the properties as follows:

71.   This satisfies paragraphs 152-10(1)(a) and (b), as set out in paragraph 32 above in the Detailed Reasoning section.

72.   As outlined in subsections 152-10(1AA) and 328-110(1) of the ITAA 1997 above in paragraphs 33 - 34 of the Detailed Reasoning section, Company A satisfies the definition of a CGT small business entity. Company A has carried on the business of cattle farming for more than xx years (business ceased in the 20XX financial year).

73.   Taxation Ruling TR 97/11 Income Tax: am I carrying on a business of primary production? ('TR 97/11') provides the Commissioner's view of the factors used to determine if a taxpayer is in business for tax purposes. Its principles are not restricted to questions of whether a primary production business is being carried on.

74.   Paragraph 13 of TR 97/11 provides an overview of the Commissioner of Taxation's (the 'Commissioner') view of the factors used to determine if you are in business for tax purposes. Paragraph 13 notes that:

"The courts have held that the following indicators are relevant:

•           whether the activity has a significant commercial purpose or character; this indicator comprises many aspects of the other indicators;

•           whether the taxpayer has more than just an intention to engage in business;

•           whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity;

•           whether there is repetition and regularity of the activity;

•           whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business;

•           whether the activity is planned, organised and carried on in a business-like manner such that it is directed at making a profit;

•           the size, scale and permanency of the activity; and

•           whether the activity is better described as a hobby, a form of recreation or a sporting activity."

75.   The business activities of Company A include the grazing and maintenance of cattle for the purpose of selling them, in line with paragraph 995-1(1)(b) of the ITAA 1997. The following factors provide evidence that Company A is carrying on a business of primary production in line with those factors in TR 97/11.

•           The purchase, grazing and sale of cattle has been conducted on a regular and repetitive basis since purchase of the properties.

•           Company A has an intention to derive profits from the activities and has conducted market research into the industry.

•           Significant capital expenditure has been incurred to run the operations including the purchase of sheds, fencing, mowers and cattle feeding systems.

•           The cattle farming business is carried on in the manner of ordinary trade, including utilisation of staff to conduct activities on the land, sale of cattle to external parties. Furthermore, the expenses incurred mimic those of the industry.

•           There is organisation of activities, including keeping of books, records, and online systems to track the progress of the business. There have been regular reviews of this information to make decisions.

76.   For the financial year ending xx YY 20XX, Company A had an aggregated turnover of $xyz. This satisfies sub paragraph 152-10(1)(c)(i).

77.   Both of the properties at Property X and Property Y were used in the cattle stud business and were held for over xx years. Therefore, Company A passes the active asset test as detailed at section 152-35 of the ITAA 1997. This satisfies sub paragraph 152-10(1)(d).

78.   As such, Company A meets the basic conditions set out in subsection 152-10(1) of the ITAA 97 to access the Small Business CGT concessions on the sale of the two properties.

Question 2:

Small Business 50% Reduction (section 152-205 and 152-215)

79.   As was established in Question 1, the basic conditions under Subdivision 152-A are met for Company A.

80.   However, as Subdivision 152-B applies to disregard the capital gains, section 152-215 states Subdivision 152-C does not apply. Consequently, the Small business 50% reduction in section 152-205 of the ITAA 97 does not apply.

Question 3a:

Small Business 15-year Exemption (section 152-110)

81.   As was established in Question 1, the basic conditions under Subdivision 152-A are met for Company A. This satisfies paragraph 152-110(1)(a) of the ITAA 1997.

82.   As previously discussed, the asset was held for a period of more than 15 years prior to the CGT event occurring. This satisfies paragraph 152-110(1)(b) of the ITAA 1997.

83.   Paragraph 152-110(1)(c) of the ITAA 1997 states that the entity must have had a significant individual for a total of at least 15 years (even if the 15 years was not continuous and it was not always the same significant individual) during which the entity owned the CGT asset.

84.   An entity will be a significant individual under section 152-55 of the ITAA 1997 if they hold a small business participation percentage in the company of at least 20%. Small business participation percentage in section 152-65 of the ITAA 1997 is defined as:

''An entity's small business participation percentage in another entity at a time is the percentage that is the sum of:

(a)     the entity's direct small business participation percentage in the other entity at that time, and

(b)     the entity's indirect small business participation percentage in the other entity at that time."

85.   Broadly, a direct small business participation percentage is the percentage that the entity has from holding shares in the company. As previously stated in the facts, Taxpayer A and Taxpayer B hold 50% of the shares each. Therefore, they both hold a small business participation percentage of 50% and are considered significant individuals.

86.   These shares have been held from xx YY 198X to the date of sale of the properties. This is a total period of xx years, x month, and xx days. Therefore, the taxpayer has a significant individual for at least 15 years during which the properties were owned.

87.   Paragraph 152-110(1)(d) of the ITAA 1997 states that an individual who was a significant individual of the company or trust just before the CGT event either:

(i) was 55 or over at that time and the event happened in connection with the individual's retirement; or

(ii) was permanently incapacitated at that time.

88.   According to this requirement, both Taxpayer A and Taxpayer B must be aged over 55 years of age and the event must happen in connection with their retirement.

89.   Taxpayer A was xx years old, and Taxpayer B was yy years old at the time of the CGT event.

90.   The ITAA 1997 does not define the phrase 'in connection with a taxpayer's retirement'. However, the ATO's online website at ato.gov.au (QC 52288) states that whether a CGT event happens in connection with an individual's retirement depends on the particular circumstances of each case but, to be regarded as a retirement, there would need to be at least a significant reduction in the number of hours the individual works. The ATO's website also states that 'in connection' could mean the CGT event occurred before or after the retirement.

91.   Taxpayer A was primarily involved in running the cattle business. In addition to the cattle stud, Taxpayer A had been involved in a very successful aluminum business, which he stood down from over x years ago. To supplement his own investment income, Taxpayer A has received a pension from his self-managed super fund and dividends from Company A for his management of the company.

92.   Following the sale of the cattle stud, Taxpayer A has significantly reduced his hours involved in working. As a director of the company, it is estimated that he was spending x-y hours of his week overseeing the farming activities. This included oversight of x-y employees and contractors, review of plans for purchase and sale of cattle, management of business connections and discussions with the group's CFO in respect of the performance of the business.

93.   Following the property sales, Taxpayer A has significantly altered his activities and is no longer required to invest x-y hours per week in the business. This suggests a significant reduction in the number of hours worked by him (ie 100% of his pre-sale working capacity).

94.   Tax Agents who submitted this private ruling application confirm that the funds from the sale of the properties will be used to reinvest in income producing assets that will support Taxpayer A and Taxpayer B's retirement from business.

95.   As such, the sale of the properties will be in connection with Taxpayer A's retirement.

96.   Based on the above information, the taxpayer qualifies for the Small Business 15-Year Exemption CGT Concession.

97.   As the small business 15-Year Exemption applies, section 152-215 provides that none of the other concessions in Division 152 apply as all of the capital gains can be disregarded under Subdivision 152-B.

Question 3b:

Funds from sale of properties - non-assessable, non-exempt income

98.      Section 152-125 of the ITAA 1997 determines that payments to the company's CGT concession stakeholders are exempt under certain circumstances.

99.      The term "CGT concession stakeholder" is defined in subsection 152-60(a) as:

"a significant individual in the company or trust'.

100.    It has been previously determined in this ruling that Taxpayer A and Taxpayer B are both significant individuals in the company and therefore are CGT concession stakeholders for the meaning under section 152-125 of the ITAA 1997.

101.    As the answer to Question 3a is yes, subparagraph 152-125(1)(a)(i) of the ITAA 1997 is met for Company A. Subparagraph 152-125(1)(b)(ii) does not apply here. As a result, if the taxpayer uses the 15 Year Exemption, the payment will need to be made 2 years after the CGT event. This would be two years following the contract of sale, being xx YY 202Z.

102.    Paragraph 152-125(1)(c) of the ITAA 1997 further requires that the individual was a CGT concession stakeholder of the company or trust just before the relevant CGT event.

103.    As confirmed above, Taxpayer A and Taxpayer B will meet the definition of CGT concession stakeholders. Therefore, the requirements of section 152-125(1) of the ITAA 1997 will be met assuming a payment is made by xx YY 202Z.

104.    Broadly, subsection 152-125(2) confirms that the taxpayer may disregard payments made to Taxpayer A and Taxpayer B from their taxable income so long as they do not exceed their stakeholder participation percentage of the exempt gain.

105.    As the answer to Question 3a is yes, and if the taxpayer uses the 15 Year Exemption, the payments made to Taxpayer A and Taxpayer B will not exceed their stakeholder participation percentage, being 50% for each shareholder, multiplied by the exempt amount.

106.    When considering subsections 152-125(2) and 152-125(3) together, it is confirmed that where a payment is made to Taxpayer A and Taxpayer B, the payment will not be included in their individual taxable income, making the payments exempt and not a dividend or a frankable distribution from the company.

Question 4a and 4b:

Small Business Retirement Exemption (section 152-210 and 152-215)

107.    Section 152-210 states that a capital gain, as reduced under section 152-205, may also qualify for the small business retirement exemption. However, as Subdivision 152-B applies to disregard the capital gains, section 152-215 states Subdivision 152-C does not apply. Consequently, the company does not qualify for the small business retirement exemption as any capital gain is not reduced under section 152-205.

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