Edited version of private advice

Authorisation Number: 1052121325011

Date of advice: 22 May 2023

Ruling

Subject: CGT - small business concessions

Question 1

Will the sale/transfer of the whole or part of the Post-CGT Property be considered a CGT event A1 pursuant to section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes, to the extent that any improvements to the land are not considered separate assets under section 108-55 and 108-70.

Question 2

If the gains realised on the sale of the whole or part of the Post-CGT Property is assessable as capital gains, will it be a discount capital gain under Division 115 of the ITAA 1997?

Answer

Yes.

Question 3

If the gain realised on the sale of the whole or part of the Post-CGT Property is assessable as capital gains, will the small business CGT concessions be available to you under Division 152 of the ITAA 1997?

Answer

Yes.

Question 4

If the small business CGT concessions are available, will you be able to access the 15-year exemption under section 152-105 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

Income year ending 30 June 20XX

Income year ending 30 June 20XX

The scheme commenced on:

XX XX XX

Relevant facts and circumstances

1.    You own the following properties (Properties):

•         Pre-CGT Property, which was first acquired by you before September 1985.

•         Post CGT Property), which was acquired by you post-September 1985

2.    The Post-CGT Property was originally owned by Company A, a family company.

3.    Both properties had been used in the farming enterprise of the family since the mid­19XXs.

4.    Following the liquidation of the Company in or about 19XX, you acquired the Post-CGT Property from the Company for a total purchase price of $X.

5.    Both the Post and Pre-CGT Properties were and still are used in the farming enterprise that has been carried on by you since you acquired the Properties.

6.    Various improvements were carried out on the properties, including the construction of storage sheds, fencing and cattle yards, and installation and maintenance of a water dam.

7.    In or about XX XX, you were contacted by a state government department regarding the proposed compulsory acquisition of part of the Pre-CGT Property and the Post CGT Property.

8.    Following lengthy negotiations, it was agreed that new titles would be created out of parts of the Pre-CGT Property and the Post CGT Property, and these new titles were identified as Lot X in Deposited Plan X (part of Folio ID: X) (Pre-CGT Lot) and Lots X and X in Deposited Plan X (part of Folio ID: X and X) (Post-CGT Lot).

9.    Under a contract for sale dated XX XX XX, the Pre-CGT Lot and Post-CGT Lot were compulsorily acquired for the purchase price of $X.

10.  At the time of entry into the contract for sale you were X years of age. The sale of the Pre-CGT Lot and Post-CGT Lot enabled you to commence the transition to retirement from the farming enterprise.

11.  The compulsory acquisition of the Post-CGT and Pre-CGT Lots allowed you to reduce your involvement with the farming enterprise on the remaining parts of the Properties, with the intention that your children would take on more active roles in the farming enterprise.

12.  Since the disposal of the Post and Pre-CGT Lots, you have more fully transitioned to retirement. Your family, in varying capacities, is largely involved in the day-to-day operation of the business.

13.  The activity carried out on the Properties is cattle farming, and the farming income derived by you is purely from the sale of cattle.

14.  Your health has significantly deteriorated and you no longer physically carry on the activities yourself.

15.  You no longer reside on the Properties. You now reside in a nursing home and no longer have the capacity to manage the business' affairs on your own.

16.  Through the assistance of your children, you have been winding up your farming business operations and have a very limited number of cattle remaining.

17.  Your family are carrying out the activities for you as part of winding up your affairs.

18.  Your family is not being remunerated in assisting you to wind up your affairs. It is expected that this will likely carry on for some months into the XX income year.

19.  It is anticipated that the business will be fully wound up in the coming months and that sale of the Properties, the last of the livestock and various pieces of old equipment will be the final part of the winding up process.

20.  You have executed on XX XX a conditional sale agreement for the sale of the Post-CGT Property to your children, which did not proceed.

21.  You are contemplating entering into a sale of your interest in the Post-CGT Property to an unrelated third party.

22.  As part of one of the proposed transactions, it is contemplated that you will take a partial interest in the purchasing entity, along with unrelated third parties.

23.  In the event that the transaction being contemplated does not proceed, you will then sell the Post-CGT Property to another unrelated third party or his children.

24.  In any event, you will be proceeding to dispose of your interest in the Post-CGT Property in the XX or XX income year.

25.  You have ceased any further involvement in the farming business due to age and ill health.

26.  There is no goodwill in the business and, as such, no capital gain should be triggered on the transfer of the business to your family.

27.  In relation to the Post-CGT Property, there is a verbal agreement whereby one of your children, who assists you with the farming business and acts as a caretaker, resides on that property.

28.  The cost base of the Post-CGT Property will not be calculated at any time with reference to indexation.

29.  The Post-CGT Property is not being used in the business of your affiliate, or an entity that is connected with you.

30.  The Post-CGT Property has not been used for any purpose other than the farming enterprise during your ownership period.

31.  The consideration you receive for the sale or transfer of the Post-CGT Property will be equal to its market value.

32.  The capital proceeds you receive for the transfer of the Post-CGT Property will exceed the cost base for that property.

33.  The turnover of the farming business will be less than $X million in the XX and XX income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Subsection 104-10(2)

Income Tax Assessment Act 1997 Subsection 104-10(3)

Income Tax Assessment Act 1997 Subsection 104-10(4)

Income Tax Assessment Act 1997 Subsection 108-55

Income Tax Assessment Act 1997 Subsection 108-55(1)

Income Tax Assessment Act 1997 Subsection 108-70

Income Tax Assessment Act 1997 Subsection 108-70(1)

Income Tax Assessment Act 1997 Division 115

Income Tax Assessment Act 1997 Section 115-10

Income Tax Assessment Act 1997 Subsection 115-20(1)

Income Tax Assessment Act 1997 Subsection 115-25(1)

Income Tax Assessment Act 1997 Subsection 118-24(1)

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 Subsection 152-10(AA)

Income Tax Assessment Act 1997 Section 152-10

Income Tax Assessment Act 1997 Paragraph 152-10(1A)(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 Subsection 152-35(2)

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

Income Tax Assessment Act 1997 Subsection152-40(4)

Income Tax Assessment Act 1997 Paragraph 152-40(4)(e)

Income Tax Assessment Act 1997 Section 152-49

Income Tax Assessment Act 1997 Section 152-105

Income Tax Assessment Act 1997 Subsection 152-105(d)

Income Tax Assessment Act 1997 Subsection 328-110(1)

Reasons for decision

All references are to the Income Tax Assessment Act 1997 unless otherwise specified.

Question 1

Will the sale/transfer of the whole or part of the Post-CGT Property be considered a CGT event A1 pursuant to section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

Yes, to the extent that any improvements to the land are not considered separate assets under section 108-55 and 108-70.

Detailed reasoning

34.  CGT event A1 happens if you dispose of a CGT asset (subsection 104-10(1)).

35.  Subsection 104-10(2) provides that you dispose of a CGT asset if a change in ownership occurs from you to another entity, whether because of some act or event or by operation of law.

36.  The time of the CGT event is when you enter into the contract for disposal or if there is no contract, when the change of ownership occurs (subsection 104-10(3)).

37.  A building or structure on land you acquired on or after 20 September 1985 is taken to be a separate CGT asset from the land if a balancing adjustment in Subdivision 40-D applies to the building or structure (subsection 108-55(1)).

38.  The most common balancing adjustment event is where you sell the depreciating asset, which will occur when you sell the Post-CGT Property.

39.  Any capital improvements made to the Post CGT Property will be taken to be a separate CGT asset if one of the balancing adjustment provisions set out in subsection 108-55(1) applies to the improvement (whether or not there is a balancing adjustment) (subsection 108-70(1)).

40.  Subsection 118-24(1) provides that any capital gain or loss that a taxpayer makes from a CGT event, that is also a balancing adjustment event that happens to a depreciating asset the taxpayer held, is to be disregarded if the decline in value of the asset was worked out under Division 40 or would have been worked out under that Division had the taxpayer used it.

Question 2

If the gains realised on the sale of the whole or part of the Post-CGT Property is assessable as capital gains, will it be a discount capital gain under Division 115 of the ITAA 1997?

Summary

Yes.

Detailed reasoning

41.  Where CGT event A1 happens to property you own, you will make a capital gain if the capital proceeds from the disposal are more than the cost base of those shares (subsection 104-10(4)).

42.  If you make a capital gain on the disposal of the Post-CGT Property, Division 115 sets out the requirements for it to be a discount capital gain:

•         the gain must be made by, an individual, a complying superannuation entity, a trust, or a life insurance company (section 115-10)

•         the CGT event must happen after 11.45am on 21 September 1999 (section 115-15)

•         the cost base must be calculated without reference to indexation

•         (subsection 115-20(1)), and

•         the CGT asset must have been acquired at least 12 months before the CGT event (subsection 115-25(1)).

43.  If you have made a capital gain on the disposal of the Post-CGT Property, you will meet the requirements for the capital gain to be a discount capital gain as:

•         you are an individual

•         the CGT event will happen after 11.45am on 21 September 1999,

•         the cost base has been calculated without reference to indexation

•         you have held the property for at least 12 months.

Question 3

If the gain realised on the sale of the whole or part of the Post-CGT Property is assessable as capital gains, will the small business CGT concessions be available to you under Division 152 of the ITAA 1997?

Summary

Yes.

Detailed reasoning

Basic conditions

44.  Section 152-10 contains the basic conditions that must be satisfied to be eligible to apply the CGT small business concessions:

•         a CGT event happens in relation to a CGT asset in an income year.

•         the event would (apart from this Division) have resulted in the gain.

•         at least one of the following applies:

­   you are a CGT small business entity for the income year

­   you satisfy the maximum net asset value test in section 152-15

­   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 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.

•         the CGT asset satisfies the active asset test in section 152-35

45.  You are a CGT small business entity for an income year if (subsections 152-10(AA) and 328-110(1)):

•         you carry on a business in the current year, and

•         your aggregated turnover for the current year or year before the current year is less than $2 million

46.  Additionally, in circumstances where a business is in the process of winding up, section 152-49 may have application.

47.  Section 152-49 applies to an entity that, in the year in which the CGT event happens, carried on a business in an earlier year and is now being wound up, and the asset had been used in the course of carrying on that business at the time the business stopped being carried on.

48.  The effect of section 152-49 in this matter is, that for the purposes of the active asset test and the basic conditions in paragraphs 152-10(1A)(d), the entity can be taken to be carrying on the business at the time of the CGT event, and the asset can be taken to be used in the course of carrying on that business at that time.

Active asset test

49.  Subsection 152-35(1) of the ITAA 1997 states that a CGT asset satisfies the active asset test if:

•         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 of ownership, or

•         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 and a half years.

50.  The period begins when you acquire the asset and ends the earlier of:

•         the CGT event, and

•         if the relevant business ceased to be carried on in the 12 months before that time - the cessation of the business, or any longer period of that the Commissioner allows (subsection 152-35(2).

Meaning of active asset

51.  Subsection 152-40(1) defines an active asset as follows:

A CGT asset is an active asset at 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.

52.  Subsection152-40(4) of the ITAA 1997 provides when a CGT asset cannot be an active asset. Paragraph 152-40(4)(e) of the ITAA 1997 provides that an asset whose main use is to derive rent is specifically excluded from being an active asset.

Application to your circumstances

53.  You acquired the Post-CGT Property in XX and have used it in your farming enterprise since its acquisition to at least XX, when you first started to transition to retirement.

54.  As you have owned the asset for more than 15 years, it only needs to be an active asset of yours for a total of at least 7 and a half years.

55.  Accordingly, the Post-CGT property is an active asset.

56.  Your health has significantly deteriorated and you no longer physically carry on the activities yourself. Accordingly, you are no longer carrying on a business as a sole trader.

57.  Through the assistance of your children, you have been winding up your farming business operations and have a very limited number of cattle remaining.

58.  Your family are carrying out the activities for you as part of winding up your business affairs, which includes the sale of the Post-CGT Property.

59.  Section 152-49 will apply as the business you carried on has ceased and the activities that are still ongoing are part of those in winding up the business.

60.  The effect of section 152-49 in this matter is, that for the purposes of the active asset test and the basic conditions in paragraph 152-10(1A)(d), you will be taken to be carrying on the business at the time of the CGT event on the sale of the Post-CGT Property, and it will be taken to be used in the course of carrying on that business at that time.

61.  Your aggregated turnover for the year of the CGT event and the year before is less than $X million.

62.  Accordingly, you will be eligible to apply the CGT small business concessions in relation to the Post-CGT Property:

•         as a CGT event happens in relation to the Post CGT Property on the sale or transfer.

•         Where the event would (apart from this Division 152) result in the gain.

•         you are taken to be a CGT small business entity for the income year pursuant to section 152-149, and

•         the Post-CGT Property asset satisfies the active asset test.

Question 4

If the small business CGT concessions are available, will you be able to access the 15-year exemption under section 152-105 of the ITAA97?

Summary

Yes.

Detailed reasoning

63.  Section 152-105 states you can disregard a capital gain from a CGT event happening to a CGT asset if you:

•         satisfy the basic conditions for the CGT small business concessions

•         continuously owned the CGT asset for the 15-year period ending just before the CGT event happened.

64.  Subsection 152-105(d)) requires if you are an individual, you must have been (retirement condition):

•         at least 55 years old and the CGT event happened in connection with your retirement, or

•         permanently incapacitated at the time of the CGT event.

65.  Whether a CGT event happens in connection with an individual's retirement depends on the particular circumstances of each case. There would need to be at least a significant reduction in the number of hours the individual works or a significant change in the nature of their present activities to be regarded as a retirement. However, it isn't necessary for there to be a permanent and everlasting retirement from the workforce. A CGT event may be in connection with your retirement, even if it occurs at some time before retirement. Whether particular cases satisfy the conditions depends very much on the facts of each case.

Application to your circumstances

66.  As stated in the previous answer, you meet the conditions for the basic conditions for the CGT small business concessions

67.  You have continuously owned the Post-CGT Property for the 15-year period ending just before the CGT event happened.

68.  Accordingly, you meet the first two requirements set out in section 152-105.

69.  You are an individual that is at least 55 years of age. Consequently, you need to meet the retirement condition.

70.  Prior to the proposed CGT event you had already began your transition to retirement from the farming enterprise. Your health has significantly deteriorated, you no longer physically carry on the activities yourself, and you now reside in a nursing home.

71.  You have ceased any further involvement in the farming business due to age and ill health and transitioned operation of the business to your family.

72.  You are now fully retired. The sale of the Post-CGT Property will occur as part of the winding up of your farming business as a result of your retirement.

73.  Accordingly, the sale is connected to your retirement.

74.  As you meet all the requirements of section 152-105, you are eligible to access the 15-year exemption under section 152-105.

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