Edited version of private advice

Authorisation Number: 1052375465608

Date of advice: 1 April 2025

Ruling

Subject: Small business 15-year exemption

Question 1

Is the Company entitled to claim the 15-year exemption for companies and trusts under section 152-110 of the Income Tax Assessment Act 1997 (ITAA 1997) when it transfers the property to the Relative?

Answer 1

Yes.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The Company has owned the property since 19XX. The cost base of the property is significantly below its market value.

The property is reserved for rural activity.

The sole shareholder (the Shareholder) of the Company is aged over 55 years and has held 100% of the shares since 20XX. The sole shareholder previously held a 50% shareholding since incorporation. The Shareholder is the farming manager and is an experienced farmer who holds formal accreditation and maintains a register.

The Shareholder also holds the relevant certificates necessary to undertake a commercial livestock rearing business.

Since acquisition, the whole property has been used for livestock farming. There are approximately X head of livestock per hectare at any given time, with rotations occurring as livestock are raised and sold. The livestock reach market weight at XX to XX months of age.

Financial records reflecting farming activity only exist for the past XX years.

The farming has taken place at a similar intensity for the XX year period, barring a minor slowdown in the industry due to COVID-19.

No sales were made in X2 of the XX income years due to the life cycles of the livestock. The preceding income years had larger than normal sales for the same reason. Gross profit has been derived in all but these two income years.

It is expected that sales will be derived in the 20XX income year, resulting in gross profit.

Sales and purchase records are maintained and all farming expenses recorded in financial transaction documents. All invoices are kept, with the services of an accounting firm used to maintain financial records.

The Company has sought out ways to maximise the use of the land to rear livestock more sustainably, including by reliance on cheaper grain feed.

Depreciable plant and equipment are used to maintain the quality of the pasture and farmland.

The business is insured.

The aggregated turnover for the 20XX income year was less than $2 million and is expected to be less than $2 million for the 20XX income year.

A relative (the Relative) of the Shareholder lives in the dwelling situated on the property. The Relative is also an experienced farmer and has worked part time on the farm and paid rent at a subsidised rate.

From 20XX the Relative lived in the dwelling rent free on compassionate grounds. The Relative's income had decreased, and they were subject to COVID-19 measures.

The Shareholder intends to retire from farming and arrange for the transfer of the property to the Relative, who plans to continue farming. The market value of the property has increased significantly since its acquisition by the Company. The transfer to the Relative will result in a capital gain.

The Shareholder does not operate any other business.

There are no other affiliates or connected entities of the Company.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 Division 104

Income Tax Assessment Act 1997 subsection 104-10(1)

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

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

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 subdivision 152-B

Income Tax Assessment Act 1997 subsection 152-10(1)

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

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

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

Income Tax Assessment Act 1997 subparagraph 152-10(1)(c)(i)

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

Income Tax Assessment Act 1997 subsection 152-10(1AA)

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 paragraph 152-40(1)(a)

Income Tax Assessment Act 1997 section 152-55

Income Tax Assessment Act 1997 section 152-65

Income Tax Assessment Act 1997 subsection 152-70(1)

Income Tax Assessment Act 1997 subsection 152-110(1)

Income Tax Assessment Act 1997 paragraph 152-110(1)(a)

Income Tax Assessment Act 1997 paragraph 152-110(1)(b)

Income Tax Assessment Act 1997 paragraph 152-110(1)(c)

Income Tax Assessment Act 1997 paragraph 152-110(1)(d)

Income Tax Assessment Act 1997 subparagraph 152-110(1)(d)(i)

Income Tax Assessment Act 1997 section 328-110

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

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

Reasons for decision

Division 152 provides small business relief to allow eligible taxpayers to disregard or defer some or all of a capital gain arising from the disposal of an active asset used in a small business, provided certain conditions (the basic conditions) are met.

Subsection 152-10(1) sets out the basic conditions to be satisfied before a taxpayer can access the small business relief, and 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).

Division 104 sets out all the CGT events for which you can make a capital gain or capital loss. Section 108-5 sets out what is a CGT asset. You make a capital gain or loss if a CGT event happens to a CGT asset.[1]

CGT event A1 happens if you dispose of your ownership interest in a CGT asset.[2]

Property is considered to be a CGT asset.[3]

Since the Company is proposing to dispose of the property to the Relative, CGT event A1 will happen at the time the contract is entered into or when the change of ownership happens.[4] This will result in the first condition in paragraph 152-10(1)(a) being satisfied.

You make a capital gain if the capital proceeds from the disposal are more than the asset's cost base.[5] The Company is proposing to transfer the property to the Relative for market value consideration. The approximate cost base of the property is significantly below the expected market value consideration. This will result in a capital gain being made on the disposal of the property to the Relative. Therefore, the second condition in paragraph 152-10(1)(b) will be satisfid.

In relation to the third condition in paragraph 152-10(1) it is your view you satisfy subparagraph

152-10(1)(c)(i), that is, you are a CGT small business entity for the income year.

You are a CGT small business entity for an income year if you are a small business entity for the income year and 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.[6]

Subsection 328-110(1) provides that you are a small business entity for an income 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.

In short, the Company needs to carry on a business in the year of the property is proposed to be transferred to the Relative and must have had either an aggregated turnover below $2 million in the previous year or an aggregated turnover that is likely to be below $2 million in the year of transfer.

The term 'business' is defined in subsection 995-1(1) to include any profession, trade, employment, vocation or calling, but does not include occupation as an employee. However, whether or not the activities of a taxpayer amount to the carrying on of a business is a question of fact and degree to be decided on the facts of each case.

Subsection 995-1(1) defines 'business' to include 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'. However, this definition simply states what activities may be included in a business. It does not provide any guidance for determining whether the nature, extent, and manner of undertaking those activities amount to the carrying on of a business.

Taxation Ruling TR 97/11 'Income tax: Am I carrying on a business of primary production?' provides indicators that the courts have concluded are relevant when determining whether a business is being carried on.

The indicators provided in TR 97/11 are:

•                     whether the activity has a significant commercial purpose or character

•                     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 businesslike manner such that it is directed at making a profit

•                     the size, scale, and permanency of the activity

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

Each case must be judged on its own particular facts and the determination of the question is generally a result of a process of weighting all the relevant indicators together to form a general opinion of whether a business is being carried on. Each of these indicators will now be considered in relation to the activities conducted by you on the properties.

Whether the activity has a significant commercial purpose or character

A way of establishing that there is a significant commercial purpose or character is to compare the activities with those of a taxpayer who is carrying on a similar activity that is a business. Any knowledge, previous experience or skill of the taxpayer in the activity, and any advice taken by the taxpayer in the conduct of the business should also be considered but are not necessarily determinative.[7] Paragraph 30 of TR 97/11 provides a list of factors to show whether an activity has a significant commercial purpose or character. In applying these factors to your activity collectively point towards a significant commercial purpose and character:

•                     a business plan was not provided, however the number of livestock run on the property is commensurate with the size of the farm and has resulted in the farming enterprise been profitable for X of the past XX years, utilizing the experience of its farming manager

•                     both the Shareholder and the Relative have many years of farming knowledge and experience and hold holding all relevant accreditations and licenses

•                     the Company has successfully conducted farming activities on the property since 19XX

•                     livestock are sold through registered livestock traders

•                     the amount of capital invested includes depreciable plant and equipment, with regular purchases and sales of livestock conducted over the years

•                     the Shareholder has experience in farming and animal husbandry and stays across trends in the industry

•                     size and scale is sufficient for a commercial enterprise - the Company profitably operates the property with the reasonable maximum capacity for property of its size

•                     an intention to make a profit - the Company has raised and sold livestock profitably on the property for X of the past XX income years, with an expectation of making a gross profit in the 20XX income year.

Whether the taxpayer has more than just an intention to engage in business

The Company has at all times since acquiring the property in 19XX, used it for farming, although records have only been kept for the past XX years. Livestock has been sold in the past X years.

It is accepted the Company has undertaken tangible activities and had 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

The Profit and Loss XXX Business Summary Analysis provided shows a gross profit for all but X2 of the previous XX income years that records have been kept. No sales were made in the 20XX and 20XX income years due to the life cycles of the livestock. The preceding income years had larger than normal sales for the same reason. This indicates a profit-making purpose and a realistic prospect of achieving profit from the activity, especially given the long history of engaging in livestock business and the experience of the farming manager.

Whether there is repetition and regularity of the activity

At most times since at least 20XX, the Company had a livestock herd commensurate with the size of the property. The farming has taken place at a similar intensity for that period, barring a minor slowdown in the industry in 20XX.

It is accepted that there is repetition and regularity of the farming business.

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

Paragraph 64 of TR 97/11 lists a range of factors that should be compared with the characteristics of others engaged in the same type of business. You have provided the following information relevant to these factors:

•                     the volume of sales - head of livestock sold.

•                     the amount invested in capital items - depreciable plant and equipment are used to maintain the quality of the pasture and farmland.

•                     the farming manager has significant prior experience in the maintenance of livestock for the purposes of sale and has various knowledge and experience in animal husbandry and management and pasture management. Also, the Relative is an experienced farmer and worked part time as a farm hand.

•                     The Shareholder also holds the relevant certificates necessary to undertake a commercial livestock rearing business.

The information provided shows that the business is 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 businesslike manner such that it is directed at making a profit?

Sales and purchase records are maintained and all farming expenses recorded in financial transaction documents. All invoices are kept, with the services of an accounting firm used to maintain financial records.

It is accepted the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit.

The size, scale, and permanency of the activity

The number of livestock is at the upper end of what is considered reasonable for a property of its size (i.e., the maximum reasonable to maintain on the farmland given its size and pasture quality).

It is accepted the size, scale and permanency of the activity is sufficient for this indicator to be met.

Is the activity better described as a hobby, a form of recreation or a sporting activity?

From the information provided, the activity does not meet the description of recreation, hobby or sports, as it is carried it out in a business-like manner by a corporate entity.

Conclusion on carrying on a business

The weighing of all the indicators in TR 97/11 leads to the conclusion that the Company is carrying on a business.

The Company's turnover for the 20XX income year is expected to be below $2 million, while the turnover in the 20XX income year was below $2 million. Since the Company does not have any affiliates or connected entities that carry on a business, these figures also represent the aggregated turnover. Since both these figures are below $2 million, the Company falls within the meaning of a CGT small business entity in subparagraph 152-10(1)(c)(i) and will satisfy the third condition in paragraph 152-10(1)(c).

The final condition in paragraph 152-10(1)(d) requires the CGT asset to satisfy the active asset test in section 152-35.

Subsection 152-35(1) relevantly states:

A CGT asset satisfies the active asset test if:

(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 period specified in subsection (2).

Subsection 152-35(2) states the period begins when you acquired the asset and ends the earlier of when the CGT event happens, or the relevant business ceased.

As the property was acquired in 19XX, the Company has owned the property for more than 15 years. To satisfy the active asset test, the property must also have been an active asset for at least 7½ years between 19XX and when the CGT event happens.

A CGT asset is an active asset if you own the asset and it is used, or held ready for use, in the course of carrying on a business.[8] The Company has conducted a verified primary production business on the property for the previous XX years.

Therefore, as the Company has held the property for more than 15 years and it was an active asset for at least 7½ years during that period, the property will satisfy the active asset test in paragraph 152-10(1)(d).

The Company therefore satisfies all the basic conditions in subsection 152-10(1).

Small business 15-year exemption

There are 4 small business concessions available. The Company is seeking to apply the small business 15-year exemption in Subdivision 152-B, which takes priority over the other small business concessions. If the small business 15-year exemption applies, the entire capital gain is disregarded so there is no need to apply any further concessions.

Subsection 152-110(1) states:

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;

(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.

As discussed above, all the basic conditions in subsection 152-10(1) are satisfied, therefore the first condition in paragraph 152-110(1)(a) is satisfied.

The Company has owned a 100% interest in the property since 19XX, meaning the second condition in paragraph 152-110(1)(b) is satisfied.

The third condition in paragraph 152-110(1)(c) requires the Company to have had a significant individual for a total of at least 15 years during which the Company owned the CGT asset.

The term 'significant individual' is defined in section 152-55. An individual is a significant individual in a company or a trust at a time if, at that time, the individual has a 'small business participation percentage' in the company or trust of at least 20%.

Under section 152-65, an entity's small business participation percentage in another entity is the sum of the entity's direct and indirect small business participation percentages in the other entity.

The table in subsection 152-70(1) provides that an entity's direct small business participation percentage in a company at the relevant time is the percentage of the voting power, entitlement to dividends and capital an entity has because of the shares it holds in the company. If these amounts are different, the smallest amount is used.

The Shareholder has been the 100% shareholder of the Company since 20XX and was a 50% shareholder at all times prior to then. The Shareholder is therefore a significant individual in relation to the Company, having a 'small business participation percentage' in the company of at least 20% since incorporation.

Accordingly, paragraph 152-110(1)(c) is satisfied as the Company has had a significant individual for a total of at least 15 years during the time that it has owned the property.

The Shareholder will be over 55 year of age when the property is proposed to be transferred to the Relative. For the purposes of subparagraph 152-110(1)(d)(i), the Shareholder, as the significant individual of the Company just before the CGT event happens, will be over the age of 55 and not permanently incapacitated. The fourth and final condition in subparagraph 152-110(d)(i) therefore requires the CGT event to happen in connection with retirement.

The term 'retirement' is not defined in the legislation. Therefore, the word takes its ordinary meaning. For the Shareholder, they intend to retire from their sole employment as the farming manager immediately and reduce their work hours to nil. It is accepted the CGT event will happen in connection with the Shareholder's retirement. Therefore, the fourth and final condition in paragraph 152-110(1)(d) will be satisfied.

The Company will satisfy all the requirements in subsection 152-110(1) when the property is transferred to the Relative and is eligible able to apply the small business 15-year exemption to disregard the capital gain.

[1] Section 102-20

[2] Subsection 104-10(1)

[3] Section 108-5

[4] Subsection 104-10(3)

[5] Subsection 104-10(4)

[6] Subsection 152-10(1AA)

[7] Paragraph 29 of TR 97/11.

[8] Paragraph 152-40(1)(a)

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