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Authorisation Number: 1011765166306

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Ruling

Subject: Small business concession - 15-year exemption

Subject

Small business Capital Gains Tax (CGT) concessions - 15-year exemption

Question 1

Does the asset satisfy the active asset test under section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Are you able to use the small business 15-year exemption for the disposal of the asset under Division 152 of the ITAA 1997?

Answer

Yes

This ruling applies for the following period

1 July 2010 - 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

You commenced to carry on a business pre September 1985. You operated as a sole trader before forming a partnership, and then trading under a trust post September 1985. You are a beneficiary of the trust and a director of the trustee company.

You initially operated from a property at XX.

You decided to expand your business and purchased a smaller property post September 1985 at YY. This property was already established to your business needs. There was also a vacant house on the property in which the previous owners had resided.

You continued the business activity on this property and engaged, through a real estate agent, tenants for the house.

The tenants had exclusive use of the residence and garden. You retained access and usage rights of the rest of the property. You estimate the property area for which you received rental income to be a minimal proportion of the total land area.

You advise that the house was tenanted so that it did not become derelict. You had no use for the house in the business.

The business turnover from the YY property was between X times more than the income received from the rented house.

You continued to farm the property until the water authorities restricted pumping from the river. From this time the land sat empty, other than some trees which did not require additional watering. Most years you were able to harvest, although the quality and quantity deteriorated. They provided a small return.

Both properties were affected by the drought, but the XX property continued production as it had a larger river as a water source.

You did not keep machinery or equipment, other than a diesel pump and motor, at the YY property. This was kept at the XX property as the crops at this property were more labour intensive. You transported machinery and equipment to the YY property when required.

You sold the YY property in the 2010 financial year.

Your aggregated annual turnover has always been less than $2 million.

The net asset value of your assets including connected entities and affiliates is below $6 million.

You have decided to retire in 2011.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 Subdivision 152-A

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 Subdivision 152-B

Income Tax Assessment Act 1997 Section 152-100

Income Tax Assessment Act 1997 Section 152-130

Income Tax Assessment Act 1997 Section 328-110

Income Tax Assessment Act 1997 Section 328-125

Reasons for decision

Question 1

Active asset test

Under section 152-35 of the ITAA 1997 a CGT asset satisfies the active asset test if:

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 ownership period specified in (2).

Section 152-40 of the ITAA 1997 provides a CGT asset is an active asset at a time if, at that time you own the asset 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:

· you; or

· your affiliate; or

· another entity that is connected with you.

Section 328-125 of the ITAA 1997 provides, in part, that an individual may be connected with a discretionary trust if either entity controls the other entity in a way defined in that section. To that end, the individual may control the discretionary trust if the trustee acts, or could reasonably be expected to act, in accordance with the directions or wishes of the individual, its affiliates, or the individual together with its affiliates.

In terms of section 328-130 of the ITAA 1997 an individual may be an affiliate of a trust if he/she acts, or could reasonable be expected to act, in accordance with the trusts directions or wishes, or in concert with the trust, in relation to the affairs of the business of the individual.

Paragraph 152-40(4)(e) of the ITAA 1997 disqualifies a CGT asset from being an active asset if:

(the) "main use in the course of carrying on the business mentioned in subsection (1) is to derive rent"

Used in the course of carrying on a business

A situation may arise where a CGT asset, such as property, could be used for a number of different purposes. Section 152-40 of the ITAA 1997 does not impose minimum usage requirements for an asset to satisfy the definition of an active asset. Whether an asset is used in the course of carrying on a business is a question of fact and requires an objective consideration of all relevant facts. No one single factor will necessarily be determinative. Resolving the matter is likely to involve a consideration of a range of factors such as:

· the comparative areas of use of the premises (between deriving rent and other uses);

· the comparative times of use of the premises (between deriving rent and other uses); and

· the comparative levels of income derived from the different uses of the asset.

Your circumstances

You have been working in your relevant industry, under various business structures, since before September 1985. You own a property at XX where you operate your business. You decided to expand your business and purchased a smaller (approx 1/3 of the size) property at YY. This property was already operating as the same business type as yours and the crops were less labour intensive than those you were already growing. A very small percentage of the property contained a residence.

You purchased the property to expand your business activities.

The turnover from the business activity on this property was less than that of the larger property.

When you were no longer permitted to pump water to use in the property, the income from the property has been rental income and a small amount from crop sales.

The amount of gross rental income received indicates that the primary purpose of the purchase was not to earn rental income. The gross rental income received was not reflective of a property of this size and type.

Comparative areas of use of the premises

The property is xx acres. A very small percentage of the area contains the rented property, and the remaining was utilised for the business.

Comparative times of use of the premises

You purchased the property post September 1985 and sold it in the 2011 financial year.

The business operated approximately xx years.

The residence on the property was rented for virtually the entire ownership period.

Comparative levels of income derived from the different uses of the asset

The market farm returned xx per annum for xx years.

The rented premises returned xx for xx years.

Summary

It is accepted that YY was an active asset from when purchased until you ceased to operate the business from the property.

Therefore you satisfy the active asset test under section 152-35 of the ITAA 1997.

Question 2

The small business 15-year exemption is set out in subdivision 152-B of the ITAA 1997. A small business entity can disregard a capital gain under section 152-100 of the ITAA 1997 if certain conditions are satisfied:

(a) the basic conditions set out under section 152-10 of the ITAA 1997, and

(b) you continuously owned the asset for at least 15 years ending just before the CGT event, and

(c) either

(i) you are an individual who is at least 55 years old at the time of the CGT event and the event happens in connection with your retirement, or

(ii) you were permanently incapacitated at the time of the CGT event.

Basic conditions

A CGT event happens

When you sold the farm land a change of ownership occurred and a CGT event resulted. This condition is satisfied

The event would have resulted in a gain

You have stated that you realised a capital gain on the sale of the farm land. This condition is satisfied.

You are a small business entity for the income year or you satisfy the maximum net asset value test

You state that the aggregate turnover of the business was under $2 million (you are a small business entity) and that the value of your and your affiliates assets was less.

The CGT asset meets the active asset test

This condition was considered in Question 1 where it was concluded you satisfy the active asset test.

You satisfy all of the basic conditions for relief under Division 152 of the ITAA 1997.

Small business 15-year exemption

You owned the asset for more than 15 years and it was an active asset for more than 7 years, you have satisfied this part of the active asset test.

You are over 55 years old and you advise the event has happened in connection with your retirement.

Therefore you are able to apply the small business 15 year exemption.