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Ruling

Subject: Transfer of crop

Question 1

Is the market value of the crop at the time of transfer of ownership included in your assessable income?

Answer

Yes.

Question 2

Is the transfer of the crop assessable as a capital gain?

Answer

No.

Question 3

Does the crop satisfy the active asset test for the purposes of the small business capital gains tax concessions?

Answer

As the transfer of the crop is not assessable as a capital gain, we have not considered the CGT small business concessions.

This ruling applies for the following periods:

Year ended 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You and your spouse owned a farming property that included an immature crop contained on the land.

The farming property was transferred to a relative for no consideration.

You and your spouse have been conducting a business as partners on the property continually since the property was purchased.

The partnership is a small business entity for the purposes of the small business capital gains tax concessions.

The crop will be ready to harvest during the next financial year.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 70-85

Income Tax Assessment Act 1997 section 70-90

Income Tax Assessment Act 1997 section 104-10, and

Income Tax Assessment Act 1997 section 118-20.

Reasons for decision

Question 1

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that assessable income includes income according to ordinary concepts. Section 6-10 of the ITAA 1997 provides that a taxpayer's assessable income includes statutory income amounts which are not ordinary income but are included in assessable income by another provision.

Under section 70-90 of the ITAA 1997, when trading stock is disposed of outside the ordinary course of a taxpayer's business, the taxpayer is required to bring to account, as assessable income, the market value of the stock on the date of disposal.

This provision also applies to certain other assets as if they were trading stock. These assets are outlined in section 70-85 of the ITAA 1997 and include:

· standing or growing crops,

· crop-stools and

· trees planted and tended for sale.

There are three basic conditions that must be met for section 70-90 of the ITAA 1997 to apply:

· The taxpayer must dispose of the item of trading stock outside the ordinary course of a business.

· The trading stock must be held in a business that taxpayer is carrying on.

· The trading stock must be an asset of that business.

In this case, you and your spouse disposed of a property including an immature crop. The entire property was gifted to a relative for no consideration. The crop is considered to be an asset as described in section 70-85 of the ITAA 1997. As the crop was an asset of the partnership that was disposed of outside the ordinary course of business, section 70-90 of the ITAA 1997 will apply. Therefore, the market value of the crop on the date of disposal should be included as assessable income in the 2011-12 financial year.

Other information

Section 70-95 of the ITAA 1997 states that if an entity disposes of trading stock outside the ordinary course of business, the entity that acquires the trading stock is treated as having bought it for the amount included in the disposing entity's assessable income under section 70-90 of the ITAA 1997.

Question 2

A taxpayer will have a capital gain only if a CGT event happens. Section 104-10 of the ITAA 1997 specifies that CGT event A1 happens if a taxpayer disposes of a CGT asset.

Section 118-20 of the ITAA 1997 prevents double taxation by reducing a capital gain arising from a CGT event to the extent that an amount has already been included in a taxpayer's assessable income or exempt income in any income year under a provision of the Act outside Part 3-1 of the CGT provisions.

In your case, the disposal of the crop will result in CGT event A1 occurring and you will make a capital gain pursuant to section 104-10 of the ITAA 1997. However, as the market value of the crop on the day of disposal is also assessable under section 70-90 of the ITAA 1997 the anti-overlap provisions of section 118-20 of the ITAA 1997 apply. Therefore, the capital gain on the crop is reduced to zero.

Question 3

As section 118-20 of the ITAA 1997 operates to reduce the capital gain on the crop to zero, consideration of the small business CGT concessions is not required.