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Ruling

Subject: CGT and the small business concessions

Questions:

1. Is the farming property, jointly owned by you and other family members, considered 'taxable Australian property' for capital gains tax purposes?

Answer:

Yes.

2. Do you qualify for the 15 year exemption?

Answer:

Yes.

This ruling applies for the following period

Year ending 30 June 2013

The scheme commenced on

1 July 2012

Relevant facts

You and other family members purchased a property approximately 25 years ago and operated a primary production business on the property, and additional leased land, under a partnership structure until 2000.

Since 2000, the property has been leased to a third party.

One family member has since passed away, with his/her share passing to the remaining members.

You are over 55 years of age.

You and the other family members are now considering selling the property.

You are not an Australian resident for tax purposes.

You intend to retire once the property has been sold.

You satisfy the maximum net asset test.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Division 115

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 Subdivision 152-B

Income Tax Assessment Act 1997 Division 855

Reasons for decision

Foreign resident

The Tax Laws Amendment (2006 Measures No 4) Act 2006 inserted Division 855 into the ITAA 1997 to narrow the range of assets on which a foreign resident will be liable to Australian capital gains tax (CGT). These assets are described as 'taxable Australian property'. 

Subsection 855-15 of the ITAA 1997 explains when a CGT asset is a taxable Australian property and includes taxable Australian real property.

The term 'real property' is not defined in the tax legislation. Therefore it takes the ordinary meaning of the term. In the Macquarie Dictionary, real property means 'tangible and immovable property such as land and houses'.

In your case, you are a foreign resident for tax purposes and are only liable for CGT on the disposal of taxable Australian property. The farming property owned by you and other family members is considered to be taxable Australian property for the purposes of Division 855 of the ITAA 1997. Therefore, the disposal of the property will be assessed under the CGT provisions.

CGT concessions

To qualify for the small business CGT concessions, you must first satisfy the 'basic conditions' that are common to all the concessions.

STEP 1 - You must first satisfy one of the following:

· you are a small business entity

· you do not carry on business (other than as a partner) but your asset is used in a business carried on by a small business entity that is your affiliate or an entity connected with you (passively held assets)

· you are a partner in a partnership that is a small business entity, and the CGT asset is:

o an interest in a partnership asset (partnership assets), or

o an asset you own that is not an interest in a partnership asset (partner's assets)

· you satisfy the maximum net asset value test.

In your case, neither you nor the partnership is carrying on a business in the current financial year. The property has been a passively held asset since 2000, being leased to a third party, who is not your affiliate or an entity connected with you. However, you do satisfy the maximum net asset test.

STEP 2 - The asset in question must satisfy the active asset test.

If you have owned the asset for more than 15 years, the active asset test is satisfied where the asset was an active asset of yours for a total of least 7.5 years during the test period.

In your case, you and other family members purchased the property approximately 25 years ago and operated a primary production business on the property under a partnership structure until 2000, or approximately 13 years.

As the property has been owned for more than 15 years and was used in the partnership's primary production business activity for more than 7.5 years, the property satisfies the active asset test.

Therefore, you satisfy the 'basic conditions' required to qualify for the small business CGT concessions.

CGT concessions

Where the 'basic conditions' are met, individuals (including partners in partnerships) may be able to reduce any capital gain in the following sequence. First you offset capital losses against capital gains. Then you apply:

· the small business 15-year exemption (if applicable)

· the small business CGT concessions.

The small business 15-year exemption takes priority over the other small business concessions and the CGT discount. If the small business 15-year exemption applies, you entirely disregard the capital gain so there is no need to apply any further concessions.

15 year exemption

You can disregard a capital gain from a CGT event happening to a CGT asset you have owned for at least 15 years if you satisfy the basic conditions and:

· continuously owned the CGT asset for the 15 year period ending just before the CGT event happened; and

· when the CGT event happened, you were permanently incapacitated, or you were 55 years old or older and the event happened in connection with your retirement.

Whether a CGT event happens in connection with an individual's retirement depends on the particular circumstances of each case. There does 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 is not necessary for there to be a permanent and everlasting retirement from the workforce.

In your case, you have held the property continuously for at least 15 years and you are over 55 years of age and the event will happened in connection with your retirement. Therefore, you qualify for the small business 15 year exemption.