Edited version of your private ruling

Authorisation Number: 1012448111982

Ruling

Subject: Capital gains tax - active asset

Question 1

Does the property, an asset of the Partnership, qualify as an active asset for the partners of the Partnership under subsection 152-40(1) of the Income Tax Assessments Act 1997 (ITAA 1997) and meet the requirements of the active asset test under section 152-35 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 2010;

Year ending 30 June 2011;

Year ending 30 June 2012;

Year ending 30 June 2013.

The scheme commences on:

19 December 2011.

Relevant facts and circumstances

The Taxpayer has carried on and continues to carry on a primary production business in partnership with his/her spouse.
The Taxpayer and his/her spouse have an equal interest in the share of the assets and the net income/loss of that partnership.
In late 2003, the Taxpayer, and a number of family members entered into a partnership (the Partnership) to acquire land (the Property).
The interests held by each partner in the assets and the net income/loss of the Partnership is as follows: partner (X%), partner (X%) and the Taxpayer (Y%).

The intention of the partners in acquiring the Property was to build on the existing strong family bonds through shared involvement in a variety of agricultural enterprises with the overall aim of conducting a profitable farming business on the said property in a sustainable manner.
To that end, in late 2003, the Partnership entered into a farming arrangement with the Primary Production Business Partnership to provide the land comprising the Property to be used for the carrying on of various farming activities for a period of Z years commencing from a particular date in 2003. In return, the Partnership receives an annual GST inclusive payment, payable half yearly in advance. This arrangement was formalised under the "Farming Agreement".

In late 2003, a Partnership Agreement was established between the partners to formalise the Partnership arrangement with respect to the Property.
The Partnership established a farm management and development program detailing the immediate and long term goals for the Property. The property was initially unsuitable for commercial farming operation. Accordingly, between certain years, the Property was lightly farmed by the Primary Production Business Partnership while the land was brought up to commercial farming operation.
Examples of infrastructure upgrades include:

·
Property development planning;
Removal of noxious weeds;
Application and installation of various riparian grants;
Clearing of paddock of tree stumps;
Repairing cattle yards;
Building cattle drought holding yards;
Repairing and replacing existing fencing;
Installation of an access road through The Property;
Installation of a livestock watering system;
Installation of a permanent creek crossing;
Repairs on the shearing shed;
Installation of temporary shed;
Installation of 4 new dams;
Vermin control etc.

The cost of the infrastructure upgrades, including the provision of labour, was funded and provided by the partners of the Partnership.

The Partnership was also actively involved in the planning of the various farming activities including the assistance with animal and pasture management undertaken on the Property. The partners also provided technical advice and shared ideas with the Primary Production Business Partnership in regards to the farming activities on the Property. The work was unpaid on the basis that the annual payment was sufficient to cover the labour costs of the partners. Further, it was the desire of the partners that the farm became profitable within a reasonable period of time.

Early 2008, another business was set. This primary production business also undertook farming operations on the Property.

The Property was subsequently sold late 2011.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-35;

Income Tax Assessment Act 1997 section 152-40;

Income Tax Assessment Act 1997 section 328-125;

Income Tax Assessment Act 1997 section 328-130.

Reasons for decision

The conditions for a CGT asset to satisfy the active asset test are contained in section 152-35 of the ITAA 1997. That section requires that the relevant asset must be an active asset of the taxpayer for the relevant period of time.

In the present case, the asset is being leased to another entity so it cannot be said to be employed directly in carrying on a business. Subsection 152-40(4)(e) of the ITAA 1997 states that even if an asset would otherwise qualify as an active asset, it cannot be an active asset if its main use is to derive rent.

Taxation Determination TD 2006/63 states at paragraph 9:

If a CGT asset, such as land, is leased by a taxpayer to a connected entity for use in the connected entity's business, the question arises as to whether the main use of the asset is to derive rent.

In determining the main use of an asset for the purposes of paragraph152-40(4)(e) of the ITAA 1997, any use of the asset by a connected entity is treated as the taxpayers use of the asset (paragraph 152-40(4A)(b) of the ITAA 1997).

Consequently, in order for the property to be an active asset, the entity carrying on business on the Property will need to be either your affiliate, as defined in section 328-130 of ITAA 1997, or connected with you as defined in section 328-125.

Connected entity

The meaning of connected with is found in section 328-125 of the ITAA 1997. It states at paragraph 328-125(1)(a) that an entity is connected with another entity if either controls the other in the manner described in the section.

For present purposes, the relevant paragraph is 328-125(2)(a)(ii) of the ITAA 1997 which states that an entity controls another if it beneficially owns, or has the right to acquire the beneficial ownership of, interests in the other entity that carry between them the right to receive a percentage that is at least 40% of the partnership.

Since you hold a percentage of the partnership, you hold a controlling percentage. Therefore, by definition the partnership which is using the asset in the course of carrying on a business is connected with you.

Given that the partnership meets the definition in section 328-125 of the ITAA 1997 the asset would meet the definition of an active asset in sub-section 152-40(1) of the ITAA 1997. Furthermore, the effect of sub-section 152-40(4A) of the ITAA 1997 means that the exclusion provision in sub-section 152-40(4)(e) of the ITAA 1997 is not applicable. Consequently, the property does qualify as an active asset for the purposes of the small business concessions.