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Edited version of your written advice
Authorisation Number: 1051360579683
Date of advice: 13 April 2018
Ruling
Subject: CGT active asset
Question
Does the portion of the Land acquired by X in the income year 200x satisfy the active asset test under section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
No.
This ruling applies for the following periods:
Year ended 30 June 200x to 30 June 20xx
The scheme commences on:
1 July 200x
Relevant facts and circumstances
X inherited half share of a property in 19xx.
X ran a primary production business on this property in partnership with a family member. The partnership came to an end after four years and X operated the business as a sole trader.
The title to the other half share of the property (the Land) was transferred to X as part of a family financial rearrangement. X continued the primary production business on the Land in the same scale and manner as was done previously on the first half share of the property. This continued for four years after which the business came to an end.
After four years, the Land was agisted which continued for nine years. During this time, X was doing contract work at other properties as well as caring for the agisted cattle on the Land. X also maintained the Land and incurred expenses for that.
The Land was formally leased out for the next four years and was sold at the end of the lease period.
X satisfied the maximum net asset value test in relation to the Land the year the Land was sold as well as in the year before.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 152-35
Income Tax Assessment Act 1997 section 152-40
Reasons for decision
One of the basic conditions that must be satisfied by a taxpayer to be eligible to CGT small business relief is that the asset giving rise to the capital gain, for which the relief is being sought, passes active asset test in section 152-35.
Subsection152-35(1) states that
A CGT asset satisfies the active asset test if:
(a) you have owned the asset for 15 years or less and the asset was an active asset of yours for a total of at least half of the period specified in subsection (2); or
(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).
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According to subsection 152-35(2) |
(a) begins when you acquired the asset; and
(b) ends at the earlier of:
(i) the CGT event; and
(ii) if the relevant business ceased to be carried on in the 12 months before that time or any longer period that the Commissioner allows - the cessation of the business.
In the present case, X owned the Land for more than 15 years. The Land will satisfy the active asset test if it was an active asset for X for seven and half years during this period as per paragraph 152-35(1)(b).
According to section 152-40, a CGT asset owned by a taxpayer is an active asset if it was used or held ready for use in the course of carrying on a business by the taxpayer alone or by their affiliates or entities connected with the taxpayer. The business can be carried on by the taxpayer alone or in partnership.
Taxation Ruling TR 97/11 Income Tax: am I carrying on a business of primary production (TR) discusses various indicators to determine when an entity is carrying on a business. While each case depends on its facts and is not possible to lay down any conclusive test of whether a business of primary production is or is not being carried on, the Courts have held that certain indicators provide general guidance. Paragraph 13 of the TR lists them as follows:
● 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; and
● whether the activity is better described as a hobby, a form of recreation or a sporting activity.
During the period of ownership, X carried on a primary production business on the Land for the first four years. For the next nine years, X agisted the Land. Although X cared for the agisted cattle and maintained the Land, the frequency and the scale of the activities did not qualify as carrying on a business. The activities did not have significant commercial purpose or character or done with the purpose of making profit. They were not planned, organised or carried out in a businesslike manner. The Land was formally leased out for the last four years and was finally sold at the end of the lease period.
Therefore, of the total ownership period of 17 years, the Land was an active asset of X for only four years and accordingly does not satisfy the active asset test in paragraph 152-35(1)(b).