Edited version of your written advice

Authorisation Number: 1051382761327

Date of advice: 6 June 2018

Ruling

Subject: CGT - small business concessions

Question

Are you a small business entity carrying on a business of primary production under division 328-110 of the Income Tax Assessment 1997?

Answer

Yes

Question 2

Will the property qualify as an ‘active asset’ for the purpose of section 152-35 of the Income Tax Assessment 1997?

Answer

Yes

Question 3

Are you eligible to apply the small business capital gain (CGT) 15 year exemption under Division 152-B of the Income Tax Assessment 1997 on the disposal of your original ownership interest in the property?

Answer

Yes – however, you will not be eligible to apply the 15 year exemption to the ownership interest that you acquired on the death of your spouse unless you dispose of the Property within the 2 year period

Question 4

Will you be eligible to apply the 50% capital gain discount under Subdivision 115-A of the Income Tax Assessment 1997 to any capital gain made on the disposal of the ownership interest that you acquired from your spouse?

Answer

Yes.

Question 5

Will you be eligible to apply the CGT small business 50% reduction under Subdivision 152-A of the Income Tax Assessment 1997 to any capital gain made on the disposal of the ownership interest that you acquired from your spouse?

Answer

Yes.

Question 6

Will you be eligible to apply the CGT small business retirement exemption up to a lifetime limit of $500,000 under Subdivision 152-A of the Income Tax Assessment 1997 to any capital gain made on the disposal of the ownership interest that you acquired from your spouse?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2018

Year ended 30 June 2019

The scheme commences on:

1 July 2017.

Relevant facts and circumstances

In 19XX, you acquired cattle grazing farmland (the Property) as a joint tenant with your spouse.

Between 19XX and 20XX you ran a cattle grazing breeding operation in partnership with your spouse.

The cattle are a composite of Hereford and Angus.

The cattle are in a continuous breeding program to produce young steers and heifers for the sale at local sale yards.

Your profit and loss figures show a profit in X of the last X financial years.

You have installed or purchased various infrastructure, buildings, plant and machinery

You are a member of the MLA (Meat and Livestock Australia).

The Property is in the National Livestock Identification System used for buying and selling cattle.

You are Livestock Production Assurance accredited and registered as a primary producer.

In 20XX you entered a retirement home.

In 20XX your spouse passed away.

In 20XX you inherited your spouse’s half ownership interest in the Property.

You continued the cattle operation as a sole trader.

Your aggregated turnover is less than $2 million.

You are over the age of 55 and plan to retire.

You will transfer the Property to your child triggering a CGT event.

There are plans to do significant upgrades to aging infrastructure.

Since the death of your spouse, your child resides at the property 4 days a week and performs the cattle farming activities and engaged the services of a neighbour to help manage the cattle and provide advice.

Your child has the relevant qualifications and attends Landcare workshops regularly.

You intend to make a profit from the cattle grazing breeding operation.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5,

Income Tax Assessment Act 1997 Section 8-1,

Income Tax Assessment Act 1997 Section 995-1,

Income Tax Assessment Act 1997 Part 3-1, and

Income Tax Assessment Act 1997 Part 3-3

Reasons for decision

Summary

It is considered that you are carrying on a business of primary production for income tax purposes.

The Property is considered to be an active asset as it was used for the purposes of carrying on a business during the period of ownership.

You have met the basic conditions for the capital gains tax (CGT) small business 15 year exemption to apply to your half ownership interest in the Property.

For the 15-year exemption to apply to the half ownership interest you inherited from your spouse, the Property must be disposed within two years from the date of death.

If the Property is not sold within the 2 year period, the 15 year exemption does not apply to your spouse’s half ownership interest. However, you can apply the CGT discount to the capital gain before applying the remaining small business concessions.

If you do not continue to carry on the business, or use the asset in another business, after the two-year time limit, the active asset test may not be satisfied and the small business concessions may not be available.

Detailed Reasons

Carrying on a business

Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'.

The question of whether a business is being carried on is a question of fact and degree. The courts have developed a series of indicators that are applied to determine the matter on the facts.

Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? provides the Commissioner’s view of the indicators that are taken into account when determining when a taxpayer is carrying on a business of primary production. The factors considered important are:

● 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 regularity and repetition of the activity

● whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business

● whether the activity is planned, organised and carried on in a businesslike manner such that it is described as 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 sporting activity.

No one indicator is decisive. The indicators must be considered in combination and as a whole. Whether a 'business' is carried on depends on the large or general impression.

In your case you have operated this activity for over 25 years and have made a net profit from this activity in X of the last X years. The activities you do in relation to the Property are similar to activities carried on in that line of business by other business operators. Produce is bred and sold through the markets in a manner that is consistent with the industry. You spend a reasonable amount of time in relation to the operation and have maintained detailed financial and cattle keeping records. You hold the relevant qualifications and have sought advice, indicating that your activity is planned and organised in a businesslike manner. Therefore, upon consideration of the above factors, it is considered that you are carrying on a business of primary production for income tax purposes.

Small business concessions

To qualify for the small business concessions, you must satisfy several conditions that are common to all the concessions. These are called the basic conditions.

The basic conditions in Subdivision 152-A of the ITAA 1997 which are relevant to you are:

● the small business entity test; and

● the active asset test.

Small business entity

You will be a small business entity if you are an individual, partnership, company or trust that is carrying on a business and has an aggregated turnover of less than $2 million.

In your case, you are considered to be a small business entity.

Active asset test

The active asset test is satisfied if:

● 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 test period detailed below, or

● 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 7.5 years during the test period.

The test period is from when the asset is acquired until the CGT event. If the business ceases within the 12 months before the CGT event (or such longer time as the Commissioner allows) the relevant period is from acquisition until the business ceases.

A CGT asset is an active asset if it is owned by you and is:

● used or held ready for use in a business carried on (whether alone or in partnership) by you, your affiliate, your spouse or

● an intangible asset that is inherently connected with a business carried on (whether alone or in partnership) by you, your affiliate, your spouse or child, or another entity that is connected with you, carries on; for example, goodwill.

In your case, you satisfy the active asset test as you have held the property for more than 15 years and it has been used for the primary production of cattle for your entire ownership period.

CGT concessions

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 CGT discount

● 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 for the small business CGT concessions (the active asset test requires the asset to have been an active asset for at least 7.5 years of the whole period of ownership)

● continuously owned the CGT asset for the 15 year period ending just before the CGT event happened.

Deceased estates

Where an asset forms part of the estate of a deceased individual, section 152-80 of the ITAA 1997 provides that where the deceased individual would have been entitled to access the small business CGT concessions immediately before his or her death, then the trustee of the deceased estate will be eligible to access the concessions if a CGT event happens in relation to the CGT asset within two years of the individual’s death.

Under Division 152 of the ITAA 1997 four different CGT concessions may be accessed if the basic conditions in Subdivision 152-A are satisfied. These are the:

(a) 15-year exemption;

(b) 50% active asset reduction;

(c) retirement exemption; and

(d) small business rollover.

In this case, you have met the basic conditions for the capital gains tax (CGT) small business 15-year exemption to apply to your half ownership interest in the Property.

In determining whether the deceased would have been entitled to the 15-year exemption, where the deceased was not permanently incapacitated immediately prior to death, the deceased is only required to have been over 55 years of age or over and the disposal of the asset is not required to have happened in connection with retirement.

To apply the 15 year exemption to your spouse’s half ownership interest in the Property you will need to dispose of the Property within the 2 year period.

If the Property is not disposed within the 2 year period, the 15-year exemption doesn’t apply to your spouse’s half ownership interest.

You can apply the CGT discount (if applicable) to the capital gain on the ownership interest you acquired from your spouse before applying the remaining small business concessions.

Discount capital gain

CGT event A1 in section 104-10 of the Income Tax Assessment Act 1997, relating to the disposal of a CGT asset, will happen when you dispose of property. You will make a capital gain if the capital proceeds from the disposal are more than the cost base. You will make a capital loss of those capital proceeds are less than the reduced cost.

You will be eligible for the discount capital gains where:

● you are an individual

● the CGT event happened after 21 September 1999

● the capital gain must be calculated without any reference to indexation of the cost base; and

● the CGT asset was acquired more than 12 months the CGT event.

The discount percentage is 50%.

Where a capital gain meets these requirements, that capital gain is a discount capital gain. Generally, the discount percentage is applied to the discount capital gain, to arrive at your net capital gain.

You will be eligible to apply the discount capital gain of 50% to any capital gain on the ownership interest you acquired from your spouse, if your capital gain is calculated without any reference to indexation of the cost base.

Small business 50% reduction

Unlike the other small business concessions, the small business 50% active asset reduction applies automatically if the basic conditions are satisfied, unless you choose for it not to apply.

To apply the small business 50% active asset reduction, you need to satisfy only the basic conditions. There are no further requirements.

In your case, you satisfy the basic conditions and you will be eligible for the small business 50% active asset reduction to any capital gain made on the ownership interest you acquired from your spouse.

Retirement exemption

You may choose to apply the small business retirement exemption after the CGT discount has been applied and the small business 50% active asset reduction, that is, to the remaining 25% of the capital gain.

If you are an individual, you can choose to disregard all or part of a capital gain if:

● you satisfy the basic conditions

● you keep a written record of the amount you chose to disregard (the CGT exempt amount), and

● if you are under 55 years old just before you choose to use the retirement exemption, you make a personal contribution equal to the exempt amount to a complying superannuation fund or retirement savings account (RSA).

If you are 55 years old or older when you make the choice to access the retirement exemption, there is no requirement to pay any amount to a complying superannuation fund or RSA

For an individual choosing the retirement exemption, there is no requirement to terminate any activity or cease their business.

The amount of the capital gain that you choose to disregard (that is, the CGT exempt amount) must not exceed your ‘CGT retirement exemption limit’ or, in the case of a company or trust, the CGT retirement exemption limit of each CGT concession stakeholder receiving a payment.

As discussed above, you satisfy the basic conditions and you are over 55 years of age. Therefore, providing you have no previous CGT exempt amounts disregarded under the retirement exemption, you will be able to choose to disregard up to $500,000 under the retirement exemption to any capital gain made on the ownership interest you acquired from your spouse.by simply keeping a record of the amount you chose to disregard.

Application to your situation

In this case, it is considered that you are carrying on a business of primary production for income tax purposes. You have met the basic conditions for the capital gains tax (CGT) small business 15-year exemption to apply to your half ownership interest in the Property.

To apply the 15 year exemption to your spouse’s half ownership interest in the Property you will need to dispose of the Property within the 2 year period.

If the Property is not disposed within the 2 year period, the 15-year exemption doesn’t apply to any capital gain made on the ownership interest you acquired.

You can apply the CGT discount to any capital gain made on the ownership interest you acquired from your spouse before applying the remaining small business concessions.