Edited version of your written advice

Authorisation Number: 1051473419536

Date of advice: 22 February 2019

Ruling

Subject: Small business concessions-active asset test

Question 1

Is your interest in the property an active asset under section 152- 35 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

No

This ruling applies for the following periods:

Year ending 30 June 2019

Year ending 30 June 2020

The scheme commences on:

1 July 2018

Relevant facts and circumstances

A few decades ago you worked as a contractor for Person A, who operated a business as a sole trader where all trading income and expenses was received and paid by Person A.

Person A was the legal owner of the property.

Person A has a family member.

Person A never married and did not have any children.

The family member never married and did not have any children.

A number of decades ago you entered into a share farming arrangement with Person A.

You received a yearly payment under the share farming arrangement with Person A.

Due to Person’s A and their family member’s age you had undertaken most of the farming operations at the property.

You estimate you have put in over $XXX, XXX in time and labour to improve the property over the years.

The Last Will and Testaments of Person A and their family member were executed.

You were named as the Executor of both Wills.

Clause Y of the Person’s A Will provides that on their death they give, devises and bequeaths all their real and personal property whatsoever absolutely to family member providing they survive Person A by XX days. In the event the family member predeceased or does not survive Person A by XX days all their real and personal property is absolutely to you.

Clause Y of the family member’s Will provides that on the death of the family member they give, devises and bequeaths all their real and personal property whatsoever absolutely to Person A providing they survive the family member by XX days. In the event Person A predeceased or does not survive the family member by XX days all their real and personal property absolutely to you.

Person A passed away and Probate for Person’s estate was granted.

The family member inherited the property.

The family member passed away a few months after Person A and Probate for the family member’s estate was granted.

You are the sole owner of the property as you inherited the property on the date of death of the family member.

You as a partner in a partnership used the property in the following way:

● To carrying on a primary production business for a period significantly less than half your period of ownership.

● Leased the property to a third party for more than half the period on ownership.

● Enter into a share faming arrangement of a few years with a third party.

You did not make any lease payment to Person A or to the family member when you used the property before their deaths.

Person A and the family member are not related to you nor are they your affiliate or an entity connected to you or the partnership.

You had no active involvement in the property during the period the property was leased to a third party.

The partnership returned the leasing income for the property in the partnership’s tax returns.

The partnership also returned primary production income from the sale of stock in the partnership’s tax returns.

The partnership ceased its farming operation at the property.

You entered into a share farming arrangement with a third party to use the property.

You had no active involvement in the operation and decision making process in respect of the share farming activity conducted on the property by the third party.

You are not in partnership with third party under the share farming arrangement.

Due to the declining health of your spouse you have become their carer and are considering selling the property.

You receive a carer payment to assist in caring for your spouse.

You expect a contract to purchase the property will be entered into within XX months.

Relevant legislative provisions

Income Tax Assessment Act 1997 paragraph 152-35(1)(a)

Income Tax Assessment Act 1997 subsection 152-35(2)

Income Tax Assessment Act 1997 section 152-40

Income Tax Assessment Act 1997 subsection 152-40(1)

Income Tax Assessment Act 1997 paragraph 152-40(1)(a)

Income Tax Assessment Act 1997 subsection 152-40(4)

Income Tax Assessment Act 1997 paragraph 152-40(4)(e)

Reasons for decision

Active asset test

Subsection 152-35(1) of the ITAA 1997 states that a CGT asset satisfies the active asset test 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 period of ownership, 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 and a half years.

A CGT asset is an active asset if at a given time, among other things, it is owned and used (or held ready to use) in the course of carrying on a business (paragraph 152-40(1)(a) of the ITAA 1997).

Importantly, paragraph 152-40(4)(e) of the ITAA 1997 provides that an asset whose main use is to derive rent cannot be an active asset.

You have suggested that you have an equitable interest in the property before you acquired the property on the date on death of the family member.

Equitable interest

In the absence of evidence to the contrary, property is considered to be owned by the person(s) registered on the title.

However, ownership can also be claimed by an equitable owner for reasons explained below. If this fact can be proven beyond doubt, then ownership belongs to the equitable owner.

To prove that a different equitable interest exists, there must be evidence that a trust, whether express, constructive or resulting or implied has been established such that one party is taken merely to hold their interest in the property for the benefit of the other.

Express Trust

All State property laws mandate that the creation of a trust over real property be evidenced in writing. You have not produced any evidence to show that you, Person A or the family member had entered into a written agreement that Person A or the family member held their legal interest in the property as Trustee for you. Therefore, it is concluded that there was no express trust in respect of that interest.

Constructive Trust

No evidence has been provided of a court order as to the existence of a constructive trust, therefore, it is concluded that no constructive trust exists in respect of the property.

Resulting or Implied Trust

Implied/resulting Trust

An implied trust is a trust that is implied from the presumed intention of the owner of the property. That is, it is the presumed intention of the owner of the property that they merely hold it on trust for another.

Taxation Ruling TR 93/32 discusses the implications for taxpayers who contend that the equitable interests in the property do not correspond to the legal interest, and concludes with the following statement (at paragraph 41):

We consider that there are extremely limited circumstances where the legal and equitable interests are not the same and that there is sufficient evidence to establish that the equitable interest is different from the legal title. We will assume where taxpayers are related, eg husband and wife, that the equitable right is exactly the same as the legal title.

For example, where a person purchases and pays for property but legal title to it is transferred to another person at the purchaser's direction, if that other person is a stranger, the presumption of resulting trust arises and the property is considered to be held on trust for the purchaser.

However, where the property is transferred to a spouse or child of the purchaser, the presumption of resulting trust is replaced by the presumption of advancement which deems the purchase to be prima facie an advancement (that is, an absolute gift from the purchaser to the spouse or child). The consequence of the presumption of advancement being upheld is that the parties will hold their equitable interests in the property in the same proportions as their legal interests.

Application to your circumstances

In this case, it is Person A who initially owned the property until their death at which point in time the family member inherited the property. This is supported by the fact the legal and equitable owners of the property is found in copy of the Wills bequeathing the property to you upon their deaths. Additionally, a review of Person A and the family member’s Will does not state anything to imply that there was a trust arrangement in place or that you had legal interests in the property prior to their deaths.

We acknowledge there was a close relationship between you, Person A and the family member and that you had operated the farming operation on property over a number of years and provided your time and labour to improve the property. However, these facts do not give sufficient weight that you have an equitable interest in the property as it does not extinguish Person A and the family member’s legal or equitable rights in respect of the property as the owners. As noted above in the absence of strong evidence demonstrating the existence of a resulting trust, Person A and the family member had the legal and equitable right to the property.

Therefore, you do not hold an equitable interest in respect of the property.

In respect of the application of the active asset you inherited the property on the day the family member passed away and you are seeking to dispose of the property within XX months upon the issuing to this ruling. Therefore, the property has been owned for a period of less than 15 years and we need to consider the use of the property over the period of time the property was held by you and whether it was an active asset of yours for a total of at least half of the period of ownership. At this point in time the property would need to be used or held ready for use in the course of carrying on a business that was carried on by you, your affiliate or another entity for a period of more than XX years in order for the property to be considered an active asset.

The period of ownership before renting of the property and the day after the renting of the property ceased until the partnership ceased its business operation

A review of the information provided indicates the property was used to carry on a business for a period significantly less than half the period of ownership.

The period the property was rented

In this period the partnership used the property to derive rent from a commercial lease for a period significantly more than half the period of ownership. The income derived from the property during this period was rental income from an unrelated party.

The period of share farming until the disposal of the property

Share Farming

Taxation Determination TD 95/62 discusses whether the owner of land who allows the land to be used in a share farming arrangement would be considered to be engaged in a business of primary production and states:

In certain circumstances, a share farming arrangement may amount to the carrying on of a business in partnership. Factors which are considered by the Commissioner to be relevant to the existence or otherwise of a partnership generally are set out in Taxation Ruling TR 94/8. If a partnership is in existence then each partner will of course be considered to be carrying on that business.

Many arrangements do not amount to the carrying on of a business in partnership. In such cases, the fact that the land is used for cultivation in a business of primary production does not necessarily mean that the owner of the land is also carrying on that business.

To be carrying on a business, the taxpayer must be involved in the activities that make up the business. This would be evidenced by an element of control over, and/or an ongoing participation in, the business. The involvement should be direct or immediate, rather than passive. The payment of expenses relating to the ownership of the land would not, without more, be sufficient.

In this period, based on the information provided you had no active involvement in operation or the decision making process in respect of the share farming activity conducted on the property by a third party until the property is disposed of. As the property was not used or held ready for use in the course of carrying on a business that was carried on by you, your affiliate or another entity connected with you, the property was not an active asset during the period it was used for share farming.

It should also be noted that, if the property was considered to have been used by you in the course of carrying on a business (in your own right) during the period of the share farming arrangement, the payments you received for the use of the property would be in the nature of income from property. In that case, the rental exclusion in paragraph 152-40(4)(e) of the ITAA 1997 would apply and the property would not be an active asset.

After considering the information provided such as the comparative times and the use of the property over the ownership period we consider that the main use of the property was to derive rent.

Accordingly, you fail the active asset test requirement that the asset must have been active for at least half the period of ownership in terms of paragraph 152-35(1)(a) of the ITAA 1997. As the property is not an active asset it does not satisfy the basic conditions for the small business CGT concessions set out in Sub-division 152-A of the ITAA 1997 and those concessions will not be available to you.