Edited version of private advice

Authorisation Number: 1051582538739

Date of advice: 24 September 2019

Ruling

Subject: CGT event D1

Question 1

Did CGT event D1 occur when you entered into the Deed of Variation and Assignment?

Answer

Yes.

Question 2

Have the basic conditions for the small business CGT concessions been met in relation to that CGT event?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on

1 July 20XX

Relevant facts

You purchased a XXha property in 19XX.

You operate a farming business on the property and have done so for more than XX years.

Your aggregated turnover is less than $XXX.

On XX/XX/20XX you entered into an Option Agreement with Company A for a term of X years under which you granted the company the option to lease part of your land. The agreement also sets out the terms of the lease if the lease option is exercised by Company A.

Subsequently you entered into a Deed of Variation and Assignment (DVA) which made variations to the Option Agreement including:

·         Allowing Company A to assign its interest in the Option Agreement to its related entity, Entity B.

·         Amending the lease terms to allow the tenant to enter into financing arrangements and agreeing to enter into a tripartite financing agreement with the tenant and financier if requested to. Under the tripartite financing agreement the financier may choose to exercise any powers and perform any obligations of the tenant under the lease if the tenant breaches the financing arrangements.

·         You agreeing to allow the tenant to sublease the lease if the lease option is exercised.

You have received an amount for entering into the DVA.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-35

Income Tax Assessment Act 1997 Section 152-10

Income Tax Assessment Act 1997 Section 152-12

Income Tax Assessment Act 1997 Section 152-35

Reasons for decision

All legislative references that follow are to the Income Tax Assessment Act 1997.

Question 1

Section 104-35 states that:

·         CGT event D1 happens if you create a contractual right or other legal or equitable right in another entity.

·         The time of the event is when you enter into the contract or create the other right.

·         You make a capital gain if the capital proceeds from creating the right are more than the incidental costs you incurred that relate to the event.

By entering into the DVA you created contractual rights in another entity including the following:

·         Right of Company A to assign its interest in the Option Agreement to Entity B.

·         Right of Entity B to enter into financing arrangements without breaching the Option Agreement and to require you to enter into a tripartite financing agreement.

·         Right of Entity B to sublease the lease if it exercises the lease option..

Therefore, it is considered that CGT event D1 happened when you entered in the DVA with the capital proceeds being the amount you received for entering into the DVA.

Question 2

For a capital gain to qualify for the small business CGT concessions contained in Division 152, the basic conditions in subsection 152-10(1) must generally be satisfied.

You are a CGT small business entity (SBE) as your aggregated turnover is less than $2 million and therefore meet one of the basic conditions.

The other basic conditions that you would usually have to meet are:

·         a CGT event happens in relation to a CGT asset of yours in an income year (paragraph 152-10(1)(a); and

·         the CGT asset satisfies the active asset test (paragraph 152-10(1)(d)).

However, the effect of subsection 152-12(1) is that paragraphs 152-10(1)(a) and (d) do not apply in the case of CGT event D1.

Instead, subsection 152-12(2) requires that the right giving rise to CGT event D1 must be inherently connected with another CGT asset which satisfies the active asset test.

Ther term 'inherently connected' is not defined in the Income Tax Assessment Act 1997 and therefore takes its ordinary meaning.

The principal purpose of the Option Agreement and DVA is to provide for the leasing of part of your land. All the rights you have granted by entering into the DVA are related to the leasing of the relevant land. Therefore, we consider that the rights you have created by entering into the DVA are inherently connected to that land.

As you have owned the land for more than XX years and you have used it in your farming business for at least X.X years, the land satisfies the active asset test under section 152-35.

Consequently, subsection 152-12(2) is satisfied and therefore the basic conditions for the small business CGT concessions been met in relation to your CGT event D1.