Edited version of private advice

Authorisation Number: 1051651647061

Date of advice: 2 April 2020

Ruling

Subject: Small business CGT concessions

Question 1

Will the Commissioner of Taxation (the Commissioner) exercise his discretion to contained in subsection 152-125(4) of Income Tax Assessment Act 1997 (ITAA 1997) to extend the two year time limit that would ordinarily apply to payments from the SFT to its CGT concession stakeholders under section 152-125(1)(b) of ITAA 1997 to a period of five years and three months in order to accommodate a settlement on 30 June 2024 in relation to the sale of farming land granted by the SFT to the purchaser?

Answer

Yes

Question 2

Will the Commissioner exercise his general power of administration to extend the time required for payment of the superannuation contribution under section 292-100(4) of ITAA 1997 from two years to a period of five years and three months in order to accommodate a settlement on 30 June 2024 in relation to the sale of farming land granted by the SFT to the purchaser?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

July 20XX

Relevant facts and circumstances

The Family Trust carries on a dairy farming business (the Business).

The Family Trust has carried on the business for over XX years.

The total value of the assets in the business is less than XXX dollars.

The Family Trust currently has one main customer being "The Dairy'.

The dairy farm operation has been the family business for a number of generations.

Currently, the farm is operated jointly by individuals who are both over 55 years old.

Both the Individuals are beneficiaries of The Family Trust.

The next generation of the family do not wish to operate the dairy farm.

Sale of the land and business

Due to their age the owners decided to advertise the business and relevant land for sale around August 20XX. As a result of the campaign conducted a number of parties expressed their interest in the business.

Shortly after the business was advertised (business assets and land), the main customer of the business commenced a process to sell its own business.

Given the critical nature of the customer relationship between The Family Trust and Its main Customer, this announcement brought significant uncertainties to the future of the business.

Due to this uncertainty, all but one of the interested parties withdrew their expression of interest.

This put significant pressure on the sale process. As a result, the deal was heavily favoured for the buyer.

However, given the principle's age and their strong desire to retire from the farm they continued the sale process.

After three to four months of marketing and negotiations, The family Trust signed a contract to sell it business and land.

Details of the sale and lease to Glenwood

Three separate contracts were exchanged on XX July 20XX for the sale of land and business assets (including livestock and equipment). The terms of sale were as follows:

·                     business assets were transferred on XX July 20XX for $X,XXX,XXX subject to purchase price adjustments for livestock

·                     all lots of land to transfer / settlement date no later than XX June 20XX (or earlier at the purchaser's discretion)for a total transfer price of $X,XXX,XXX.

·                     a deposit of $XXX,XXX was paid to the vendor upon signing the contracts for the sale of the land.

·                     immediately following the settlement of the business and business assets, the purchaser entered into a five year lease agreement for the land with SFT.

The lease payments charged under the agreement are understood to be consistent with market rent.

The lease was entered into enable the purchaser to operate the farming business which had just been acquired on the land which was subject to the deferred settlement.

It is acknowledged that the structure of the sale in relation to the five-year deferred settlement is unusual and on its face disadvantages the vendor.

Based on information provided by the real estate agent, it is not uncommon for the purchaser, to acquire farming land and operations in this manner. In particular the purchaser, have purchased distressed farms in past using this approach where they:

·                     do not negotiate on the purchase price but offer significantly long settlement period;

·                     lease the land from the vendor until settlement and operate the farming business on the land;

·                     use the profit from carrying on the farming business until settlement to help them finance the purchase price.

Application of the Small Business15 year exemption

As a result of the sale of the land, business and business assets the family trust will have a:

·                     $XXX,XXX balancing adjustment gain/loss on the disposal of the equipment

·                     $XXX,XXX trading stock gain/ loss in on the disposal of the livestock

·                     $XXX,XXX net capital gain (after recoupment of capital losses and the application of the CGT general discount) on the sale of the land acquired after 20 September 1985 (post-CGT land)

·                     $X,XXX,XXX disregarded capital gain on the sale of the land acquired before 20 September 1985 (pre-CGT land)

Assumptions

·                     Following settlement of the pre and post-CGT land, SFT will to make payment of the exempt amounts immediately to the owners as the CGT concessional stakeholders. The payment will be shared 50/50 between the two owners on the basis that they each have a 'shareholders participation percentage of 50% in accordance with subsection 152-125(2)

·                     Within 30 days of the exempt amounts being received by the principles, they will both contribute up to $XXX,XXX each to their superannuation fund and give their superannuation trustee the required notification in accordance with subsection 292-100(2) that the amount should be assessed under the CGT cap in accordance with section 292-100 and not treated as a non-concessional contribution in accordance with section 292-90(1),subparagraph 292-90(2)(c)(iii) and sections 292-100.

·                     At the time the contribution is made we would ask the Commissioner to assume that both the principles, will satisfy the 'Work Test' in regulation 7.04(2)(b) of the Superannuation Industry (Supervision) Regulations 1994(SISR).

Relevant legislative provisions

Income Tax Assessment Act 1997 subdivision 152-A

Income Tax Assessment Act 1997 section 152-105

Income Tax Assessment Act 1997 section 152-110

Income Tax Assessment Act 1997 subsection 152-125(1)

Income Tax Assessment Act 1997 paragraph 152-125(1)(b)

Income Tax Assessment Act 1997 subsection 152-125(2)

Income Tax Assessment Act 1997 subsection 152-125(4)

Income Tax Assessment Act 1997 section 285-85

Income Tax Assessment Act 1997 section 292-90

Income Tax Assessment Act 1997 section 292-100

Income Tax Assessment Act 1997 section 292-105

Reasons for decision

Question 1

15 year exemption

The rules covering the small business 15 year exemption are contained in Subdivision 152-B of the ITAA 1997. If you qualify for the small business 15 year exemption you can entirely disregard the capital gain you make from the disposal of a capital gains tax (CGT) asset and do not need to apply any other concessions. In addition, you do not have to apply capital losses against your capital gain before applying the exemption.

Under section 152-110 of the ITAA 1997, a trust can disregard the capital gain made on the disposal of a CGT asset if the trust:

·                     for the gain satisfies the basic conditions for the small business CGT concessions in Subdivision 152-A of the ITAA 1997

·                     continuously owned the CGT asset for the 15 year period ending just before the CGT event

·                     had a significant individual for a total of at least 15 years (even if it was not the same significant individual during the whole period) during which the trust owned the CGT asset; and an individual who was a significant individual of the trust just before the CGT event was either:

-                    55 or over at the time and the event happens in connection with the individual's retirement, or

-                    permanently incapacitated at the time.

In your case, the basic conditions contained in Subdivision 152-A of the ITAA 1997 were satisfied because:

·                     a CGT event occurred when you sold the assets of the trust

·                     the event resulted in a gain

·                     you satisfied the maximum net value asset test at the time of the event, and

·                     you operated the business continually for more than 15 years

In addition, just before the CGT event:

·                     you had a significant individual for the entire ownership period of the farming business, and

·                     the significant individual, who was more than 55 years old, has decided to retire.

The trust qualifies for the small business 15 year exemption in section 152-110 of the ITAA 1997.

Extension of time

Section 152-125 of the ITAA 1997 provides that, if a capital gain made by a trust is disregarded under the small business 15 year exemption, or would have been except that the capital gain was disregarded anyway because the relevant CGT asset was acquired before 20 September 1985, any distribution made by the company of that exempt amount to a CGT concession stakeholder is not included in the assessable income of the CGT concession stakeholder, and not deductible to the trust, if the following conditions are satisfied:

·                     the trust makes a payment within two years after the CGT event that resulted in the capital gain or, in appropriate circumstances, such further time as allowed by the Commissioner

·                     the payment is made to an individual who was a CGT concession stakeholder of the trust just before the CGT event; and

·                     the total payments made to each CGT concession stakeholder does not exceed an amount determined by multiplying the CGT concession stakeholders control percentage by the exempt amount.

The Commissioner may exercise his discretion under subsection 152-125(4) of the ITAA 1997 and allow further time to make payments to the concessional stakeholder taking into account the individual circumstances and commercial practices of each case. The range of factors that the Commissioner will consider in allowing an extension of time includes:

a) whether there is evidence of an acceptable explanation for the period of extension requested and whether it would be fair and equitable in the circumstances to provide such an extension;

b) whether there is any prejudice to the Commissioner if the additional time is allowed (however, the mere absence of prejudice is not enough to justify the granting of an extension);

c) whether there is any unsettling of people, other than the Commissioner, or of established practices;

d) the need to ensure fairness to people in like positions and the wider public interest;

e) whether there is any mischief involved; and

f) the consequences of the decision.

Application to your circumstances

There are multiple reasons why you are unable to make a payment of the full exempt amount to the CGT concession stakeholder by the end of the two years after the CGT event.

·                     The funds from the sale of land will not be received until XX June 20XX and therefore SFT will not have the cash to distribute the exempt amount to the CGT concessional stakeholder until XX June 20XX.

·                     It is not uncommon for the vendorto acquire farming land and operations in this manner over an extended period of time.

·                     This is an unusual situation (i.e. it is an exception rather than norm) where the vendor had to agree to a long settlement term due to lack of buyers in the market.

Having considered the relevant circumstances, the Commissioner will exercise his discretion and extend the two year time limit under subsection 152-125(4).

Question 2

In-specie contribution

The term 'contribution' is not defined in the ITAA 1997. Taxation Ruling TR 2010/1: 'Income tax:superannuation contributions' outlines the Commissioner's view on the ordinary meaning of contribution, how a contribution can be made and when contributions are made for the purposes of the ITAA 1997.

Section 285-5 of the ITAA 1997 provides that a superannuation contribution can be made by transferring property to the superannuation provider (an in-specie contribution) providing the contribution is or includes the market value of the property.

CGT lifetime cap

If an individual makes an in-specie contribution of an asset to their superannuation fund with the intent of disregarding all or part of the capital gain under the CGT small business concessions, they may also be eligible to exclude all or part of that contribution from counting against their non-concessional cap and instead be counted against their CGT cap under section292-105 of the ITAA 1997.

Paragraph 292-90(2)(c) of the ITAA 1997 provides for certain types of contributions to be excluded from being considered a non-concessional contribution. One such contribution is a contribution covered under section 292-100 relating to certain CGT-related payments, to the extent that it does not exceed your CGT cap amount when it is made.

Subsection 292-100(1) of the ITAA 1997 states that a contribution is covered under this section if it is:

a) a contribution made by an individual to a fund in respect of the individual;

b) the requirement in subsections (2), (4), (7) or (8) is met; and

c) the individual chooses to apply this section to an amount that is all or part of the contribution.

Where an individual intends to disregard any capital gain resulting from a CGT event under section 152-105 of the ITAA 1997 (15 year exemption for individuals), subsection 292-100(2) is the appropriate subsection to consider. Paragraph 292-100(2)(b) requires an individual to make a contribution to their superannuation fund before the later of:

the day they are required to lodge their income tax return for the income year in which the CGT event happened;

30 days after the day they receive the capital proceeds

As you will qualify for the small business 15 year exemption when you retire during the 20XX income year, the capital gain can be entirely disregarded. Accordingly, if you make an in-specie contribution of the property to your fund in connection with your retirement, you are eligible to choose to exclude some or all of the contribution from being a non-concessional contribution, up to your CGT cap.

The choice will only be valid if it is:

(a) made in the approved form; and

(b) given to the superannuation fund on or before the time the contribution is made.