Edited version of private advice

Authorisation Number: 1051716055527

Date of advice: 17 July 2020

Ruling

Subject: Small business capital gains tax concessions

Question 1

Under 'Arrangement A', is Company X able to access the small business 15-year exemption provided by section 152-110 of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the disposal of the farmland?

Answer

Yes.

Company X satisfies the basic conditions as a connected entity that is a small business entity uses the farmland in its business and has done so for at least 7.5 years. Also, the additional conditions for the 15-year exemption will be met as the company has had a significant individual for more than 15 years and the significant individual just before the CGT event will be over 55 at that time and the event will happen in connection with that individual's retirement. Further information about the small business 15-year exemption can be found by searching 'QC 52288' on ato.gov.au

Question 2

Under 'Arrangement B', is Company X able to access the small business 15-year exemption provided by section 152-110 of the ITAA 1997 in relation to the disposal of the farmland?

Answer

Yes.

As with Arrangement A, Company X satisfies the basic conditions and the company has had a significant individual for more than 15 years. Although, under Arrangement B, the significant individual over the age of 55 will retain some level of involvement in major asset decisions after the CGT event, they will still cease working and having any day to day involvement in the business. That is, they will still have a significant reduction in working hours and a significant change in the nature of their present activities. Therefore, it is still accepted that the CGT event will happen in connection with their retirement.

This ruling applies for the following period:

Year ending 30 June 2021

The scheme commences on:

1 July 2020

Relevant facts and circumstances

Arrangement A

Company X owns farmland that is used in the farming operations of Trust Y.

The directors of Company X are Z, and their spouse W. Z holds all A to E class ordinary shares and all but one of the F class ordinary shares which is held by W.

Having regard to sections 152-55, 152-65, 152-70 and 152-75 of the ITAA 1997, Z has been a significant individual of Company X for at least 15 years of the ownership period of the relevant farmland and will be a significant individual of the company just before the disposal of the land.

Z and W are both over 55 years of age.

The farmland has been owned by Company X for more than 15 years and used by Trust Y since 200X in its farming business.

Trust Y is a discretionary trust with the beneficiaries including Z, W, their children, grandchildren and spouses of their children and grandchildren.

The directors of the corporate trustee of Trust Y are Z, W and their adult child, V and the shareholding is one ordinary share each.

Trust Y satisfies the definition of a small business entity and is 'connected with' Company X for the purposes of section 328-125 of the ITAA 1997.

Z is currently looking to significantly reduce their working hours and retire. Following their retirement, Z will not work on the farm or have any involvement in other aspects of the farming business such as the payment of invoices, control of bank accounts etc.

Z plans to transfer the farmland (which is made up of several blocks) from Company X to certain family trusts controlled by V.

Arrangement B

Under Arrangement A the facts remain the same as Arrangement A other than with respect to the following:

·        Z will be a co-director and a shareholder of the corporate trustee of one of the family trusts that will gain ownership of the farmland.

·        Z will be one the appointers (along with W and V) of the other family trusts that will gain ownership of the farmland.

Z will not be involved in the business operations following their retirement. Z's intention by these appointments are to ensure the success of the business operations following their retirement and the successful transfer of business operations to the next generation by mitigating certain perceived risks such as the inappropriate disposal of the farmland or use of the farmland as security.

Relevant legislative provisions

Income Tax Assessment Act 1997 subdivision 152-A

Income Tax Assessment Act 1997 section152-10

Income Tax Assessment Act 1997 subdivision 152-B

Income Tax Assessment Act 1997 section 152-110