Edited version of private advice

Authorisation Number: 1051895902449

Date of advice: 7 September 2021

Ruling

Subject: Small business concessions

Question

Can the small business CGT concessions apply to the sale of subdivided land, from where business has operated on a small section of the land area only, with the vacant land to be sold and the business area retained?

Answer

No

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You have operated a sole trader small business since 19XX. You operate your business from your home property at all times, and you have operated from your current residence since 20XX.

The current residence is approximately X hectares and contains your main living residence and associated business area. The business is conducted in a large shed and adjacent covered area. There are no other premises from where the business activities are undertaken.

The property has been subdivided and X blocks of land will be sold. One block of land will be retained which includes the main residence and the associated business area.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 subsection 152-35(1)

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

Reasons for decision

The Commissioner's views on subdivided land disposals are discussed in Taxation Determination TD 97/3 Income tax: capital gains: if a parcel of land acquired after 19 September 1985 is subdivided into lots ('blocks'), do Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 treat a disposal of a block of the subdivided land as the disposal of part of an asset (the original land parcel) or the disposal of an asset in its own right (the subdivided block)?

This Determination provides that a disposal of a subdivided block is treated as the disposal of an asset in its own right, and not as a disposal of part of an asset (the original land parcel). The subdivided blocks are treated as separate assets under the capital gains provisions. These are also referred to as 'split assets.'

To qualify for the small business concessions, the basic conditions in Subdivision 152-A of the Income Tax Assessment Act 1997 (ITAA 1997) must be satisfied. One component of the basic conditions is that the active asset test, contained in section 152-35 of the ITAA 1997, is satisfied. Per subsection s152-35(1) of the ITAA 1997, a CGT asset satisfies the active asset test if the taxpayer has owned the asset for 15 years or less and the asset was an active asset of the taxpayer for a total of at least half of the relevant period; or, the taxpayer has owned the asset for more than 15 years and the asset was an active asset of the taxpayer for a total of at least 7 and a half years during the relevant period.

'Active asset' is defined in subsection 152-40(1) of the ITAA 1997 and refers to CGT assets that are 'used, or held ready for use, in the course of carrying on a business,' meaning that a CGT asset is an active asset at a given time if, at that time, the taxpayer owns the asset and it is used, or held ready for use, in the course of carrying on a business.

If land, part of which is used in the business of the taxpayer and part of which is vacant, is subdivided, the new subdivided blocks created out of the vacant part of the land will not satisfy the active asset test when they are sold. The subdivided blocks that are created out of the vacant part of the land are new assets that have never been used or held ready for use in any business. Therefore, they are not active assets, and the small business capital gains tax concessions cannot be accessed.