Edited version of private advice

Authorisation Number: 1051907101990

Date of advice: 12 October 2021

Ruling

Subject: Capital gains tax

Question 1

Was there a Capital Gains Tax (CGT) event when the Option was granted over Property1?

Answer

Yes

Question 2

If the answer to question 1 is yes, will the anticipated gain from the grant of an option be considered a capital gain event pursuant to part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 3

Upon the exercise of the option and exchange of contract, will the proceeds from the sale of Property1 be assessable as ordinary income to MRS pursuant to 6-5 of the ITAA 1997 or capital gains pursuant to Part 3-1 of the ITAA 1997?

Answer

Part 3-1 of the ITAA will apply to the proceeds of the sale

Question 4

If the sale of Property1 is assessable as capital gains, will capital gains be partially exempted because it was MRS main residence?

Answer

No

Question 5

If the sale of Property1 is assessable as capital gains, will discount capital gains under Division 115 of the ITAA 1997 be available to MRS?

Answer

Yes

Question 6

If the sale of Property1 is assessable as capital gains, will the small business CGT concessions be available to MRS under Division 152 of the ITAA 1997?

Answer

Yes

Question 7

Was there a CGT event when the Option was granted over Property2?

Answer

Yes

Question 8

If the answer to question 7 is yes, will the anticipated gain from the grant of an option be considered a capital gain event pursuant to part 3-1 of the ITAA 1997?

Answer

Yes

Question 9

Upon the exercise of the option and exchange of contract, will the proceeds from the sale of Property2 be assessable as ordinary income to the Trust pursuant to 6-5 of the ITAA 1997 or capital gains pursuant to Part 3-1 of the ITAA 1997?

Answer

Part 3-1 of the ITAA will apply to the proceeds of the sale

Question 10

If the sale of Property2 is assessable as capital gains, will discount capital gains under Division 115 of the ITAA 1997 be available to the Trust?

Answer

Yes

Question 11

If the sale of Property2 is assessable as capital gains, will the small business CGT concessions be available to the Trust under Division 152 of the ITAA 1997?

Answer

Yes

This ruling applies for the following periods:

Income year ending 30 June 20XX

Income year ending 30 June 20XX

Income year ending 30 June 20XX

Income year ending 30 June 20XX

Income year ending 30 June 20XX

The scheme commences on:

1 April 20XX

Relevant facts and circumstances:

In the mid-19XXs, MRS and MR purchased Property1 as joint tenants.

Property1 had several acres of land and included a residence.

Prior to the purchase of Property1, MRS and MR carried on a farming business.

Immediately following the acquisition of Property1 MRS and MR moved into the residence. The residence was their main residence until early-20XXs.

In mid-19XXs MRS and MR established the Trust. The Trust is a discretionary trust. MRS and MR and their relatives and related entities are potential beneficiaries of the Trust.

The Trust carries on a farming business.

In early-19XXs, the Trust purchased Property2.

MRS and MR and the Trust purchased the properties for use as residential premises and to carry on a farming business. They considered that the size of the properties made them appropriate to carry on the primary production activities.

Property1 and Property2 are adjacent to each other and were used in the farming business of the Trust.

Improvements were made to the properties for the purposes of the farming business.

In early-20XXs, the Government compulsorily acquired part of Property1, including the residence.

In early-20XXs, MRS and MR and the Trust were approached regarding the granting of options over Property1 and Property2. The options were granted. The options lapsed.

In mid-20XXs MRS and MR and the Trust were approached by the Company in relation to the proposed sale of Property1 and Property2.

In mid-20XXs, MRS and MR entered Agreement1 (option) with the Company, and the Trust entered Agreement2 (option) with the Company.

The options were exercised by the Company in late-20XXs.

In late-20XXs, MRS entered a contract for the sale of Property1.

In late-20XXs, the Trust entered a contract for the sale of Property2.

MRS and MR and the Trust did not make application to Council for the subdivision of Property1 or Property2 prior to entering, or since entering Agreement1 and Agreement2.

Prior to entering Agreement1 and Agreement2, MRS and MR and the Trust did not take steps to sell Property1 or Property2, other than granting the earlier options.

MRS does not carry on any business activities in their personal capacity.

MRS and the Trust anticipate that there will be capital gains from Agreement1 and Agreement2.

MRS and the Trust anticipate that there will be capital gains from the sale of Property1 and Property2.

MRS and the Trust have self-assessed that MRS is connected with the Trust for the purposes of section 328-125 of the ITAA 1997 in the income year that the properties were sold.

At the time the options were exercised and the properties sold MRS was over the age of 55.

In mid-20XXs, MRS and MR began to review their succession and retirement plan and took steps in relation to their retirement having several meetings with their solicitor and accountant in planning their retirement.

In early-20XXs, MR suffered poor health and the family encouraged them to consider retirement.

The decision to enter the options were made with regard to the retirement and succession plan of MRS and MR and the poor health of MR.

MRS and MR and the Trust progressively scaled down the farming business until the passing away of MR in late 20XXs.

The farming business continued to be carried out on the properties up to the sale of the properties in late-20XXs. However, there was a significant reduction in the number of hours worked with respect to the farming business, and a significant change in the nature of their activities as the activities were being undertaken on a significantly smaller scale, particularly given that MR had been unwell for some time.

The Trust self-assessed that it is a CGT small business entity for the purposes of section 152-10 (1AA) of the ITAA 1997.

MRS and the Trust fail the maximum net asset value test in section 152-15 of the ITAA 1997.

Relevant legislative provisions

Section 70-10 of the Income Tax Assessment Act 1997

Part 3-1 of the Income Tax Assessment Act 1997

Section 104-10 of the Income Tax Assessment Act 1997

Section 104-40 of the Income Tax Assessment Act 1997

Division 115 of the Income Tax Assessment Act 1997

Section 115-10 of the Income Tax Assessment Act 1997

Section 115-15 of the Income Tax Assessment Act 1997

Section 115-20 of the Income Tax Assessment Act 1997

Section 115-25 of the Income Tax Assessment Act 1997

Section 116-65 of the Income Tax Assessment Act 1997

Subdivision 118-B of the Income Tax Assessment Act 1997

Section 118-100 of the Income Tax Assessment Act 1997

Section 118-110 of the Income Tax Assessment Act 1997

Section 118-115 of the Income Tax Assessment Act 1997

Section 118-120 of the Income Tax Assessment Act 1997

Section 118-130 of the Income Tax Assessment Act 1997

Section 118-125 of the Income Tax Assessment Act 1997

Section 118-165 of the Income Tax Assessment Act 1997

Section 118-185 of the Income Tax Assessment Act 1997

Section 118-200 of the Income Tax Assessment Act 1997

Section 134-1 of the Income Tax Assessment Act 1997

Division 152 of the Income Tax Assessment Act 1997

Section 152-10 of the Income Tax Assessment Act 1997

Section 152-15 of the Income Tax Assessment Act 1997

Section 152-35 of the Income Tax Assessment Act 1997

Section 152-40 of the Income Tax Assessment Act 1997

Subdivision 152-B of the Income Tax Assessment Act 1997

Section 152-105 of the Income Tax Assessment Act 1997

Subdivision 152-C of the Income Tax Assessment Act 1997

Subdivision 152-D of the Income Tax Assessment Act 1997

Subdivision 152-E of the Income Tax Assessment Act 1997

Section 328-110 of the Income Tax Assessment Act 1997

Section 328-125 of the Income Tax Assessment Act 1997

Reasons for decision

Question 1

Subsection 104-40(1) of the ITAA 1997 provides that CGT event D2 happens if you grant an option to an entity, or renew or extend an option you had granted. The time of the CGT event is when the option is granted, renewed or extended (subsection 104-40(2)).

CGT event D2 happened when MRS and MR entered Agreement1 and granted an option over Property1.

Question 2

Subsection 104-40(4) of the ITAA 1997 provides that you make a capital gain from CGT event D2 if the capital proceeds from the grant, renewal or extension of the option are more than the expenditure you incurred to grant, renew, or extend it, and you make a capital loss if those proceeds are less.

Subsection 104-40(5) of the ITAA 1997 states that the capital gain or loss you make from the grant, renewal or extension of the option is disregarded if the option is exercised. Section 134-1 of the ITAA 1997 sets out the consequences of an option being exercised, and in situations where the option binds the grantor to dispose of the CGT asset, refers the grantor of the option to the effect in section 116-65 of the ITAA 1997. Subsection 116-65(2) states that the capital proceeds from the disposal of the CGT asset include any payment you received for granting, renewing or extending the option.

MRS anticipates that there will be a capital gain from granting the option (Agreement1). If the sale of Property1 is a disposal of a capital asset and the purchase amount is capital proceeds, any gain from granting the option under Agreement1 will be disregarded and will be included in the capital proceeds from the sale (disposal) of Property1.

Question 3

Generally, the proceeds of the sale of land will be taxed in one of three ways:

(1)  as ordinary income, where the land is held as trading stock and sold as part of a business

(2)  as ordinary income, where the land is not trading stock and is sold as part of an isolated transaction, or

(3)  on capital account, where the proceeds of sale are a mere realisation of a capital asset

Trading stock sold as part of a business

Subsection 70-10(1) of the ITAA 1997 provides that trading stock includes:

(a)  anything produced, manufactured or acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of a business; and

(b)  livestock

The High Court has accepted that land can be trading stock (see Federal Commissioner of Taxation v St Hubert's Island Pty Ltd (1978) 138 CLR 210 which considered the meaning of "trading stock" in the Income Tax Assessment Act 1936).

The Commissioners view on when land is trading stock is provided in Taxation Determination TD 92/124 Income tax: property development: in what circumstances is land treated as 'trading stock'?, which provides:

1.   Land is treated as trading stock for income tax purposes if:

• it is held for the purpose of resale; and
• A business activity which involves dealing in land has commenced.

Both the required purpose and the business activity must be present before land is treated as trading stock...

Property1 was purchased to use as a main residence and to carry on a primary production business (farm). The property was used in the farming business until late-20XXs. There is no evidence that when the property was owned by MRS and MR it was held for the purposes of resale as part of a business involving dealing in land.

Sold as part of an isolated transaction

In Federal Commissioner of Taxation v Myer Emporium Limited (1987) 163 CLR199 the High Court determined that profits made otherwise than in the ordinary course of a business are income where there is an intention or purpose to make a profit from the transaction:

Although it is well settled that a profit or gain made in the ordinary course of carrying on a business constitutes income, it does not follow that a profit or gain made in a transaction entered into otherwise than in the ordinary course of carrying on the taxpayer's business is not income. Because a business is carried on with a view to profit, a gain made in the ordinary course of carrying on the business is invested with the profit-making purpose, thereby stamping the profit with the character of income. But a gain made otherwise than in the ordinary course of carrying on the business which nevertheless arises from a transaction entered into by the taxpayer with the intention or purpose of making a profit or gain may well constitute income. Whether it does depends very much on the circumstances of the case. Generally speaking, however, it may be said that if the circumstances are such as to give rise to the inference that the taxpayer's intention or purpose in entering into the transaction was to make a profit or gain, the profit or gain will be income, notwithstanding that the transaction was extraordinary judged by reference to the ordinary course of the taxpayer's business. Nor does the fact that a profit or gain is made as the result of an isolated venture or a "one-off" transaction preclude it from being properly characterized as income... The authorities establish that a profit or gain so made will constitute income if the property generating the profit or gain was acquired for the purpose of profit-making by the means giving rise to the profit. (at 209-210)

The Court distinguished between profits from a realisation of capital, and profits from a profit-making scheme or undertaking (at 213):

... this Court... has accepted that profits derived in a business operation or commercial transaction carrying out a profit-making scheme are income, whereas the proceeds of a mere realization or change of investment or from an enhancement of capital are not income...

The proposition that a mere realization or change of investment is not income requires some elaboration. First, the emphasis is on the adjective "mere"... Secondly, profits made on a realization or change of investments may constitute income if the investments were initially acquired as part of a business with the intention or purpose that they be realized subsequently in order to capture the profit arising from their expected increase in value... It is one thing if the decision to sell an asset is taken after its acquisition, there having been no intention or purpose to sell at the time of acquisition of acquiring for the purpose of profit-making by sale. Then, if the asset be not a revenue asset on other grounds, the profit made is capital because it proceeds from a mere realization. But it is quite another thing if the decision to sell is taken by way of implementation of an intention or purpose, existing at the time of acquisition, of profit-making by sale, at least in the context of carrying on business or carrying out a business operation or commercial transaction.

The Commissioner's view on whether a transaction has a profit-making purpose is set out in Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income, which includes the following:

6. Whether a profit from an isolated transaction is income according to the ordinary concepts and usages of mankind depends very much on the circumstances of the case. However, a profit from an isolated transaction is generally income when both of the following elements are present:

(a)    the intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain; and

(b)    the transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction.

7. The relevant intention or purpose of the taxpayer (of making a profit or gain) is not the subjective intention or purpose of the taxpayer. Rather, it is the taxpayer's intention or purpose discerned from an objective consideration of the facts and circumstances of the case.

8. It is not necessary that the intention or purpose of profit-making be the sole or dominant intention or purpose for entering into the transaction. It is sufficient if profit-making is a significant purpose.

9. The taxpayer must have the requisite purpose at the time of entering into the relevant transaction or operation. If a transaction or operation involves the sale of property, it is usually, but not always, necessary that the taxpayer has the purpose of profit-making at the time of acquiring the property.

10. If a transaction or operation is outside the ordinary course of a taxpayer's business, the intention or purpose of profit-making must exist in relation to the transaction or operation in question.

...

13. Some matters which may be relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction are the following:

(a)    the nature of the entity undertaking the operation or transaction;

(b)    the nature and scale of other activities undertaken by the taxpayer;

(c)    the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained;

(d)    the nature, scale and complexity of the operation or transaction;

(e)    the manner in which the operation or transaction was entered into or carried out;

(f)     the nature of any connection between the relevant taxpayer and any other party to the operation or transaction;

(g)    if the transaction involves the acquisition and disposal of property, the nature of that property; and

(h)    the timing of the transaction or the various steps in the transaction.

MRS and MR purchased Property1 to use as a main residence and to carry on a primary production business (farm). The farming business was carried on by the Trust from part of Property1 until the sale of the property in late-20XXs. In that time improvements were made to the property for the purposes of the farming business. In early-20XXs the residence on Property1 ceased being used as the main residence of MRS and MR, and in early-20XXs part of Property1 (including residence) was compulsorily acquired by Government.

From early-20XX MRS and MR took steps to plan for their retirement and had several meetings with their solicitor and accountant. In early-20XXs MR fell ill and was encouraged by the family to consider retirement. At around this time, the MRS and MR were approached regarding the granting of an option over Property1. Given the poor health of MR and the plan to retire, the option was granted. This option lapsed in mid-20XXs, and in the mid-20XXs MRS and MR were approached by the Company regarding the grant of an option over Property1. The option was granted for the same reasons the previous option was granted. The Company exercised the option in late 20XXs and the property was sold. Prior to the sale of Property1, MRS and MR did not take any other steps to sell that property and did not make any application to local council for the subdivision of that property.

The foregoing shows that Property1 was purchased for use in a primary production business and was used for that purpose up until it was sold. The decision to enter the options and sell was made in consideration of MRS and MR intention to retire and because of the poor health of MR. MRS and MR did not take any action to subdivide the property before the sale and did not take any other action to sell the property.

In these circumstances it is considered that the sale is a mere realisation of a capital asset and is not part of a commercial transaction or business operation with a purpose of making a profit.

As such, Part 3-1 of the ITAA 1997 will apply to the proceeds of the sale. There will be a capital gain if the capital proceeds from the disposal are more than the asset's cost base, and a capital loss if the capital proceeds are less than the reduced cost base (section 104-10 of the ITAA 1997). MRS anticipates that there will be a capital gain.

Question 4

Subdivision 118-B of the ITAA 1997 allows you to ignore a capital gain or loss you make from a CGT event that happens to a dwelling that is your main residence (section 118-100 of the ITAA 1997).

Subsection 118-110(1) of the ITAA 1997 provides that a capital gain or capital loss you make from a CGT event that happens in relation to a CGT asset that is a dwelling or your ownership interest in it is disregarded if you are an individual, the dwelling was your main residence throughout your ownership period, and the interest did not pass to you as a beneficiary of or as trustee of a deceased estate.

Section 118-185 of the ITAA 1997 provides that you get only a partial exemption for a CGT event that happens in relation to a dwelling or your ownership interest in it if the dwelling was your main residence for part only of your ownership period and the interest did not pass to you as a beneficiary of or as trustee of a deceased estate.

Section 118-200 of the ITAA 1997 provides that you get only a partial exemption if your ownership interest in a dwelling passed to you as a beneficiary of a deceased estate or you owned it as trustee of a deceased estate.

Relevantly, a dwelling includes a building that consists wholly or mainly of residential accommodation and any land immediately under the building (subsection 118-115(1) of the ITAA 1997). Section 118-120 of the ITAA 1997 provides that the exemption applies to land adjacent to a dwelling to the extent that the land was used primarily for private or domestic purposes in association with the dwelling. The maximum area of adjacent land covered by the exemption is 2 hectares, less the area of land immediately under the dwelling.

Section 118-125 of the ITAA 1997 provides that your ownership period of a dwelling is the period on or after 20 September 1985 when you had an ownership interest in the dwelling, or land on which the dwelling is later built.

Section 118-130 of the ITAA 1997 provides that you have an ownership interest in a dwelling if:

• for land - you have a legal or equitable interest in it
• for a dwelling that is not a flat or home unit - you have a legal or equitable in it or a right to occupy it.

Section 118-165 of the ITAA 1997 provides that the exemption does not apply to a CGT event that happens in relation to land to which the exemption can extend under section 118-120 (about adjacent land) if that event does not also happen in relation to the dwelling or your ownership interest in it.

The residence (dwelling) on Property1 was used as MRS and MR's primary residence from the date of acquisition until early-20XXs. In early 20XXs, the Government compulsorily acquired part of Property1 including the residence (dwelling). The compulsory acquisition caused CGT event A1 to happen with respect to the dwelling, and from that time MRS no longer had a legal or equitable interest in the dwelling or a right to occupy the dwelling (the ownership period ceased). Therefore, when Property1 was sold by MRS, no CGT event happened in relation to a dwelling. As such, section 118-185 of the ITAA 1997 will not apply to reduce the capital gain from the sale of Property1. Further, section 118-165 of the ITAA 1997 will prevent MRS from claiming the exemption in respect of land that was adjacent to the dwelling (section 118-120 of the ITAA 1997) as the sale of Property1 did not include the dwelling.

Question 5

Division 115 of the ITAA 1997 sets out the requirements for a capital gain to be a discount capital gain. Relevantly, to be a discount capital gain:

•      the gain must be made by, an individual, a complying superannuation entity, a trust, or a life insurance company (section 115-10 of the ITAA 1997)

•      the CGT event must happen after 11.45am on 21 September 1999 (section 115-15 of the ITAA 1997)

•      the cost base must be calculated without reference to indexation (subsection 115-20(1) of the ITAA 1997), and

•      the CGT asset must have been acquired at least 12 months before the CGT event (subsection 115-25(1) of the ITAA 1997).

MRS is an individual, the property was sold after 21 September 1999, and the property was owned for more than 12 months. Provided the cost base of Property1 is calculated without reference to indexation, any capital gain from the sale of Property1 will be a discount capital gain.

Question 6

Division 152 of the ITAA 1997 provides certain CGT concessions (Small business 15-year exemption, Small business 50% reduction, Small business retirement exemption, and Small business roll-over) for small businesses that satisfy the basic conditions for relief set out in section 152-10 of the ITAA 1997. The concessions allow for a capital gain to be reduced or disregarded.

Subsection 152-10 (1) of the ITAA 1997 states:

A capital gain (except a capital gain from CGT event K7) you make may be reduced or disregarded under this Division if the following basic conditions are satisfied for the gain:

(a)    a CGT event happens in relation to a CGT asset of yours in the income year;

(b)    the event would (apart from this Division) have resulted in the gain;

(c)    at least one of the following applies:

                                  (i)       you are a CGT small business entity for the income year;

                                 (ii)       you satisfy the maximum net asset value test

                                (iii)      ...

                               (iv)       the conditions mentioned in subsection (1A) or (1B) are satisfied in relation to the CGT asset in the income year.

(d)    the CGT asset satisfies the active asset test.

CGT event happens that would have resulted in a gain

The sale of Property1 has caused CGT event A1 to happen and would result in a capital gain for MRS (MRS anticipates that there will be a capital gain).

CGT small business entity

Subsection 152-10(1AA) provides that you are a CGT small business entity for an income year if you are a small business entity for the income year, and you would be a small business entity for the income year if each reference in section 328-110 of the ITAA 1997 to $10 million were a reference to $2 million.

Section 328-110 of the ITAA 1997 provides that you are a small business entity for the current income year if you carry on a business in the current income year and you carried on a business in the previous income year and your aggregated turnover for the previous income year was less than $XX million, and/or your aggregated turnover for the current income year is likely to be less than $XX million.

MRS does not carry on any business activities in their personal capacity and is not a small business entity.

Maximum net asset value test

Section 152-15 of the ITAA 1997 sets out the maximum net asset value test:

You satisfy the maximum net value test if, just before the CGT event, the sum of the following amounts does not exceed $6,000.000:

(a)    the net value of the CGT assets of yours;

(b)    the net value of the CGT assets of any entities connected with you;

(c)    the net value of the CGT assets of any affiliates of yours or entities connected with tour affiliates (not counting any assets already counted under paragraph (b)).

MRS has self-assessed that they do not satisfy the maximum net asset value test.

Subsection (1A) or (1B)

Relevantly, subsection 152-10(1A) provides:

The conditions in this subsection are satisfied in relation to the CGT asset in the income year if:

(a)    your affiliate, or an entity that is connected with you, is a CGT small business entity for the income years; and

(b)    you do not carry on a business in the income year (other than in partnership); and

(c)    ...

(d)    In any case - the CGT small business entity referred to in paragraph (a) is the entity that, at a time in the income year, carries on the business (as referred to in subparagraph 152-40(1)(a)(ii) or (iii) or 152-40(1)(b)) in relation to the CGT asset.

Subsections 328-125 (3) and (4) of the ITAA 1997 set out when a discretionary trust is controlled by another entity:

(3)    an entity (the first entity) controls a discretionary trust if a trustee of the trust acts, or could reasonably expected to act, in accordance with the directions or wishes of the first entity, its affiliates, or the first entity together with its affiliates.

(4)    An entity (the first entity) controls a discretionary trust for an income year if, for any of the 4 income years before that year:

(a)    the trustee of the trust paid to, or applied for the benefit of:

(i) The first entity; or

(ii) any of the first entity's affiliates; or

(iii) the first entity and any of its affiliates

any of the income or capital of the trust; and

(b)    the percentage (the control percentage) of the income or capital paid or applied is at least 40% of the total amount of income or capital paid or applied by the trustee for that year.

The Trust has self-assessed that it is a CGT small business entity. The Trust used Property1 to carry on its primary production business. MRS and the Trust have self-assessed that MRS is connected with the Trust in the income year that Property1 Road was sold.

Active asset

Paragraph 152-35(1)(b) of the ITAA 1997 provides that a CGT asset satisfies the active asset test if 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 7½ years during the period specified in subsection 152-35(2) of the ITAA 1997. The relevant period begins when you acquire the asset and ends at the CGT event (subsection 152-35(2) of the ITAA 1997).

Paragraph 152-40(1)(a) of the ITAA 1997 provides that a CGT asset is an active asset at a time, if at that time you own the asset and it is used, or held ready for use, in the course of carrying on a business that is carried on by you, your affiliate or another entity that is connected with you.

Property1 was owned by MRS (and MR until late-20XXs) for over 30 years, and until it was sold in late-20XXs was used by the Trust in the operation of a primary production business; the land was used for farming.

Property1 was owned for more than 15 years and was used in the course of carrying on a business of an entity connected with MRS (the Trust). Property1 satisfies the active asset test.

Basic conditions conclusion

The basic conditions in section 152-10 of the ITAA 1997 are satisfied in relation to the capital gain from the sale of Property1:

•      a CGT event (disposal) happened in relation to a CGT asset (Property1)

•      the CGT event resulted in a capital gain (MRS anticipates that there will be a capital gain)

•      the conditions in paragraph 152-10(1A) of the ITAA 1997 are satisfied in relation to the CGT asset, and

•      the CGT asset satisfies the active asset test.

Small Business 15-year exemption

Section 152-105 of the ITAA 1997provides that an individual can disregard any capital gain arising from a CGT event if all of the following conditions are satisfied:

•      the basic conditions set out in section 152-10 of the ITAA 1997 are satisfied for the gain (subsection (152-105(a))

•      you continuously owned the CGT asset for the 15-year period ending just before the CGT event (subsection 152-105(b))

•      either you are 55 or over at the time of the CGT event and the event happens in connection with your retirement, or you are permanently incapacitated at the time of the CGT event. (subsection 152-105(d))

Basic conditions

The basic conditions set out in section 152-10 of the ITAA 1997 are satisfied for the gain (see above).

Continuously owned the CGT asset for 15 years just before the CGT event

Property1 was purchased in mid-1980s and sold in late20XXs; it was continuously owned by MRS for the 15-years just before the CGT event (the disposal of Property1).

Over 55 and in connection with retirement

MRS was over 55 at the time of the CGT event.

Whether a CGT event happens in connection with an individual's retirement depends on the particular circumstances of each case. There would need to be at least a significant reduction in the number of hours the individual works or a significant change in the nature of their present activities to be regarded as a retirement. However, it isn't necessary for there to be a permanent and everlasting retirement from the workforce.

MRS and MR began to consider their retirement plan in mid-20XXs and following the poor health of MR in early 20XXs and continued poor health, MRS and MR progressively reduced the number of hours worked on the farm business and took steps to sell the property (granting the two options) with a view to retire.

The sale of Property1 is considered to be in connection with the retirement of MRS.

Conclusion

As the small business 15-year exemption conditions are satisfied, MRS can disregard the capital gain arising from the sale of Property1.

As such, it is not necessary to consider the other concessions (Small business 50% reduction, Small business retirement exemption, and Small business roll-over) in Division 152 of the ITAA 1997.

Question 7

Refer to question 1 for a discussion of the relevant law.

CGT event D2 happened when the Trust entered Agreement2 and granted the Company an option to purchase Property2.

Question 8

Refer to question 2 for a discussion of the relevant law.

The Trust anticipates that there will be a capital gain from granting the option to the Company. If the sale of Property2 is a disposal of a capital asset and the purchase amount is capital proceeds, any gain from granting the option under Agreement2 will be disregarded and will be included in the capital proceeds from the sale (disposal) of Property2.

Question 9

Refer to question 3 for a discussion of the relevant law and the Commissioner's view.

Trading stock sold as part of a business

Property2 was purchased to carry on a primary production business (farm). The property was used in the farming business from the time of acquisition until late-20XXs. There is no evidence that when the property was owned by the Trust it was held for the purposes of resale as part of a business involving dealing in land.

Sold as part of an isolated transaction

The Trust purchased Property2 to carry on a primary production business (farm). The farming business was carried on by the Trust from Property2 from the time of acquisition until the sale of the property in late 20XXs. In that time improvements were made to the property for the purposes of farming.

From mid-20XXs MRS and MRs took steps to plan for their retirement and had several meetings with their solicitor and accountant. In early-20XXs MR suffered a stroke and was encouraged by the family to consider retirement. At around this time, the Trust was approached regarding the granting of an option over Property2. Given the poor health of MR and the plan to retire the option was granted. This option lapsed in mid 20XXs, and in mid-20XXs the Trust was approached by the Company regarding the grant of an option over Property2. The option was granted for the same reasons the previous option was granted. The Company exercised the option in late-20XXs and the property was sold. Prior to the sale of property2 the Trust did not take any other steps to sell that property and did not make any application to local council for the subdivision of that property.

The foregoing shows that Property2 was purchased for use in a primary production business and was used for that purpose up until it was sold. The decision to enter the call options and sell was made in consideration of MR and MRS intention to retire and because of the poor health MR. The Trust did not take any action to subdivide the property before the sale and did not take any other action to sell the property.

In these circumstances it is considered that the sale is a mere realisation of a capital asset and is not part of a commercial transaction or business operation with a purpose of making a profit.

As such, Part 3-1 of the ITAA 1997 will apply to the proceeds of the sale. There will be a capital gain if the capital proceeds from the disposal are more than the assets cost base, and a capital loss if the capital proceeds are less than the reduced cost base (section 104-10 of the ITAA 1997). The Trust anticipates that there will be a capital gain.

Question 10

Refer to question 5 for a discussion of the relevant law.

The Trust is a trust, the property was sold after 21 September 1999, and the property was owned for more than 12 months. Provided the cost base of Property2 is calculated without reference to indexation, any capital gain from the sale of Property2 will be a discount capital gain.

Question 11

Refer to question 6 for a discussion of the relevant law.

CGT event happens that would have resulted in a gain

The sale of Property2 has caused CGT event A1 to happen and would result in a capital gain for the Trust (the Trust anticipates that there will be a capital gain).

CGT small business entity

The Trust has self-assessed that it is a CGT small business entity.

Active asset

Property2 was owned by the Trust for over 25 years, and until it was sold in late-20XXs was used by the Trust in the operation of a primary production business; the land was used for farming.

Property2 was owned for more than 15 years and was used in the course of carrying on the business of the Trust. Property2 satisfies the active asset test.

Basic conditions conclusion

The basic conditions in section 152-10 of the ITAA 1997 are satisfied in relation to the capital gain from the sale of Property2:

•      a CGT event (disposal) happened in relation to a CGT asset (Property2)

•      the CGT event resulted in a capital gain (the Trust anticipates that there will be a capital gain)

•      the Trust is a CGT Small Business Entity, and

•      the CGT asset satisfies the active asset test.

Small business CGT concessions

As the basic conditions in section 152-10 of the ITAA 1997 are satisfied in relation to the capital gain from the sale of Property2, the Trust will be eligible to apply the concessions in Division 152 of the ITAA 1997 provided the requirements in the relevant subdivisions (see below) are satisfied:

• 15-year exemption (subdivision 152-B)
• Small business 50% reduction (subdivision 152-C)
• Small business retirement exemption (subdivision 152-D), and
• Small business roll-over (subdivision 152-E).