Edited version of private advice

Authorisation Number: 1051908488594

Date of advice: 24 November 2021

Ruling

Subject: Small business concessions - 15 year exemption

Question

Can you access the small business concession - 15-year exemption in Subdivision 152-B of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the sale of the land?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You and your spouse acquired a property a number of years ago where you carried on a primary production business. The business was profitable and the property also became your main residence.

Prior to the business commencing, cleaning and clearing of the land was carried out in preparation for farming activities.

You have maintained business records for all sales, expenses, invoices, receipts. and prepare financial statements for each income year.

Several years ago you entered into a Deed of Variation Option Agreement (the Option Agreement) with a company (the Purchaser) under which they could exercise their right to acquire the land at a future date, subject to certain conditions.

Under the terms of the Option Agreement, the Purchaser was able to exercise its call option to acquire the land in a certain financial year.

The Purchaser paid an amount of money for the granting of the call option and you continued to operate the farming business until close to the Settlement date.

By Deed of Variation to the Option Agreement and Contract, details were varied in relation to the Plan of Subdivision, including the price of the Contract due to the variations in the apportionment of the price attributed to your decision to retain your main residence. Accordingly, the main residence area of the property was excluded from the agreement.

The call option was exercised by the Purchaser and settlement occurred a short time later.

Your combined aggregated turnover for that year was below the $2 million threshold.

You were both over 55 years old at the time of the sale and your intention was to retire upon the completion of the sale.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-40

Income Tax Assessment Act 1997 section 116-65

Income Tax Assessment Act 1997 section 134-1

Income Tax Assessment Act 1997 Division 152-B

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 subsection 152-10(1) (a)

Income Tax Assessment Act 1997 subsection 152-10(1) (d)

Income Tax Assessment Act 1997 section 152-35

Reasons for decision

Detailed reasoning

Capital gains tax (CGT) is the tax you pay on certain gains you make. You make a capital gain or capital loss as a result of a CGT event happening (section 102-20 of the ITAA 1997).

There are two CGT events that will be relevant to your circumstances, CGT event D2 and CGT event A1.

Granting an option to sell your property constitutes a CGT event D2 (subsection 104-40(1) of the ITAA 1997).

The subsequent sale from the exercising of the option will be a CGT event A1 (subsection 104-10 (1) of the ITAA 1997).

Granting an option

CGT event D2 occurs if you grant an option to an entity (section 104-40 of the ITAA 1997). The timing of the event is when you enter into the option.

CGT event D2 occurred when you entered into the Deed of Option. The capital proceeds for the event is the amount you received under the Deed of Option.

You can disregard any capital gain from CGT event D2 when the option has been exercised by the buyer (subsections 104-40(5) and 134-1(4) of the ITAA 1997). If the tax return for the relevant year has already been lodged, you will need to amend your return to exclude the amount relating to the D2 event.

The subsequent sale of the property from exercising the option will be a CGT event A1 (section 104-10). The time of the event will be the date that the option is exercised (Taxation Determination TD 16).

Where you dispose of a CGT asset because another entity exercised an option you granted in relation to the asset, the capital proceeds you receive from the disposal include any payment you received for granting the option (section 116-65 of the ITAA 1997).

Small business concessions - 15-year exemption

The basic conditions in Subdivision 152-A of the ITAA 1997 (as relevant to this case) are:

•         the entity satisfies one of the following tests:

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

(ii) you satisfy the maximum net asset value test

(iii) you are a partner in a partnership that was a CGT small business entity for the income year and the CGT asset is an interest in an asset of the partnership

(iv) if the assets were passively held assets, the conditions in regard to affiliates and connected entities, and partnerships are met, and

•         the CGT asset satisfies the active asset test.

You are a small business entity for an income year (the current year) if (section 328-110 of the ITAA 1997):

•         (a) you carry on a business in the current year, and

•         (b) your aggregated turnover for the current year, worked out as at the end of that year, is less than $10 million (subsection 328-110(1) of the ITAA 1997)

•         or aggregated turnover for previous year was less than $10 million.

In the financial year that the property was sold there was partnership business income, and the aggregated turnover was under $2 million.

The active asset test is contained in section 152-35 of the ITAA 1997. The active asset test is satisfied if:

(a) you have owned the asset for 15 years or less and the asset was an active asset of yours for a total of at least half of the test period detailed below, or

(b) 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 7.5 years during the test period.

The test period is from when the asset is acquired until the CGT event. If the business ceases within the 12 months before the CGT event (or such longer time as the Commissioner allows) the relevant period is from acquisition until the business ceases.

A CGT asset is an active asset (subject to the exclusions) if it is owned by you and used, or held ready for use, in the course of carrying on a business that is carried on (whether alone or in partnership) by you or your affiliate or another entity that is connected with you (subsection 152-40(1) of the ITAA 1997).

You used the property in the course of carrying on a business for more than seven and a half years during the period from when the property was acquired until the business ceased.

Under section 152-105 of the ITAA 1997, you can disregard any capital gain arising from the disposal of the asset, if all of the following conditions are satisfied:

(a) the basic conditions in Subdivision 152-A of the ITAA 1997 are satisfied for the gain;

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

(d) (i) you are 55 or over at the time of the CGT event and the event happens in connection with your retirement

Whether there is a 'retirement' for the purposes of the 15-year exemption will depend on the circumstances of each particular case. It is considered for the term to be satisfied, there must at least be a significant reduction in the number of hours the individual is engaged in present activities, or a significant change in the nature of present activities. You are both acquired the property more than 15 years ago, are over 55 years of age, and have retired now.

Conclusion

The basic conditions in Subdivision 152-A of the ITAA 1997 were satisfied for the gain. You and your spouse owned the property for over 15 years before it was sold. You satisfy the conditions for the 15-year exemption and can disregard any capital gain you made on the sale of the property.