Edited version of private advice

Authorisation Number: 1051909178224

Date of advice: 14 October 2021

Ruling

Subject: Active assets

Question

Does the property qualify as an 'active asset' within the meaning of that term in section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes. A substantial proportion of the property by area is used for business purposes. While at times some of the property has also been used to derive rental and advertising income. The primary purpose of the property since the date of acquisition was to be use in the Trust's business activities on the land to cultivate seedlings for the other farms within the business operations and therefore, it satisfies the definition of an active asset in section 152-40 of the ITAA 1997.

This ruling applies for the following period

Year ended 30 June XXXX

The scheme commences on:

1 July 2021

Relevant facts and circumstances

The taxpayer held real property and it was leased to Trust throughout the ownership period. The Trust is "connected with" the taxpayer and the property was used exclusively by Trust within the business conducted by the taxpayer. The business has been operating for over XX years and is run like all other similar businesses in that industry. This property was sold for $XXXX in the income year ended 30 June XXXX.

The taxpayer chose to apply the Small Business Rollover under Subdivision 152-E allowing them to obtain a replacement asset within two years. The taxpayer purchased two properties within the two-year replacement rollover period as replacement assets.

The taxpayer purchased an additional property of X.X acres in size. It included a residential property with a house and 1 acre of land and a nursery of X.X acres, which is fully fenced, and the tenants are not permitted to enter nursey or access plant or machinery located within the fenced nursey grounds.

The residential building, which is currently vacant, has previously been rented to unrelated third parties, as well as employees and backpackers who have worked on the farms. You have advised, it was rented for a modest amount per month which helped provide an increased level of security for the nursey operations. The tenancy agreement included a special condition that the tenant must not enter the nursery section of the property nor can they use the plant or machinery.

There is a real estate advertising sign on the property where an amount per annum was received for the advertising space. This is the final year of the signage rental and it will be taken down at the end of the income year.

The property has a bespoke-built nursery for the plantation and growth of seedlings. There is a drip irrigation in the seedling beds, tractors and excavators are used on this property and moved between this and other farms when seed beds are prepared. Weed control is done annually, no chemicals. The nursey operation has not been expanded as of yet, but plans are in place to expand the nursery. Seeds are sown in spring and grown out until the following winter when they are then transported to the other farms. The seedlings are approximately 30cm high and have a value of approximately $XXXX each. The seedlings will ultimately be used to plant trees on the other properties held by the taxpayer.

The nursery was never set up for public sales as its primary purpose is to propagate the seedlings that are then subsequently planted out on the other farms owned which in turn are grown into trees. This growth process takes many years so the income generated from the seedlings will not be known for quite some time. There are also grape vines within the nursery, which will be subsequently planted out on one of the farms also owned by the taxpayer. These vines will produce fruit that will be used for wine making and selling as part of a business.

The income received by the taxpayer is approximately $X,XXX per annum from the nursery operations. You believe the revenue ultimately derived from the sale of the mature trees, grape vine and wine produced will exceed the amounts received from rent and the advertising sign.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-40