Edited version of private advice

Authorisation Number: 1051977413505

Date of advice: 12 May 2022

Ruling

Subject: Small business concessions - active asset

Question

Is the part of the land, known as the 'A' that will have its separate legal title at the point of proposed disposal after subdivision, considered an active asset for the purpose of Subdivision 152-A of the Income Tax Assessment Act 1997 (ITAA97)?

Answer

Yes

The disposal of the subdivided block 'A' is treated as the disposal of an asset in its own right, and not as a disposal of part of the original land parcel. This is supported by 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)? (TD 97/3).

While the 'A' was used in the course of carrying on a business by a connected entity of the Trust for its entire ownership period since acquisition, it will meet the 'meaning of active asset' under paragraph 152-40(1)(a) of the ITAA 1997 and meet the active asset test as set out in paragraph 152-35(1)(b) of the ITAA 1997.

Please note the date for determining when the 'A' was acquired for the purpose of applying section 109-5 of the ITAA 1997 is based on the date on which the original block of the land was acquired.

This ruling applies for the following periods:

Financial year ending 30 June 2022

Financial year ending 30 June 2023

The scheme commences on:

1 July 2021

Relevant facts and circumstances

In capacity as trustee for the X Trust (the Trust), individual B acquired a block of land known as 'C' (the C), in 19XX.

The C consisted of XX acres.

A part of the C, approximately X acres, known as the 'A' (the A), is an area separately fenced from the remaining of the C, but under the same legal title as of the C. The 'A' is a tangible asset of the trustee of the Trust.

The majority area of the C has been leased to unrelated parties, with some 'excepted areas', from 19XX to X 20XX. The A was one of the 'excepted areas' that was not leased.

The A has been used by individual B separately, in capacity as a sole trader, for their X business, for the entire ownership period since the acquisition of the C in 19XX.

Individual B has recently been approached with an offer to sell the A. Individual B is interested in selling the A while retaining the remaining areas of the C. The A is in the process of being formally surveyed with the objective of subdividing it from the remaining C. It will have a separate legal title when the disposal occurs.

The Trust is a discretionary trust and individual B is the sole trustee of the Trust. Individual B is considered an entity that controls the discretionary trust, therefore an entity connected with the Trust as it satisfies subsection 328-125(3) of the ITAA 1997.

The proposed disposal of the A (the CGT event A1) is expected to occur in the 20XX calendar year, falls under either financial year ending 30 June 20XX or financial year ending 30 June 20XX.

If the CGT event A1 occurs during the 20XX calendar year as planned, the 'A' has been owned by the trustee of the Trust for more than 15 years, was an active asset for a total of at least 7.5 years in the relevant test period.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 112-25

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152-40

Income Tax Assessment Act 1997 section 328-125

Income Tax Assessment Act 1997 section 109-5