Edited version of private advice

Authorisation Number: 1051998718989

Date of advice: 27 June 2022

Ruling

Subject: Small business CGT concessions - active asset test

Question 1

Will Interest A in the property satisfy the active asset test in accordance with section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes. Interest A in the property satisfies the active asset test for the small business capital gains tax (CGT) concessions. You have owned the property for more than 15 years and it was an active asset of yours for a total of at least 7.5 years during the test period.

Question 2

Will Interest B in the property satisfy the active asset test in accordance with section 152-35 of the ITAA 1997 if it's disposed of after XX 2022?

Answer

Yes. After considering your facts and circumstances, the Commissioner is satisfied that Interest B will satisfy the active asset test for the small business CGT concessions if it's disposed of after XX 2022. You have owned the property for more than 15 years and it will be used or held ready for use in a business carried on for a total of at least 7.5 years during the test period, if it's disposed of after XX 2022.

This ruling applies for the following periods:

•   Period ending 30 June 2022

•   Period ending 30 June 2023

The scheme commences on:

1 July 2021

Relevant facts and circumstances

In 19XX you acquired an interest in a large property from your parents (Interest A). You began operating a primary production business in partnership with your parent on the portion of the land known as Property X.

The partnership ran stock.

In early 19XX, you and your parent disposed of part of the large property, keeping part of the property known as Property X.

In 19XX the partnership was dissolved and your parent's interest in Property X was transferred to you (Interest B).

Interest A and Interest B are jointly known as Property X. You now own 100% of the Property X.

You began operating a primary production business as a sole trader. Business activities included grazing stock, maintaining fencing, mustering, controlling weeds, feeding and watering the stock.

From 20XX to 20XX Property X was agisted.

In 20XX you recommenced operating your primary production business on Property X. You acquired stock and grazed them.

You regularly travelled to Property X to look after the business and also relied on family members in the area to help.

You became aware that the property needed regenerating and maintenance, because the previous agistees overstocked it and did not maintain it to the necessary standard.

The property was overgrazed and there was a drought. The property was left in a poor state which caused a highly invasive weed to spread throughout the property. The weeds reduced the amount of pasture available for grazing, made it difficult for stock to access water and made it difficult to muster the stock.

Due to the property being in a poor state, you needed to hold the stock for longer than usual. They did not fatten as much as you had hoped.

In 20XX you sold the stock at a time when prices were high and made a profit, despite the higher holding costs and lack of weight on the stock.

You decided after years of neglect and overgrazing it was necessary for the entire property to be spelled and not restock until remedial work was complete and until the drought conditions improved.

For two years you carried out the following remediation activities:

•         Upgraded fencing and stockyards

•         Installed a new water tank and watering troughs

•         Graded parts of the property to improve access

•         Poisoned weeds

You were assisted by a family member and a staff member. You also engaged a fencing contractor to:

•         Rebuild fences

•         Construct stock yards and steel gates

•         Remove weeds

•         Repair roads, carry out earthworks and erosion control

The length of the process depended on weather and the success of suppressing the weed. You advised us that normal practice for larger properties is to rotate stock through paddocks that have good internal fencing.

You could not run stock on part of the property while remediating other parts of the property due to internal fencing that was required to be replaced.

You did not sell any assets during the remediation period.

Two years later you decided that the conditions on Property X had improved enough to restock. You acquired stock and you are currently grazing them on the property. You intend on selling the stock once they have increased in size.

Your reason for only stocking less stock than previously is due to being cautious of overstocking the property and recreating the previous issues.

You have calculated the future date that Interest B meets the 7.5 year requirement during the test period of the active asset test.

You intend to carry on the business activity until at least 20XX, after which you are planning your retirement.

A timeline summary of the facts is below:

Assumptions

It is assumed that your aggregated turnover for the 2022 and 2023 income years are less than $2m.

It is assumed that you will continue your primary production business on the property until you dispose of the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152-40