Edited version of private advice

Authorisation Number: 1052008989282

Date of advice: 26 July 2022

Ruling

Subject: CGT - small business concessions

Question

Does the Water Licence satisfy the active asset test for the purposes of the Capital Gains Tax small business concessions in Division 152 of the Income Tax Assessment Act 1997?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You acquired two lots of farming land.

You farmed both lots as an animal farmer for XX years.

After this initial XX years, you leased one of the lots. The lessee of the land used it to grow forestry trees. During the same period of time, you continued to farm the other lot in your own right as an animal farmer.

After the first harvest of the trees, you took the leased lot back from the lessee. You took back the land with the trees at stump and intended to grow a second harvest yourself.

You hired contractors to trim the trees where necessary to assure a second forestry crop would be successful for harvest.

Around the time you took the lot back you were granted a Water Licence (licence) to assist with the plantation. The licence was granted at a cost of nil.

The entire licence assigned to the lot was utilised for tree production between when you were granted the licence and when you sold the licence.

You are confident that the farming land in its entirety is an active asset.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152-40

Reasons for decision

Summary

Yes, the Water Licence (licence) satisfies the active asset test in section 152-35 of the Income Tax Assessment Act 1997.

Detailed reasoning

Under subsection 152-35(1) of the Income Tax Assessment Act 1997 (ITAA 1997), the active asset test will be satisfied if:

•         You have owned the asset for 15 years of less and the asset was an active asset of yours for a total of at least half of the test period detailed below; or

•         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 ½ years during the test period detailed below.

The test period:

•         begins when you acquired the asset, and

•         ends at the earlier of:

­   the CGT event, and

­   when the business ceased, if the business ceased in the 12 months before the CGT event

(subsection 152-35(2) of the ITAA 1997).

Meaning of active asset

Under subsection 152-40(1) of the ITAA 1997, a CGT asset is an active asset if 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.

An asset is not an active asset if it falls under one of the exceptions in subsection 152-40(4) of the ITAA 1997. Generally, the exceptions refer to assets used mainly to derive rent, certain interests in trusts and companies and financial instruments.

Meaning of CGT asset

Under subsection 108-5(1) of the ITAA 1997 a CGT asset is any kind of property or a legal or equitable right that is not property.

Application to your Water Licence

Your licence is a CGT asset.

The licence is an active asset because you used the licence for tree production. This tree production is considered to be part of the primary production business you were carrying on.

None of the exceptions in subsection 152-40(4) of the ITAA 1997 will apply to the licence.

Therefore, the licence satisfies the active asset test because it was an active asset for more than half of the period you owned the licence.