Edited version of private advice

Authorisation Number: 1052039155858

Date of advice: 24 October 2022

Ruling

Subject: CGT small business 15-year exemption

Question

Will you be entitled to the capital gain tax small business 15-year exemption under section 152-105 of the Income Tax Assessment Act 1997 on the disposal of the Farming Land?

Answer

Yes.

This ruling applies for the following period:

1 July 20XX - 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You and your spouse have operated a farming business for more than 30 years (Farming Business).

The operations of the Farming Business are carried out by Farming Trust.

The trustee of Farming Trust is a corporate trustee (Trustee).

You and your spouse are shareholders and directors of the Trustee.

Both you and your spouse are over 55 years of age.

You and your spouse purchased several blocks of land in joint names.

These blocks of land were purchased more than 15 years ago and have been used continuously in the Farming Business (Farming Land).

You and your spouse each currently works 80 hours each week on the Farming Business.

You both have health conditions that limit your abilities to carry out normal farming tasks. It is necessary that you cut back on the tasks and the hours that you are currently working on.

To facilitate a transition to retirement, you and your spouse propose to transfer Farming Land to your child for them to continue the Farming Business, with the intention to transfer the management and control of the Farming Business to them when you and your spouse retire completely.

Your working hours will be reduced to 30 hours a week and your spouse's to 40 hours a week.

The nature of your farming activities will continue to be reduced as your child becomes familiar with the farming business practice and is able to adopt more responsibilities. You anticipate that the transition period will take between 3 to 5 years.

The Farming Trust is a connected entity with you for the purpose of section 328-125 of the Income Tax Assessment Act 1997.

There are no other connected entity or affiliate.

The aggregated turnover of the Farming Trust is below $2 million.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 sub-division 152-A

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

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

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

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 subsection 152-40(1)

Income Tax Assessment Act 1997 section 152-105

Income Tax Assessment Act 1997 subsection 328-110(1)

Income Tax Assessment Act 1997 subsection 328-115

Income Tax Assessment Act 1997 section 328-120

Income Tax Assessment Act 1997 subsection 328-125(1)

Income Tax Assessment Act 1997 subsection 328-125(3)

Income Tax Assessment Act 1997 section 328-130

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated

Under subsection 104-10(1) CGT event A1 happens when you dispose of a CGT asset. A CGT gain or loss may happen on the disposal of the asset.

Division 152 provides for CGT small business concessions, including the 15-year exemption. To qualify for the small business CGT concessions, you must satisfy several conditions that are common to all the concessions being the basic conditions.

Under section 152-105 you can disregard a capital gain from a CGT event happening to a CGT asset if you:

(a)  satisfy the basic conditions for the small business CGT concessions,

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

(c)   if the CGT asset is a share in a company or an interest in a trust - the company or trust had a significant individual for a total of at least 15 years (even if the 15 years was not continuous and it was not always the same significant individual) during which you owned the CGT asset,

(d)  at the time of the CGT event, you are either: 55 years of age or over and the event happens in connection with retirement, or you are permanently incapacitated.

Paragraph (c) is not applicable to your circumstances. Paragraphs (a), (b) and (d) are considered below.

Paragraph (a) - The basic conditions

Section 152-10 contains the basic conditions that you must satisfy to be eligible to apply the CGT small business concessions. These conditions are:

(a)  a CGT event happens in relation to a CGT asset in an income year,

(b)  the event would have resulted in the gain,

(c)   at least one of the following applies:

•         you are a CGT small business entity for the income year,

•         you satisfy the maximum net asset value test,

•         you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an interest in an asset of the partnership, or

•         you do not carry on a business, but your CGT asset is used in a business carried on by a small business entity that is your affiliate, or an entity connected with you, or by a partnership in which you are a partner,

(d)  the CGT asset satisfies the active asset test in section 152-35.

All four of the basic conditions must be met and are considered below.

Your interest in Farming Land is a CGT asset for the purpose of section 108-5. CGT event A1 will happen when you dispose of your CGT asset by transferring it to your son.

The disposal of the asset would result in a capital gain.

You do not carry on a business, but your CGT asset is used in a business carried on by a small business entity that is an entity connected with you. You satisfy the conditions of subsection 152-10(1A) in relation to the CGT asset because:

•         you are not carrying on a business in the income year,

•         Farming Trust is an entity connected with you as its Trustee acts or could reasonably be expected to act in accordance with your wishes because you are a director,

•         Farming Land is a passively held asset utilised by Farming Trust to carry on the Farming Business,

•         Farming Trust is a CGT small business entity in the income year.

Under subsection 152-10(1AA), an entity is a CGT small business entity for an income year if it is a small business entity for the income year. Small business entity is defined in subsection 328-110(1).

Farming Trust is a small business entity under subsection 328-110(1) because:

•         it carries on the Farming Business in the income year,

•         it carried on the Farming Business in the previous income year and its aggregated turnover for the purpose of section 328-115 for the previous income year was less than $2,000,000.

Farming Land satisfies the active asset test under section 152-35 because you will have owned the asset for more than 15 years and the asset is an active asset during the period that began when you acquired Farming Land until the time the CGT event happening.

Farming Land is an active asset under subsection 152-40(1) because you own the asset and it has been used in the course of carrying on a business that is carried on by Farming Trust, being an entity connected with you.

Therefore, you satisfy the basic conditions.

Paragraph (b) - 15-year period of ownership

You satisfy this condition as you will have continuously owned Farming Land for 15-year period ending just before the CGT event.

Paragraph (d) - In connection with retirement

Whether a CGT event happens in connection with an individual's retirement depends on the particular circumstances of each case. There would need to be at least a significant reduction in the number of hours the individual works or a significant change in the nature of their present activities to be regarded as a retirement.

In this case the disposal of Farming Land to your child is considered to be in connection with your retirement.

Conclusion: As you satisfy all the relevant conditions in section 152-105 you can disregard any capital gain under the small business 15-year exemption arising from the disposal of your interest in Farming Land to your child.