Edited version of private advice

Authorisation Number: 1052094041320

Date of advice: 6 March 2023

Ruling

Subject: CGT - tax concessions for small business

Question 1

Will any capital gain or capital loss made on the disposal of the Pre-CGT Title Interests by the Taxpayer be disregarded under paragraph 104-10(5)(a) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Will the Post-CGT Title Interests disposed of by Taxpayer satisfy the active asset test in section 152-35 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period:

Income Year ended 30 June 20XX

The scheme commenced on

XX June 20XX

Relevant facts and circumstances

1.    The Taxpayer and their former Spouse commenced a cattle farming business under a partnership structure (the Partnership) when they married in 19XX.

2.    The Taxpayer and their former Spouse each have a 50% interest in the Partnership.

3.    No written partnership agreement has been prepared for the Partnership.

4.    The Taxpayer's involvement in the Partnership's business included administration, bookwork, cattle work and tractor work, as required.

5.    The Partnership conducted a cattle farming business on the Property.

6.    The Property was solely used in carrying on the Partnership's business.

7.    The Property is made up of two separate titles (Title 1 and Title 2).

8.    The former Spouse inherited 1/6 of Title 1 and 1/6 of Title 2 when their parent died prior to 20 September 1985 (the Pre-CGT Title Interests).

9.    It is noted that, for the purposes of this Ruling, the Pre-CGT Title Interests do not include any building or structure (as described in section 108-55 of the ITAA 1997) or capital improvement (as described in section 108-70) that may have been constructed (or in respect of which a contract for construction was entered into) on the Pre-CGT Title Interests on or after 20 September 1985.

10.  In 20XX, the former Spouse acquired the remaining 5/6 of Title 1 and 5/6 of Title 2 (the Post-CGT Title Interests) and, from this time, owned 100% of both Titles, on which the Partnership operated the cattle farming business.

11.  Information contained in the Partnership's tax returns for the income years ended 30 June 20XX to 30 June 20XX confirms that, during this period, the cattle farming business was carried on and that its aggregate turnover was less than $2 million per income year.

12.  The Taxpayer and their former Spouse separated in 20XX and from this date, the Taxpayer was no longer active in the cattle farming business. The cattle farming business operated continuously from 19XX until the Property was sold in 20XX.

13.  In June 20XX, court orders (Court Orders) were issued under the Family Law Act 1975 (FLA 1975).

14.  The Court Orders, in part, stipulated that, within 14 days of receipt of these orders, the former Spouse will transfer to the Taxpayer all their interest in Title 1 and Title 2.

15.  The Court Orders also noted that pursuant to section 81 of the FLA 1975 the parties intend these orders to be in full and final settlement of all claims between them for property settlement, and will as far as practically determine the financial relationship between them and avoid further proceedings between them.

16.  In accordance with the Court Orders, Title 1 and Title 2 were transferred to the Taxpayer in June 20XX.

17.  No other written agreement was entered into between the Taxpayer and their former Spouse regarding the distribution of assets following their separation.

18.  Title 1 and Title 2 were sold by the Taxpayer in August 20XX.

19.  The Taxpayer intends to make the relevant choice under subsection 152-45(2) of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 103-25(1)

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 subsection 104-10(1)

Income Tax Assessment Act 1997 subsection 104-10(2)

Income Tax Assessment Act 1997 subsection 104-10(4)

Income Tax Assessment Act 1997 paragraph 104-10(5)(a)

Income Tax Assessment Act 1997 subsection 109-5(2)

Income Tax Assessment Act 1997 Subdivision 126-A

Income Tax Assessment Act 1997 subsection 126-5(1)

Income Tax Assessment Act 1997 subsection 126-5(2)

Income Tax Assessment Act 1997 subsection 126-5(6)

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997Subdivision 152-A

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 paragraph 152-10(1)(d)

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 subsection 152-35(1)

Income Tax Assessment Act 1997 paragraph 152-35(1)(a)

Income Tax Assessment Act 1997 subsection 152-35(2)

Income Tax Assessment Act 1997section 152-40

Income Tax Assessment Act 1997 subsection 152-45(2)

Reasons for decision

Question 1

Summary

1.    Any capital gain or capital loss made on the disposal of the Pre-CGT Title Interests by the Taxpayer will be disregarded under paragraph 104-10(5)(a) of the ITAA 1997.

Detailed Reasoning

2.    CGT event A1 happened in August 20XX when the Taxpayer entered into each contract of sale for Title 1 and Title 2 (per subsections 104-10(1) and 104-10(2) of the ITAA 1997).

3.    The Taxpayer will make a capital gain from each CGT event if the capital proceeds from the disposal are more than the asset's cost base. The Taxpayer will make a capital loss if those capital proceeds are less than the asset's reduced cost base (subsection 104-10(4) of the ITAA 1997).

4.    It is noted that, in this case, when working out the Taxpayer's capital gain on each Pre-CGT Title Interest:

•         the capital proceeds will be so much of the consideration received for each Title that is reasonably attributable to the sale of the Pre-CGT Title interest (per section 116-40 of the ITAA 1997); and

•         some cost base expenditure (for example, incidental costs) relating to the relevant Title may need to be reasonably attributed between the Pre-CGT Title Interest and the Post-CGT Title Interest (per subsection 112-30(1A)).

5.    In accordance with paragraph 104-10(5)(a) of the ITAA 1997, a capital gain or capital loss you make is disregarded if you acquired the asset before 20 September 1985.

6.    Under the general acquisition rules, the Taxpayer acquired the Pre-CGT Title Interests when these CGT assets were transferred to them pursuant to the Court Orders (per CGT event A1 in the table in subsection 109-5(2) of the ITAA 1997).

7.    However, the general acquisition rules may be modified by other special acquisition rules, which relevant to this case, include provisions relating to circumstances where a CGT asset is acquired under the rollover in Subdivision 126-A of the ITAA 1997 which concerns marriage or relationship breakdowns.

8.    In this regard, subsection 126-5(1) of the ITAA 1997 provides that there is a roll-over if a CGT event happens involving an individual and his or her spouse or former spouse because of:

(a) a court order under the FLA 1975 or under a State law, Territory law or foreign law relating to breakdowns of relationships between spouses; or

(b) a maintenance agreement approved by a court under section 87 of the FLA 1975 or a corresponding agreement approved by a court under a corresponding foreign law; or

(c) (Repealed by No 144 of 2008)

(d) something done under:

(i) a financial agreement made under Part VIIIA of the FLA that is binding because of section 90G of that Act; or

(ii) a corresponding written agreement that is binding because of a corresponding foreign law; or

(da) something done under:

(i) a Part VIIIAB financial agreement (within the meaning of the FLA) that is binding because of section 90UJ of that Act; or; or

(ii) or a corresponding written agreement that is binding because of a corresponding foreign law; or

(e) something done under:

(i) an award made in an arbitration under section 13H of the FLA; or

(ii) a corresponding award made in an arbitration under a corresponding State law, Territory law or foreign law; or

(f) something done under a written agreement:

(i) that is binding because of a State law, Territory law or foreign law relating to breakdowns of relationships between spouses; and

(ii) that, because of such a law, prevents a court making an order about matters to which the agreement applies, or that is inconsistent with the terms of the agreement in relation to those matters, unless the agreement is varied or set aside.

9.    These provisions apply to CGT events A1, B1, D1, D2, D3 and F1 (as flagged in subsection 126-5(2) of the ITAA 1997).

10.  Subsection 126-5(6) of the ITAA 1997 sets-out one of the key tax consequences of the Subdivision 126-A rollover for the transferee as it states:

For a disposal case where the transferor acquired the asset before 20 September 1985, the transferee is taken to have acquired it before that day.

11.  In the current circumstances, the Taxpayer acquired the Property (and the Pre-CGT Title Interests) from their former Spouse because of a court order under the FLA 1975 and, therefore, the rollover in Subdivision 126-A of the ITAA 1997 applies (noting that once the relevant conditions are satisfied this rollover automatically applies - as highlighted in Taxation Determination TD 1999/60).

12.  Accordingly, the Pre-CGT Title Interests acquired by the Taxpayer from their former Spouse will be taken to have been acquired by them before 20 September 1985 and, as such, any capital gain or capital loss made on the sale of these interests when CGT event A1 happened in August 20XX will be disregarded pursuant to paragraph 104-10(5)(a) of the ITAA 1997.

Question 2

Summary

13.  The Post-CGT Title Interests disposed of by the Taxpayer satisfy the active asset test in section 152-35 of the ITAA 1997.

Detailed Reasoning

14.  As previously noted, CGT event A1 happened in August 20XX when the Taxpayer entered into each contract of sale for Title 1 and Title 2 (per subsections 104-10(1) and 104-10(2) of the ITAA 1997).

15.  The Taxpayer will make a capital gain from each CGT event if the capital proceeds from the disposal are more than the asset's cost base. The Taxpayer will make a capital loss if those capital proceeds are less than the asset's reduced cost base (subsection 104-10(4) of the ITAA 1997).

16.  In the current circumstances, when working out the Taxpayer's capital gain from the sale of each Post-CGT Title Interest, it is highlighted that:

•         the capital proceeds will be so much of the consideration received for each Title that is reasonably attributable to the sale of the Post-CGT Title interest (per section 116-40 of the ITAA 1997);

•         because each Post-CGT Title Interest was subject to the Subdivision 126-A rollover, in accordance with subsection 126-5(5), the first element of the Taxpayer's cost base of the Post-CGT Title Interest will equal their former Spouse's cost base of the Post-CGT Title Interest, at the time that the Taxpayer acquired it; and

•         other cost base expenditure (for example, incidental costs) relating to each Title may need to be reasonably attributed between the Pre-CGT Title Interest and the Post-CGT Title Interest (per subsection 112-30(1A)).

17.  The capital gain made on the sale of the Post-CGT Title Interests by the Taxpayer may be reduced or disregarded under Division 152 of the ITAA 1997 (small business relief) if various conditions are satisfied (including the basic conditions set-out in section 152-10).

18.  One of the basic conditions that must be satisfied to be eligible for these concessions is that the CGT asset must satisfy the active asset test (as stated in paragraph 152-10(1)(d) of the ITAA 1997).

19.  Subsection 152-35(1) of the ITAA 1997 provides that a CGT asset satisfies the active asset test if:

(a)  you have owned the asset for 15 years or less and the asset was an active asset of yours for a total of at least half of the period of ownership, or

(b)  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 and a half years.

20.  Subsection 152-35(2) of the ITAA 1997 further explains that the test period is from when the asset is acquired until the CGT event. If the business ceases within the 12 months before the CGT event (or such longer time as the Commissioner allows) the relevant period is from acquisition until the business ceases.

21.  Section 152-40 of the ITAA 1997 provides the meaning of 'active asset'. A CGT asset will be an active asset at a time if, at that time, you own the asset and the asset was used, or held ready for use in the course of carrying on a business that is carried on (whether alone or in partnership) by you, your affiliate, or by another entity that is 'connected with' you.

22.  Relevantly, subsection 152-45(2) of ITAA 1997 provides that, if you were the transferee of a CGT asset for which there has been a roll-over under Subdivision 126-A, you may choose that the active asset test applies as if:

(a)  you had acquired the asset when the transferor acquired the asset; and

(b)  the asset had been an active asset of yours at all times when the asset was an active asset of the transferor, and

(c)   the asset had not been an active asset of yours at all times when the asset was not an active asset of the transferor.

23.  Subsection 103-25(1) of the ITAA 1997 explains that the choice must be made:

(a)  by the day you lodge your income tax return for the income year in which the relevant CGT event happened; or

(b)  within a further time allowed by the Commissioner.

24.  As previously highlighted, in the current circumstances, the Taxpayer acquired the Property (including the Post-CGT Title Interests) from their former Spouse because of a court order under the FLA 1975 and, therefore, the rollover in Subdivision 126-A of the ITAA 1997 applied.

25.  The Taxpayer has also advised that they will make the choice under subsection 152-45(2) of the ITAA 1997.

26.  As a consequence, in determining whether the active asset test is satisfied:

•         The Taxpayer will be taken to have acquired the Post-CGT Title Interests when the transferor (the former Spouse) acquired these assets;

•         these assets will be taken to have been active assets of the Taxpayer at all times when the assets were an active asset of the transferor (the former Spouse); and

•         these assets will be taken to have not been active assets of the Taxpayer at all times when the assets were not an active asset of the transferor.

27.  On this basis, the Taxpayer is taken to have acquired the Post-CGT Title interests in 20XX (when the former Spouse acquired these interests).The Post-CGT Title Interests were sold in August 20XX and CGT event A1 happened on this date. Therefore, for the purposes of the ownership test period in section 152-35 of the ITAA 1997, the Taxpayer has owned the Post-CGT Title Interests for less than 15 years.

28.  Accordingly, paragraph 152-35(1)(a) of the ITAA 1997 has application and to meet the active asset test, the Post-CGT Title Interests must be an active asset for a total of at least half of the period of ownership.

29.  As previously highlighted, a CGT asset is an active asset if it is owned by you and is used or held ready for use in a business carried on (whether alone or in partnership) by you, your affiliate, or an entity connected with you.

30.  In the current circumstances, the Taxpayer and their former Spouse carried on a cattle farming business under a Partnership structure on the Property since 19XX. The Taxpayer and their former Spouse each held a 50% interest in the Partnership. Based on the information available (including information contained in the Partnership's tax returns), it is evident that, for the income years ended 30 June 20XX to 30 June 20XX, the cattle farming business was carried on by the Partnership on the Property.

31.  It is, therefore, considered that, from at least January 20XX to June 20XX, the Post-CGT Title Interests were an active asset of the former Spouse (and, therefore, pursuant to subsection 152-45(2) of the ITAA 1997, an active asset of the Taxpayer) because the former Spouse owned the assets which were used in a business carried on by the former Spouse and the Taxpayer in partnership. It is further noted that the Partnership was also connected with the former Spouse during this time under subsection 328-125(2) because they had a control percentage of at least 40% in the Partnership.

32.  As a result, the Post-CGT Title Interests were an active asset of the Taxpayer for at least half of their period of ownership and the Taxpayer satisfies the active asset test in section 152-35 of the ITAA 1997 in respect of the Post-CGT Title Interests.