Edited version of private advice

Authorisation Number: 1052169075149

Date of advice: 19 September 2023

Ruling

Subject: CGT - active asset test

Question

Are you entitled to the small business active asset reduction on the sale of part of the land?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2022

The scheme commenced on:

1 July 2021

Relevant facts and circumstances

You and your spouse purchased the property in 2005. The previous owners were using the property as a farm at the time of purchase.

You and your spouse operate a primary production business in partnership.

The partnership is a small business entity with a turnover of less than $2 million.

In 2022 the partners subdivided off lots 1 and 2 to sell to finance other business activities. The lots were sold in June 2022.

The partners have retained the remaining land to continue farming activities via the partnership.

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

Reasons for decision

Basic conditions

To qualify for the small business CGT concessions, you must satisfy several conditions that are common to all the concessions. These are called the basic conditions. Subdivision 152-C of the Income Tax Assessment Act 1997 (ITAA 1997) applies the small business 50% active asset reduction provided the basic conditions are satisfied.

A capital gain that you make may be reduced or disregarded under Division 152 of the ITAA 1997 if the following basic conditions are satisfied:

•                     A CGT event happens in relation to a CGT asset of yours in an income year,

•                     The event would have resulted in a gain,

•                     The CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997, and

•                     At least one of the following applies;

-        you are a small business entity for the income year,

-        you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997,

-        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.

Active asset test

A capital gains tax (CGT) asset will satisfy 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 test period, 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 7½ years during the test period.

The test period beings when you acquired the asset and ends at the earlier of the CGT event and if the relevant business ceased to be carried on in the 12 months before that time - the cessation of the business.

Subsection 152-40(1) of the ITAA 1997 details that a CGT asset is an active asset at a time if it is used, or held ready for use, in the course of carrying on a business that is carried on by you, or your affiliate, or another entity that is connected with you.

Application to your circumstances

In this case a CGT event occurred when you and your spouse sold part of the property. You and your spouse are partners in a partnership that was a small business entity for the 2022 financial year. The lots that were sold in the 2022 financial year have been owned for more than 15 years and used in the business operated by the partnership for at least 7½ years during the test period. Therefore, the basic conditions for the small business CGT concessions have been satisfied and you and your spouse are entitled to apply the 50% active asset reduction.