Edited version of your private ruling

Authorisation Number: 1052230945449

Date of advice: 20 March 2024

Ruling

Subject: CGT - active asset

Question

Are quotas considered to be active assets under section 152-40 of the Income Tax Assessment Act 1997?

Answer

Yes. Because you operate a commercial primary production business, you require a quota to conduct your business. The quotas are legal rights of economic value owned and used by you to generate income. The upcoming sale of the quotas demonstrates their economic value. Because of this, a quota can be considered an active asset for the purposes of CGT concessions because it is an asset that is used, or held ready for use, in the course of carrying on a business by you, as stated under section 152-40 of the ITAA 1997.

This ruling applies for the following period

Year ending 30 June 20XX

Relevant facts and circumstances

You are a private company that operates as a commercial primary production business

You are issued quotas from the government

You do not purchase or apply for the quotas

The value of the quotas has not been depreciated in any way

The sole director and shareholder of the company is retiring

You plan on selling the quotas to a third party in the 20XX financial year

You meet all of the CGT small business eligibility conditions and plan on applying the retirement exemption on the sale of the quotas.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 152-40

Reasons for decision

In section 152-40(1) of the ITAA 1997, a CGT asset is an active asset at a time if, at that time:

a)    You own the asset (whether the asset is tangible or intangible) and it is used, or held ready for use, in the course of carrying on a business that is (whether alone or in partnership) by:

              i.        You; or

             ii.        Your affiliate; or

            iii.        Another entity that is connected with you.

Further, subsection 152-40(4) of the ITAA 1997 lists CGT assets that cannot be active assets. Generally, the exclusions refer to assets used mainly to derive rent, certain interests in trusts and companies and financial instruments.

It is an offence to conduct your primary production business without a quota established by the relevant subregional or regional management organisation or arrangement. Quotas grant the owner a right to take a particular quantity of product, or to take a particular quantity of product of a particular species or type, form, or from a particular area in a managed primary production area.

Quota as a 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.

Quotas entitle the holder of the license to take a specified quantity of product and is therefore a CGT asset under section 108-5 of the ITAA 1997.

In your case, you have a legal right of economic value in the quotas, and they have been used by you in carrying on a commercial business to generate an income. The exclusions in subsection 152-40(4) of the ITAA 1997 do not apply. Hence, the quotas satisfy the definition of active assets.

Additional information

This ruling has not fully considered your eligibility for the CGT small business concessions or whether your assets satisfy the active asset test under section 152-35 of the ITAA 1997; it has only addressed the requirement under section 152-40 of the ITAA 1997. Before claiming any of the small business CGT concessions, you need to ensure that all other basic tests and other relevant requirement of Division 152 of the ITAA 1997 are met.