Edited version of private advice

Authorisation Number: 1052233458658

Date of advice: 9 May 2024

Ruling

Subject: CGT - small business concessions - retirement exemption

Question 1

Are you in the business of primary production as defined under section 995-1 of the Income Tax Assessment Act 1997?

Answer

No. Based on the overall impression of the activity of tending to trees that are intended to be felled, it does not appear that you are in a business based on the guidelines in Taxation Ruling TR 97/11 because:

•         The activity did not have significant commercial purpose of character.

•         You did not appear to have more than an intention to engage in business.

•         The activity is of insufficient size, scale, and permanency to be considered in running a business.

•         Your involvement in the activity was minimal.

It would appear that the activity is more in line with earning income from property than carrying on a business of primary production.

Question 2

Can the taxpayer access the small business CGT retirement exemption under subdivision 152-D of the Income Tax Assessment Act 1997 (ITAA 1997), on the sale of the property?

Answer

No. You do not satisfy the basic conditions under section 152-10 of the ITAA 1997 because you are not a small business entity. Therefore, you are not eligible for the capital gains retirement exemption under section 152-300 of the ITAA 1997.

This ruling applies for the following period:

X of XX 20XX to X of XX 20XX

The scheme commenced on:

X of XX 20XX

Relevant facts and circumstances

You own a property.

You have a registered ABN.

You entered into a share farm arrangement (SFA) for the growing of trees on your property.

There was a forestry management plan in place.

You did not have any input into the agreement.

You conducted the initial land clearing and regular spraying of the trees.

The other party in the agreement was responsible for the planting and removal of timber.

You received a portion of the profit for the sale of the trees.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 section 152-300

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Subsection 995-1(1) of the ITAA 1997 provides a definition of 'primary production business' and includes the activity of planting or tending trees in a plantation or forest that are intended to be felled as carrying on a business.

For the purposes of the ITAA 1997, a person is carrying on a business of primary production if:

a)    They produce primary production, as defined in subsection 995-1(1) of the ITAA 1997; and

b)    The activity amounts to the carrying on a business.

Taxation Ruling 97/11 provides the Commissioners view of the factors that are considered important in determining if you are in a business of primary production for tax purposes. The indicators under the ruling include:

•         whether the activity has a significant commercial purpose or character; this indicator comprises many aspects of the other indicators.

•         whether the taxpayer has more than just an intention to engage in business

•         whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

•         whether there is repetition and regularity of the activity.

•         whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit.

•         the size, scale, and permanency of the activity.

There is no one indicator that is decisive, and there is often a significant overlap of these indicators. The indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the 'large or general impression gained' from looking at all the indicators, and whether these factors provide the operations with a 'commercial flavour'.

Significant commercial purpose or character

There is a business plan in place that details the purpose and timeframe of the activity, as well as the total area that the plantation will use and the projected income. There is even a Forestry Management Plan that details specifics of the environment such as average rainfall, drainage, and erodibility, as well as details the considerations for continuing management of the plantation. However, these plans were not drafted by you. It can be argued that there was a significant commercial purpose or character from the behaviour of the other party in the SFA, but not you.

More than an intention to engage in business

There appears to have been an underlying profit motive from entering into the SFA, which would be contribute to an intention to run a business, however, a mere intention to carry on a business is not enough. There must be activity. You took some preparatory steps to prepare for the activity by conducted the initial land clearing. You contributed some expenses to maintaining the plantation. There does not appear to be any motive from you to continue this activity in areas other than the land dedicated for the plantation, and there does not seem to be an intention to repeat the efforts or expand the business.

Purpose and prospect of profit

Prospect of profit is a very important indicator. Usually, the purpose of carrying on a business is to engage in an activity for the purpose of profit on a continuous and repetitive basis. It is apparent that you entered into the SFA for the purpose of sharing in a profit in the arrangement. It is clear that you had a plan for the activity to succeed and even consulted people in the industry.

Repetition and regularity

You put in regular hours each year to ensure that the activity succeeded and contributed funds and effort to the maintenance of the land. However, it is also evidence that the main activities were conducted by other parties in the agreement.

The size, scale, and permanency of the activity.

By nature of the activity, it appears that the activity was conducted on a significant portion of land. However, it is evident that the activity is lacking in scale and permanency. There was clearly no intention to expand the activity to increase the total amount of trees that could potentially be harvested. Typically, in activities similar to yours, there would be plans to intermittingly grow and tend to trees in various plots to ensure consistent stream of income as the lots matured for harvesting. There does not appear that you had the intention to ensure consistent income from this activity.

Furthermore, TD 95/62 provides the commissioners view on whether owners of land used in a share farming arrangement can be considered to be engaged in a business of primary production.

Paragraphs 4 and 5 of TD 95/62 state:

Many arrangements do not amount to the carrying on of a business in partnership. In such cases, the fact that the land is used for cultivation in a business of primary production does not necessarily mean that the owner of the land is also carrying on that business.

To be carrying on a business, the taxpayer must be involved in the activities that make up that business. This would be evidenced by an element of control over, and/or an ongoing participation in, the business. The involvement should be direct or immediate, rather than passive. The payment of expenses relating to the ownership of the land would not, without more, be sufficient.

To be carrying on a business, the taxpayer must be involved in the activities that make up that business. This would be evidenced by an element of control over, and/or an ongoing participation in, the business. The involvement should be direct or immediate, rather than passive. The payment of expenses relating to the ownership of the land would not, without more, be sufficient. It is not apparent that you participated in the activities that made up the business being conducted on your property, rather, you were only providing land to accommodate the business as per the SFA, and your duties amounted to efforts and expenses related to the ownership of land.

On the general impression gained from your activity, it could not be concluded that you are running a business of primary production based on the considerations under TR 97/11 and TD 95/62. Rather, it appears that the use of the land would be in the nature of income from property rather than from the carrying on a business of primary production.

Question 2

Can you access the small business CGT retirement exemption under subsection 152-300 of the ITAA 1997 on the sale of the property?

Summary

No. You do not satisfy the basic conditions for relief under section 152-10 of the ITAA 1997 because you are not a small business entity. Therefore, you are not eligible for the capital gains retirement exemption.

Detailed reasoning

Section 152-300 of the ITAA 1997 gives taxpayers the option to disregards a capital gain from a CGT event happening to a CGT asset of their small business, if the capital proceeds from the event are used in connection to their retirement.

You must meet the basic conditions under section 152-10 of the ITAA 1997 in order to be eligible to access the CGT retirement exemption. Because you are not a small business entity, you do not meet the basic conditions for the CGT small business concessions.