Edited version of private advice

Authorisation Number: 1052238920319

Date of advice: 13 May 2024

Ruling

Subject: CGT - Small Business Concessions

Question

Are you eligible for the small business capital gains tax (CGT) retirement exemption under section 152-305 of the Income Tax Assessment Act of 1997 (ITAA 1997) on the disposal of the property?

Answer

No.

This ruling applies for the following period:

Year Ending 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

You purchased the property after September YYYY as your principal place of residence.

The main residence covers X hectares, and the farm covers X hectares.

The property was used for farming activities:

•         Farmed vegetable 1 and vegetable 2 in 19XX to19XX.

•         Farmed vegetable 3 in 20XX to 20XX.

•         Farmed vegetable 2 in 20XX.

•         Farmed vegetable 4 in 20XX and 2XX.

When you farm the land, you spend approximately x hours a week and x hours a week during harvest.

While the property was owned by you, the farming business was run by trustee for the trust.

You were the sole trustee of the trust.

You intend to maintain ownership of the residence and approximately x hectare of the surrounding land.

The trust has no business plan.

The trust did not lodge any income tax returns for 19XX to 20XX due to the farm running at a loss. Due to the level of production, the farm continued to sell excess yield, but the turnover did not exceed $20,000.

Income tax returns were lodged for the trust in 20XX, 20XX and 20XX. Only two of the three years were profitable.

The trust hasn't lodged a tax return since 20XX due to the farm running at a loss. Due to the level of production, the farm continued to sell excess yield, but the turnover did not exceed $20,000.

You have not used any of the retirement exemption cap previously.

You are over 55 years old.

You satisfy the maximum value asset test.

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

Income Tax Assessment Act 1997 Subdivision 152-D

Income Tax Assessment Act 1997 section 152-305

Income Tax Assessment Act 1997 subsection 328-125(2)(b)

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision

Basic conditions

A capital gain that you make may be reduced or disregarded under section 152-10 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;

o   you are a small business entity for the income year

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

o   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

o   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

The active asset test is contained in section 152-35 of the ITAA 1997. Where you have owned the asset for less than 15 years, the active asset test is satisfied if the asset was an active asset of yours for a total of at least half of the test period detailed below.

The test period:

•         begins when you acquired the asset, and

•         ends at the earlier of

o   the CGT event, and

o   when the business ceased, if the business in question ceased in the 12 months before the CGT event (or such longer time as the Commissioner allows).

Section 152-40 of the ITAA 1997 explains that 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, your spouse or child, or an entity connected with you.

Connected entities

Subsection 328-125(3) of the ITAA 1997 says an entity controls a discretionary trust if a trustee of the trust acts, or could reasonably be expected to act, in accordance with the directions or wishes of the first entity, its *affiliates, or the first entity together with its affiliates.

In your case you are the sole trustee of the trust so the trust would be expected to act is accordance to your wishes as you have direct control of the trust.

Carrying on a business

Subsection 995-1(1) of the ITAA 1997 defines 'business' to include 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'. However, this definition simply states what activities may be included in a business. It does not provide any guidance for determining whether the nature, extent, and manner of undertaking those activities amount to the carrying on of a business. For this purpose, it is necessary to turn to case law.

Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11)

Indicators of carrying on a business

The courts have held that the following indicators are relevant:

•         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 of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business.

•         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 and.

•         whether the activity is better described as a hobby, a form of recreation or a sporting activity.

We consider below the relevant indicators from TR 97/11 in the context of your accommodation activity.

Whether the activity has a significant commercial purpose or character

This indicator generally covers aspects of all the other indicators and broadly requires that a taxpayer be able to show that the activity is carried on for commercial reasons and in a commercially viable manner.

You have not shown that the activity is carried on for commercial reasons and in a commercially viable manner. The trust only made a small profit in X years out of the X years. The activity was irregular as you farmed the land in 19XX to 19XX then had X years where nothing was farmed. You then farmed 20XX to 20XX then had X years where you didn't farm the land. You also farmed in 20XX and 20XX.

More than an intention to engage in business

The property was originally purchased as your principal place of residence. You decided to also use the property for farming and sold excess crops to purchasers. You also don't have a business plan and the activity was very irregular over the X years.

You have not demonstrated more than intention to engage in a business, the facts do not indicate there was an intention to engage in business.

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

The taxpayer's involvement in the business activity should be motivated by wanting to make a tax profit and the taxpayer's activities should be conducted in a way that facilitates this. This will require examining whether objectively there is a real prospect of making a profit from participating in the business of the taxpayer.

The trust only was profitable X of the X years it lodged tax returns and has not lodged since 20XX. In other years the farm was making a loss and its turnover did not exceed $20,000. You also only sold the excess crops not the entire crop also indicates the activity was predominantly for private purposes and didn't have profit making purposes.

Repetition and regularity of the activity

Frequent and regular transactions are the usual feature of business operations. Turnover is maximised if the processes are repeated over a long period.

You have farmed the land in 19XX to 19XX then had X years where nothing was farmed. You then farmed 20XX to 20XX then had X years where you didn't farm the land. You also farmed in 20XX and 20XX. Your related trust that conducted the activity only lodged X years in over XX years the property was available for the activity.

Based on the above there was no repetition and regularity of the activity.

The activity is of the same kind that is carried on in a similar manner to that of the ordinary trade in that line of business

This indicator requires a comparison between the activities of the taxpayer in question and those undertaken by a person in business in the same type of industry. Where the taxpayer's activities are similar in nature to the business, further support is given to the fact that a business exists. A significant level of personal involvement in the activities is expected.

Most primary production business are conducted on an ongoing basis where crops are sown every year and that hasn't happened in this case. You also made verbal agreement with suppliers and purchasers instead of written agreements which have terms and conditions surrounding payments. You also discarded ledgers which were one of your two ways of keeping records, the other being your bank statements. Similar activities that are a business tend to be larger, more regular and profitable.

The activity is planned, organised and carried out in a business-like manner

The activities conducted by, or on behalf of the taxpayer, should be carried out in a systematic and organised manner. This will usually involve matters such as the keeping of appropriate business records by the taxpayer. If the activities are carried out on the taxpayer's behalf by someone else, there should be regular reports provided to the taxpayer on the results of those activities.

The fact that you farmed the land in 19XX to 19XX then had X years where nothing was farmed. You then farmed 20XX to 20XX then had X years where you didn't farm the land. You also farmed in 20XX and 20XX shows that the activity was not carried out systematically and there were also poor record keeping practices.

The facts indicate the activity was conducted on an ad hoc basis.

The size, scale and permanency of the activity

An activity would be expected to be of a size, scale and permanency suitable to the industry it is operating in to be recognised as a business. The larger the scale of the activity the more likely it is that the taxpayer is carrying on a business. This is not conclusive, and a person may carry on a business in a small way (Thomas v. FC of T 72 ATC 4094; 3 ATR 165).

Your property is only x hectares and x hectares of it is used as your main residence. Therefore, only x hectares are used for farming. For the farming activity no other properties are used except your own.

There is also no permanency as you farmed for X years crop then don't farm at all. You then farm for X years then don't farm for X years. You then farm for X year then don't farm for X years then farm for X years. This appears haphazard and does not display permanency. As the size of the land available is small you are using all the available land at once which limits the amount of crop you can grow.

Whether the activity is better described as a hobby, a form of recreation or a sporting activity

Based on the facts of the case, the activity would be described as a hobby or recreation activity.

Conclusion

After weighing up the objective facts surrounding this case based on the information and documentation provided and applying the indicators which are set out in TR 97/11 to your circumstances, the Commissioner considers you are not carrying on a farming business.

Application to your circumstances

In your case you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997. You have owned the property used for by the trust for over 15 years and it has been used for over 7.5 years for farming activities. You are the sole trustee of the trust, so it is a connected entity. The Commissioner does not consider the trust carries on a business which means the active asset test in section 152-35 of the ITAA 1997 is not satisfied which results in the basic conditions under section 152-10 of the ITAA 1997 are also not met. As you don't satisfy the basic conditions you are not eligible for the small business retirement exemption.