Edited version of private advice

Authorisation Number: 1052249847694

Date of advice: 9 May 2024

Ruling

Subject: CGT - small business concessions

Question 1

Does CGT event D2 occur on the date the option deed is signed by you?

Answer

Yes.

Question 2

If the option is exercised, can any capital gain that occurred from CGT event D2 be disregarded with a new CGT event D1 occurring?

Answer

Yes.

Question 3

If the operation is exercised, have the basic conditions for the small business CGT concessions been met in relation to CGT event D1?

Answer

Yes.

Question 4

If the option is not exercised, have the basic conditions for the small business CGT concessions been met in relation to CGT event D2?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 2024

Year ending 30 June 2025

The scheme commenced on:

1 July 2023

Relevant facts and circumstances

You own X hectares of land.

Company A have put forward an application for easement over the land.

An option right was signed by you in 20XX. Proceeds to be received for the option are $X.

Company A may exercise the option for easement within the next 12 months. Expected proceeds are $X. Company A is not exercising compulsory acquisition powers.

You have used this land for business for X years.

Your net assets are approximately $X and your aggregated turnover has never exceeded $X.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-35

Income Tax Assessment Act 1997 section 104-40

Income Tax Assessment Act 1997 subsection 104-40(5)

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

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

Income Tax Assessment Act 1997 subsection 152-10(1)

Income Tax Assessment Act 1997 section 152-12

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

Reasons for decision

CGT event D1 and D2

Section 104-35 of the Income Tax Assessment Act 1997 (ITAA 1997) states that:

•         CGT event D1 happens if you create a contractual right or other legal or equitable right in another entity

•         the time of the event is when you enter into the contract or create the other right

•         you make a capital gain if the capital proceeds from creating the right are more than the expenditure you incurred.

Section 104-40 of the ITAA 1997 states that:

•         CGT event D2 happens if you grant an option to an entity, or review or extend an option you had granted

•         the time of the event is when you grant, review or extend the option

•         you make a capital gain if the capital proceeds for the grant, renewal or extension of the option are more than the expenditure you incurred.

Under subsection 104-40(5) of the ITAA 1997, a capital gain you make from the grant, renewal or extension of the option is disregarded if the option is exercised.

Small business CGT concessions

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-A of the ITAA 1997 contains the basic conditions that must be satisfied for small business CGT relief. The basic conditions, as set out in subsection 152-10(1) of the ITAA 1997 are:

(a)  a CGT event happens in relation to a CGT asset of yours in an income year

(b)  the event would (apart from this Division) have resulted in a gain

(c)   at least one of the following applies:

(i)      you are a CGT small business entity for the income year

(ii)     you satisfy the maximum net asset value test

(iii)    you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an asset of the partnership, or

(iv)    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.

(d)  the CGT asset satisfies the active asset test.

The first condition in paragraph 152-10(1)(a) of the ITAA 1997 requires that the CGT event happens in relation to a CGT asset of yours. The fourth condition in paragraph 152-10(1)(d) of the ITAA 1997 requires that the CGT asset satisfies the active asset test.

With respect to the first condition it is considered the words 'in relation to' in paragraph 152-10(1)(a) of the ITAA 1997 are wide enough to allow reference to an underlying asset such as the land in relation to which the option has been granted. They are also wide enough to allow reference to land in relation to which an option to acquire an easement over the land has been granted (ATO ID 2011/45 CGT small business concessions: basic conditions - CGT event happening in relation to a CGT asset - granting an option).

With respect to the fourth condition in paragraph 152-10(1)(d) of the ITAA 1997, the land as the underlying 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 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 (subsection 152-35(1) of the ITAA 1997).

Special conditions for CGT event D1 are set out in section 152-12 of the ITAA 1997. Paragraphs 152-10(1)(a) and (d) do not apply in the case of CGT event D1. Instead, it is a basic condition that the right you create that triggers the CGT event must be inherently connected with a CGT asset of yours that satisfies the active asset test.

Application to your circumstances

Question 1

You entered into an option deed with company A in 20XX. Company A may exercise the option for easement within the next X months.

CGT event D2 occurred on the date the option deed was signed.

Question 2

If the option is exercised by company A, the capital gain from CGT event D2 will be disregarded with a new CGT event D1 occurring.

Question 3

You have carried on a business on the land for X years and your aggregated turnover is less than $X.

CGT event D1 will occur if you exercise the option. The asset that is created (the easement) is inherently connected to the land in which you have carried on the business. You will meet the basic conditions for the small business CGT concessions in relation to CGT event D1 when the option is exercised.

Question 4

If the option is not exercised, CGT event D2 will not be disregarded. CGT event D2 occurred in relation to a CGT asset of yours, being the land in which the option has been granted.

Accordingly, paragraphs 152-10(1)(a) and 152-10(1)(d) of the ITAA 1997 can be satisfied where an option is granted, but not exercised, and you will be eligible for the small business CGT concessions as you meet the basic conditions.