Edited version of private advice

Authorisation Number: 1052251830212

Date of advice: 22 May 2024

Ruling

Subject: CGT - small business concessions

Question 1

For the purposes of the maximum net asset value test, is any one of the X individuals affiliated with any one or more of the other X individuals within the meaning given to the term 'affiliate' in section 328-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Does each property owned for less than 15 years satisfy the active asset test in section 152-35 of the ITAA 1997?

Answer

Yes.

Question 3

Does each property owned for more than 15 years satisfy the active asset test in section 152-35 of the ITAA 1997?

Answer

Yes.

Question 4

With respect to the small business rollover, has each individual acquired replacement assets under the formal agreement?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

A partnership was established in 19XX and conducted business on several properties owned by the individuals of the partnership.

In 20XX the partnership expanded.

In 20XX formal agreements were executed for succession arrangements and the operation of the partnership.

In 20XX company A was incorporated and in 20XX trust A was established. Company A is the trustee.

In 20XX a share farming agreement was executed between the individuals of the partnership (landowner) and trust A (sharefarmer) to govern the business operations on the properties.

The agreement provides that the landowners maintain right to exclusive possession of the property and provides their business experience and knowledge and labour for the sharefarmer.

Sales of proceeds of the business to be allocated X% to the share farmer and X% to the landholder.

The partnership was dissolved in 20XX under a formal agreement and provides for an allocation of land to each family who operates their farming business through their own entities.

The partnership continued to declare income from the business in the 20XX income year.

Details of the properties allocated under the agreement were provided. Appraisals of the properties were carried out.

The value of each individual's property holdings as at 20XX was provided.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 Subdivision 152-E

Income Tax Assessment Act 1997 section 152-15

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

Income Tax Assessment Act 1997 subsection 152-35(2)

Income Tax Assessment Act 1997 subsection 152-40(1)

Income Tax Assessment Act 1997 section 152-47

Income Tax Assessment Act 1997 subsection 152-47(1)

Income Tax Assessment Act 1997 section 152-410

Income Tax Assessment Act 1997 section 328-130

Reasons for decision

Question 1

Under section 328-130 of the ITAA 1997 an individual or a company is an affiliate of yours if the individual or company acts, or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you, in relation to the affairs of the business of the individual or company.

However, an individual or a company is not your affiliate merely because of the nature of the business relationship you and individual or company shares.

The meaning of affiliate can be extended for a spousal relationship. For the purposes of determining whether an individual's spouse is an affiliate for the purpose of Subdivision 152-A of the ITAA 1997, section 152-47 of the ITAA 1997 can be applied. This provision deems an affiliate relationship with an individual's spouse where an asset owned by one entity is used in the course of carrying on a business by another entity, and the business entity is not otherwise an affiliate of or connected with the asset owner (subsection 152-47(1)).

A partner in a partnership would not be an affiliate of another partner merely because the first partner acts, or could reasonably be expected to act, in accordance with the directions or wishes of the second partner, or in concert with the second partner, in relation to the affairs of the partnership.

Whether a person acts, or could reasonably be expected to act, in accordance with the taxpayer's directions or wishes, or in concert with the taxpayer is a question of fact dependent on all the circumstances of the particular case. No one factor will necessarily be determinative.

For the purposes of the maximum net asset value test, the net assets of any affiliate must be included just before the CGT event (section 152-15 of the ITAA 1997).

Application to the circumstances

There are formal agreements in place between the parties. The partnership was dissolved in 20XX and each family operates their farming business through their own entities on their own properties.

It is not considered that each individual acts in accordance with the directions or wishes of the other individuals or acts in concert with each other for the purposes of the maximum net asset value test.

It is also considered that each spouse is not an affiliate under subsection 152-47(1) of the ITAA 1997.

Question 2

Active asset test

Under subsection 152-35(1), a CGT 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).

Under subsection 152-35(2), the test period:

(a)          begins when you acquired the asset; and

(b)          ends at the earlier of:

(i)            the CGT event, and

(ii)           if the relevant business ceased to be carried on in the 12 months before that time or any longer period that the Commissioner allows - the cessation of the business.

Subsection 152-40(1) provides that 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 carried on (whether alone or in partnership) by:

(i)            you, or

(ii)           your affiliate, or

(iii)         another entity that is connected with you, or

(b)          if the asset is an intangible asset - you own it and it is inherently connected with a business that is carried on (whether alone or in partnership) by you, your affiliate, or another entity that is connected with you

Taxation Determination TD 95/62 discusses whether the owner of land who allows the land to be used in a share farming arrangement would be considered to be engaged in a business of primary production.

As highlighted in TD 95/62, many arrangements do not amount to the carrying on of a business in partnership. The fact that the land is used in a business of primary production does not necessarily mean that the owner of the land is also carrying on that business. Paragraph 5 of TR 95/62 states 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. Where no involvement exists, the landowner would not be regarded as being engaged in the business of primary production.

Application to your circumstances

The partnership was established in 19XX and conducted farming activities on the properties.

In 20XX a share farming agreement was entered into between the individuals in the partnership (landowner) and trust A (sharefarmer) that sets out the obligations of each party.

As discussed in the TD 95/62, to be carrying on a business, the taxpayer must be involved in the activities that make up that business. In the absence of such an involvement, the landowner would not be regarded as being engaged in the business of primary production.

In this case, the individuals who own the land have control over the business, ongoing participation in the business and provide their business experience and knowledge.

Based on these facts, it is considered that the individuals in the partnership were carrying on a business from 20XX until the partnership was dissolved in 20XX.

The partnership went through a winding down phase up until it ceased carrying on any farming business from 20XX.

Several properties were owned for more than 15 years and the properties were used for more than 7 ½ years in the business. Therefore, these properties satisfy the active asset test.

Question 3

Several properties have been owned for less than 15 years and used in the farming business for more than half the period of ownership. Therefore these properties satisfy the active asset test.

Question 4

The small business asset roll-over concession in Subdivision-E of the ITAA 1997 allows you to defer the making of a capital gain from a CGT event, in relation to one or more of your active assets if you acquire replacement assets.

You can choose to obtain a small business asset roll-over if the basic conditions in Subdivision 152-A of the ITAA 1997 are satisfied.

A capital gain will arise, if by the end of the replacement asset period:

•         you do not acquire one or more CGT assets as replacement assets or make a capital improvement to one or more existing assets, or both (CGT event J5),

•         the replacement asset or capital improved asset is not an active asset (CGT event J5),

•         the cost of the replacement or capital improved asset is less than the amount of the capital gain disregarded (CGT event J6),

•         there is a change in the status of the replacement or capital improved asset, for example, it is no longer an active asset or becomes your trading stock (CGT event J2).

The replacement asset period starts one year before and ends two years after the last CGT event that occurs in the income year for which you choose the rollover.

Application to your circumstances

In this case, the basic conditions are met under Subdivision 152-A as the properties are CGT assets and allocation of assets under the formal agreement has triggered CGT event A1. Each individual's net assets are less than $X million and the assets are active assets.

Accordingly, each individual is able to choose the small business rollover in Subdivision 152-E in relation to the allocation of the properties. The properties allocated under the formal agreement qualify as replacement assets.