Edited version of private advice

Authorisation Number: 1052261144734

Date of advice: 12 June 2024

Ruling

Subject: CGT - concessions

Question

Will the trust satisfy the basic conditions in section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

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

The trust acquired property in the 20XX income year. At the time the property was purchased the directors of the trustee were individual A and individual B. In the 20XX income year individual A became the sole director.

The trust used the property to conduct a farming operation.

In the 20XX income year individual A passed away unexpectedly.

At all times until individual A's passing, individual A and their defacto individual C were involved in the day to day activities of the farming operations conducted by the trust.

Individual C was appointed as the sole director of the trustee following individual A's death.

Individual C made the decision to wind down the farming operations to enable the property to be sold.

By the 20XX income year the majority of the trust's livestock had been sold.

Following individual A's death, Court proceedings were brought by individual A's family members.

In the 20XX income year, a formal agreement was executed to enable the property to be placed on the market.

A contract for sale was entered into in the 20XX income year.

The delay in marketing the property for sale was due to the Court proceedings.

The property was used to carry on the farming operations for more than 50% of the ownership period. The property was also used for agistment from the 20XX income year until the 20XX income year. The business substantially ceased in the 20XX income year.

Income from livestock sales totalled $X for the 20XX to 20XX income years and income from agistment totalled $X for the 20XX to 20XX incomes years.

The aggregated turnover of the trust for each of the years ended 30 June 20XX through to 30 June 20XX was less than $2 million.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-10

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 subparagraph 152-40(4)(e)(ii)

Income Tax Assessment Act 1997 subsection 328-110(1)

Income Tax Assessment Act 1997 subsection 328-110(5)

Reasons for decision

Basic conditions

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.

Small business entity

An entity is a CGT small business entity for an income year if:

(a)          it carries on a business in the current year, and

(b)          one or both of the following applies:

(i)            it carried on a business in the income year (the previous year) before the current year and its aggregated turnover for the previous year was less than $2 million, and

(ii)            its aggregated turnover for the current year is likely to be less than $2 million (subsections 152-10(1AA) and 328-110(1)).

Relevantly, subsection 328-110(5) also applies to the entity as if it carried on a business in an income year if:

(a)          in that year it was winding up a business it previously carried on; and

(b)          it was a small business entity for the income year in which you stopped carrying on that business.

Active asset test

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

owever, an asset whose main use by you is to derive rent cannot be an active asset unless its main use for deriving rent was only temporary (subparagraph 152-40(4)(e)(ii) of the ITAA 1997).

Application to the circumstances

A CGT event occurred when the property was sold in the 20XX income year.

The farming operation effectively ceased in the 20XX income year when the majority of livestock were sold. The trust continued to wind down the business with further livestock sales in the 20XX and 20XX income years, until the property was sold in the 20XX income year. The delay in marketing and selling the property was due to the Court proceedings. The aggregated turnover was less than $2 million in the year the trust stopped carrying on the business. The trust meets the conditions of a small business entity in accordance with subsection 328-110(5) of the ITAA 1997.

The trust carried on the farming operation from the 20XX income year until the 20XX income year, then recommenced the farming operation in the 20XX income year. The farming operation then effectively ceased in the 20XX income year when the majority of livestock were sold. The trust also received agistment income from third parties in the 20XX to 20XX income years. The trust carried on the farming operation for more than 50% of the time on the property and the property was not used mainly to derive rent. The trust meets the active asset test.

Therefore the trust meets the basic conditions under subsection 152-10(1) of the ITAA 1997.