Edited version of private advice

Authorisation Number: 1052342937631

Date of advice: 18 December 2024

Ruling

Subject: CGT - small business concessions

Question 1a:

Are the proceeds of the Trust on the sale of livestock received from the forced sale due to loss from natural disaster, included in the aggregated turnover for the assessment of meeting the definition of a 'small business entity' ('SBE') for access to the small business capital gains tax ('CGT') concessions pursuant to section 328 of the Income Tax Assessment Act 1997 ('ITAA 1997')?

Answer 1a:

No.

Question 1b:

Are the conditions of section 152-10 of the ITAA 1997 met for the taxpayers (specifically subsection 152-10(1A)(a) of the ITAA 1997), such that the aggregated turnover for the YYYY financial year is less than $XXX for the purpose of the small business CGT concessions?

Answer 1b:

Yes.

Question 2:

Are natural disaster grants received by the Trust as compensation for losses also excluded from the calculation for the aggregated turnover?

Answer 2:

Yes.

Question 3:

Will the Commissioner allow an additional X-year period from DD MM YYYY to DD MM YYYY for the purchase of a replacement asset by the taxpayers after the sale of the property XXX on DD MM YYYY, pursuant to section 104-190 of the ITAA 1997?

Answer 3:

Yes.

This ruling applies for the following periods:

DD MM YYYY to DD MM YYYY

This ruling commenced on:

DD MM YYYY

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect, and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Background Information

1.              The taxpayers are primary producers, based in XXX.

2.              The taxpayers' enterprise is conducted through XXXX as Trustee for the Trust ('the Trust').

3.              The taxpayers are connected with the Trust by virtue of them being controllers of the Trust. The taxpayers are shareholders and directors of the trustee company.

4.              Natural disaster in XXX MM YYYY and MM YYYY

5.              The taxpayers endured a series of challenging events outside the ordinary course of carrying on their business that have inadvertently led to their increased turnovers for the years ended DD MM YYYY, YYYY and YYYY. They have suffered much hardship through natural disasters in the YYYY and YYYY financial years and made the decision to destock livestock due to circumstances beyond their control.

6.              In MM YYYY, XXX had a natural disaster resulting in the loss. XXX was completely destocked as an animal welfare decision due to the loss of fencing, water infrastructure, and shelter. The repeated inundations created waterlogged and boggy terrain and negatively impacted the livestock.

Affected annual turnovers

7.              The primary production business has been subjected to a succession of natural disasters that have resulted in the annual turnover for the financial years ended DD MM YYYY, YYYY and YYYY to include income earned which is not in the ordinary course of business. This has resulted in turnover for the years ending DD MM YYYY and YYYY exceeding $XX aggregated turnover, as the income includes turnover derived not in the ordinary course of income.

8.              The turnover for the years ending DD MM YYYY and YYYY was inflated due to the adjusted values for the forced sale of livestock. This was a direct result of destocking. For the YYYY financial year, the total sales of $XX are considered to be exceptional, and out of the normal course of business, because all the livestock on hand as at DD MM YYYY were sold between DD M YYYY and DD MM YYYY.

9.              The resources at XXX was lost for the second year in a row. In the immediate recovery period, livestock sales totalling $XX were received. The disaster in both geographic regions meant that the stock was unable to be transferred between properties. It was not possible to restore fencing and acquire sufficient resources required.

10.          Further, the aggregated turnover for the years ended DD MM YYYY and YYYY would not have exceeded $XX.

11.          Livestock have needed to be sold out of the ordinary course of business again in the years ended DD MM YYYY and YYYY. During both those years there were further natural disasters. During the YYYY financial year, there was a natural disaster event at XXX. During the YYYY financial year there were further natural disasters on properties operated by the business, including XXX and ZZZ and YYY. Livestock needed to be sold during and after such events because of lack of resources.

12.          The decision was made to completely destock and to no longer continue with that enterprise due to unforeseen circumstances surrounding Covid, and not having the workforce available to provide the necessary care required. There was no plan to purchase replacement. The business did not have sufficient funds to restock. It was not considered economical to restock.

Payment of natural disaster grant $XX

13.          No natural disaster grants were received by the taxpayers for MM YYYY. The taxpayers were in the process of relocating to XXX and were unaware of the grants available. Applications for disaster recovery assistance had closed by the time they had become aware of their eligibility.

14.          The Australian Government announced Special Disaster Grants of up to $XX to support the recovery of primary producers impacted that began on DD MM YYYY and DD MM YYYY.

15.          The disaster payments received by the taxpayers were Special Disaster Grants, Australian Government Reference Number (AGRN) - AGRN XX and AGRN XX. The Grants were Category X grants under the Disaster Recovery Funding Arrangements 20XX.

16.          Following the natural disaster in MM YYYY, the taxpayers received a recovery disaster payment of $XX. They received X instalments $XX on DD MM YYYY and a further $XX on DD MM YYYY.

Request for additional year to purchase replacement asset

17.          The taxpayers changed accountants after the preparation of their YYYY financial statements and tax returns. XXXX is yet to finalise the YYYY tax returns for the Taxpayers and their connected entity, the Trust.

18.          XXXX has identified anomalies in the YYYY financial statements and tax returns prepared by the previous accountant which may affect the preparation of the YYYY financial statements and tax returns.

19.          XXXX has emailed the previous accountants on several occasions to clarify specific tax and accounting transactions, so that the accuracy of the YYYY tax returns and financial statements may be confirmed, but they have been unable to obtain satisfactory explanations for the anomalies identified to date. This has delayed the lodgment of the YYYY income tax returns.

20.          This has also caused an unexpected delay in business planning for the taxpayers and affected their ability to purchase a replacement asset.

21.          XXXX submitted a private ruling application in relation to the taxpayers satisfying the $XX turnover test for the application of the small business CGT concessions on DD MM YYYY.

22.          Due to that ruling's outcome, the taxpayers have requested a revision of the ruling to clarify aspects of the scheme ruled on. Having to relodge the private ruling application has caused the taxpayers to exceed the X year replacement asset period.

Information provided

23.          You have provided several documents containing detailed information in relation to the taxpayers' application, including:

•                Private Binding Ruling ('PBR') Application, dated DD MM YYYY

•                Responses to request for further information received DD MM YYYY

24.          We have referred to the relevant information within these documents in applying the relevant tests to your circumstances.

Assumption(s)

Not applicable.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-190

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 subdivision 152-A

Income Tax Assessment Act 1997 subdivision 152-B

Income Tax Assessment Act 1997 section 152-1

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 section 152-110

Income Tax Assessment Act 1997 section 152-125

Income Tax Assessment Act 1997 section 152-205

Income Tax Assessment Act 1997 section 152-305

Income Tax Assessment Act 1997 section 328-110

Income Tax Assessment Act 1997 section 328-115

Income Tax Assessment Act 1997 section 328-120

Income Tax Assessment Act 1997 section 995-1

Further issues for you to consider

Not applicable.

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 ('ITAA 1997') unless otherwise stated.

Summary - question 1a:

The proceeds from the sale of livestock received from the forced sale due to loss, as a result of the natural disaster, are not included in the aggregated turnover for the assessment of meeting the definition of a SBE for access to the Small Business CGT concessions.

Summary - question 1b:

The conditions of section 152-10 of the ITAA 1997 are met for the taxpayers (specifically subsection 152-10(1A)(a) of the ITAA 1997), such that the aggregated turnover for the YYYY year is less than $XX for the purpose of the small business CGT concessions.

Summary - question 2:

The natural disaster grants received as compensation for damage which occurred in MM YYYY, are also excluded in the calculation of aggregated turnover.

Summary - question 3:

The Commissioner will allow an additional X year period from DD MM YYYY to DD MM YYYY for the purchase of a replacement asset by the taxpayers after the sale of the property on DD MM YYYY, pursuant to section 104-190 of the ITAA 1997.

Detailed reasoning

Question 1a:

Aggregated turnover - section 328-115 ITAA 1997

25.          As defined in subsection 328-115 of the ITAA 1997, 'aggregated turnover' is defined as the sum of all relevant annual turnovers. The relevant annual turnovers are outlined in subsection 328-115(2) and exclude any amounts covered by subsection 328-115(3).

26.          An entity's 'annual turnover' for an income year is the total ordinary income that the entity derives in the income year in the ordinary course of carrying on a business.

27.          Subject to the exceptions in section 328-115 and 328-120, a receipt will be included in aggregated turnover if it is both:

•                'ordinary income', and

•                derived in the 'ordinary course' of carrying on a business.

28.          The phrase 'ordinary course of carrying on a business' is not defined, so its meaning must be taken from its ordinary usage and context. The Macquarie Dictionary outlines the meanings of:

•                'ordinary' includes 'commonly met with, of the usual kind' or 'customary; normal'

•                'course' includes 'customary manner of procedure; regular or natural order of events', 'a mode of conduct; behaviour' or 'a particular manner of proceeding'.

29.          A 'primary production business' is defined in subsection 995-1(1) of the ITAA 1997 to include a business of 'maintaining livestock for the purpose of selling them or their bodily produce (including natural increase)'.

30.          The definition of 'livestock' excludes 'animals used as beasts of burden or working beasts in a business other than a primary production business' (subsection 995-1(1) of the ITAA 1997).

CGT Small Business Entity 'SBE'

31.          As defined in section 995-1 of the ITAA 1997, a CGT small business entity has the meaning given by subsection 152-10(1AA), as follows:

You are a CGT small business entity for an income year if:

(a) you are a small business entity for the income year; and

(b) you would be a small business entity for the income year if each reference in section 328-110 to $XX were a reference to $XX.

32.          As defined in section 995-1 of the ITAA 1997, a small business entity has the meaning given by subsection 328-110(1), as follows:

You are a small business entity for an income year (the current year) if:

(a) you carry on a business in the current year; and

(b) one or both of the following applies:

(i) you carried on a business in the income year (the previous year) before the current year and your aggregated turnover for the previous year was less than $XX;

(ii) your aggregated turnover for the current year is likely to be less than $XX.

33.          As defined in section 995-1 of the ITAA 1997, a business includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

34.          As defined in subsection 328-115 of the ITAA 1997, aggregated turnover is defined as the sum of all relevant annual turnovers. The relevant annual turnovers are outlined in subsection 328-155(2) and exclude any amounts covered by subsection 328-155(3).

35.          Section 328-120 of the ITAA 1997 sets out the meaning of annual turnover as follows:

An entity's annual turnover for an income year is the total ordinary income that the entity derives in the income year in the ordinary course of carrying on a business.

36.          The term ordinary income is defined in section 6-5 of the ITAA 1997 as 'income according to ordinary concepts'. An entity's annual turnover therefore, includes all income according to ordinary concepts derived in the ordinary course of carrying on a business.

37.          The term 'in the ordinary course of carrying on a business' is not defined in the ITAA 1997. The term therefore, takes its ordinary meaning.

38.          In Doutch v FC of T [2016] FCAFC 166, which was an appeal against the decision of the AAT in respect of small business entity concessions, the Full Federal Court confirmed the following reasoning provided by the Tribunal:

70 The phrase "in the ordinary course of carrying on a business", as it appears in s 328-120(1) of the ITAA 1997, is not defined in the ITAA 1997 and it is necessary to construe those words. In engaging in the exercise of statutory construction, the Court is to consider the text of the statute in context. The High Court in Commissioner of Taxation v Consolidated Media Holdings Ltd (2012) 250 CLR 503 observed as follows at [39]:

"This Court has stated on many occasions that the task of statutory construction must begin with a consideration of the [statutory] text" [Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue [2009] HCA 41; (2009) 239 CLR 27 at 46 [47]]. So must the task of statutory construction end. The statutory text must be considered in its context. That context includes legislative history and extrinsic materials. Understanding context has utility if, and in so far as, it assists in fixing the meaning of the statutory text. Legislative history and extrinsic materials cannot displace the meaning of the statutory text. Nor is their examination an end in itself.

39.          The extrinsic materials to which the High Court referred includes an explanatory memorandum, as follows:

72 The definition of "annual turnover" in s 328-120(1) of the ITAA 1997 was inserted into the ITAA 1997 by Tax Laws Amendment (Small Business) Act 2007 (TLASBA 2007). The "Explanatory Memorandum" to the Tax Laws Amendment (Small Business) Bill 2007 (EM), which Bill was ultimately enacted as the TSLABA 2007, commencing from the 2008 income year, states:

What does 'in the ordinary course of carrying on a business' mean?

2.15 In general, income is derived in the ordinary course of carrying on a business if the income is of a kind that is regularly or customarily derived by the entity in the course of carrying on its business, arising out of no special circumstance or event. Similarly, the income is derived in the ordinary course of carrying on a business if the income although not regularly derived, is a direct result of the normal activities of the business.

40.          Therefore, according to the EM, income is derived in the ordinary course of carrying on a business where:

(a) the income is of a kind that is regularly or customarily derived by an entity in the course of carrying on its business, arising out of no special circumstance or unusual event; and

(b) the income, although not regularly derived, is derived as a direct result of the normal activities of the business.

Question 1b:

Small business CGT concessions

41.          As stated in section 152-1 ITAA 1997, subdivision 152-A of the ITAA 1997 sets out the 'basic conditions' which must be satisfied in order for small business entities to qualify for any of the CGT small business concessions to reduce their capital gain by the various concessions in Division 152 of the ITAA 1997.

Basic conditions for small business concessions

42.          Subsection 152-10(1) of the ITAA 1997 sets out the basic conditions which must be satisfied for a capital gain to be reduced or disregarded under this Division, as follows:

A capital gain (except a capital gain from CGT event K7) you make may be reduced or disregarded under this Division if the following basic conditions are satisfied for the gain:

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

(b)           the event would (apart from this Division) have resulted in the 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 (see section 152-15);

(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;

(iv)          the conditions mentioned in subsection (1A) or (1B) are satisfied in relation to the CGT asset in the income year;

(d)           the CGT asset satisfies the active asset test in section 152-35.

CGT Events and Assets

43.          As defined in section 995-1 of the ITAA 1997, a CGT event means any of the CGT events described in Division 104 of the ITAA 1997. A CGT event described by number (eg. CGT event A1) refers to the relevant event in that Division.

44.          Subsection 108-5(1) of the ITAA 1997, outlines a CGT asset to be:

(a) any kind of property; or

(b) a legal or equitable right that is not property.

45.          To avoid doubt, subsection 108-5(2) lists the following as CGT assets:

(a) part of, or an interest in, an asset referred to in subsection (1);

(b) goodwill or an interest in it;

(c) an interest in an asset of a partnership;

(d) an interest in a partnership that is not covered by paragraph (c).

Conditions in subsection 152-10(1A)

46.          Subsection 152-10(1A) of the ITAA 1997 outlines the following:

The conditions in this subsection are satisfied in relation to the CGT asset in the income year if:

(a)           your affiliate, or an entity that is connected with you, is a CGT small business entity for the income year; and

(b)           you do not carry on a business in the income year (other than in partnership); and

(c)            if you carry on a business in partnership - the CGT asset is not an interest in an asset of the partnership; and

(d)           in any case - the CGT small business entity referred to in paragraph (a) is the entity that, at a time in the income year, carries on the business (as referred to in subparagraph 152-40(1)(a)(ii) or (iii) or paragraph 152-40(1)(b)) in relation to the CGT asset.

Maximum net asset value test

47.          The term maximum net asset value test is defined in section 152-15 of the ITAA 1997 as follows:

You satisfy the maximum net asset value test if, just before the CGT event, the sum of the following amounts does not exceed $XX:

(a) the net value of the CGT assets of yours;

(b) the net value of the CGT assets of any entities connected with you;

(c) the net value of the CGT assets of any affiliates of yours or entities connected with your affiliates (not counting any assets already counted under paragraph (b)).

48.          Section 152-20 of the ITAA 1997 sets out the meaning of net value of the CGT assets as follows:

The net value of the CGT assets of an entity is the amount (whether positive, negative or nil) obtained by subtracting from the sum of the market values of those assets the sum of:

(a) the liabilities of the entity that are related to the assets; and

(b) the following provisions made by the entity:

(i) provisions for annual leave;

(ii) provisions for long service leave;

(iii) provisions for unearned income;

(iv) provisions for tax liabilities.

Primary production business

49.          Subdivision 995-1(1) of the ITAA 1997 defines a 'primary production business' as:

you carry on a primary production business if you carry on a business of:

(a)           cultivating or propagating plants, fungi or their products or parts (including seeds, spores, bulbs and similar things), in any physical environment; or

(b)           maintaining animals for the purpose of selling themor their bodily produce (including natural increase); or

(c)            manufacturing dairy produce from raw material that you produced; or

(d)           conducting operations relating directly to taking or catching fish, turtles, dugong, bêche-de- mer, crustaceans or aquatic molluscs; or

(e)           conducting operations relating directly to taking or culturing pearls or pearl shell; or

(f)             planting or tending trees in a plantation or forest that are intended to be felled; or

(g)           felling trees in a plantation or forest; or

(h)           transporting trees, or parts of trees, that you felled in a plantation or forest to the place:

(i)             where they are first to be milled or processed; or

(j)             from which they are to be transported to the place where they are first to be milled or processed.

50.          Paragraph 9 of Taxation Ruling TR 97/11: 'Income tax: am I carrying on a business of primary production' ('TR 97/11') provides that:

A person is carrying on a business of primary production for the purposes of the ITAA 1997 if:

1.              he/she produces 'primary production', as defined in subsection 995-1(1) of the ITAA 1997; and

2.              that activity amounts to the carrying on of a business.

51.          Paragraph 13 of TR 97/11 provides an overview of the Commissioner of Taxation's (the 'Commissioner') view of the factors used to determine if you are in business for tax purposes. Paragraph 13 notes that:

"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 business-like 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."

52.          The Commissioner notes in paragraphs 15 and 16 of TR 97/11 as follows:

15. We stress that no one indicator is decisive (Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922), and there is often a significant overlap of these indicators. For example, an intention to make a profit will often motivate a person to carry out the activity in a systematic and organised way, so that the costs are kept down, and the production and the price obtained for the produce are increased.

16. 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' (Martin v. FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551) from looking at all the indicators, and whether these factors provide the operations with a 'commercial flavour' (Ferguson v. FC of T (1979) 37 FLR 310 at 325; 79 ATC 4261 at 4271; (1979) 9 ATR 873 at 884). However, the weighting to be given to each indicator may vary from case to case.

Question 2:

Grants received as compensation for losses

53.          The Disaster Recovery Funding Arrangements 20XX applies from XX November 20XXin respect of eligible events that have occurred on or after that date. Under the joint Australian Government-State Disaster Recovery Funding Arrangements 20XX, assistance is provided to alleviate the financial burden on states and territories. It also supports the provision of urgent financial assistance to disaster affected communities.

54.          Bounties and subsidies received in relation to carrying on a business are assessable income under section 15-10 of the ITAA 1997 if they are not assessable as ordinary income under section 6-5 of the ITAA 1997. Grant payments are assessable under section 15-10 of the ITAA 1997, unless they are declared non-assessable non-exempt (NANE) under a provision of Division 59 of the ITAA 1997.

55.          Division 59 of the ITAA 1997 makes provision for specific forms of income to be neither assessable income nor exempt income (NANE). Income that is non-assessable non-exempt is in effect tax free and expenses incurred in deriving this income are not deductible. A specific example of income made non-assessable non-exempt through the operation of the provisions in Division 59 is some disaster recover grants made under the Disaster Recovery Funding Arrangements 20XX agreement for damage caused on or after 1 November 2018 (section 59-99 of the ITAA 1997).

56.          Specifically, section 59-99 of the ITAA 1997 outlines:

A payment is not assessable income and is not exempt income if:

(a) for the purposes of the Disaster Recovery Funding Arrangements 20XX (set out in a determination made by the Minister for Law Enforcement and Cyber Security on XX June 20XX), the payment is a recovery grant made to a small business or primary producer as part of a Category D measure; and

(b) the payment relates to:

(i) natural disasters commencing in Australia as a consequence of disaster events occurring in the period between XX February 20XX and XX March 20XX; or

(ii) storms occurring in Australia in that period.

57.          Any grant payments specifically described as non-assessable non-exempt (NANE) income and listed in section 59-99 of the ITAA 1997, are not included in the taxpayer's tax return.

58.          As defined in subsection 328-115 of the ITAA 1997, aggregated turnover is defined as the sum of all relevant annual turnovers. The relevant annual turnovers are outlined in subsection 328-155(2) and exclude any amounts covered by subsection 328-155(3).

59.          Section 328-120 of the ITAA 1997 sets out the meaning of annual turnover as follows:

An entity's annual turnover for an income year is the total ordinary income that the entity derives in the income year in the ordinary course of carrying on a business.

60.          The term ordinary income is defined in section 6-5 of the ITAA 1997 as 'income according to ordinary concepts'. An entity's annual turnover therefore, includes all income according to ordinary concepts derived in the ordinary course of carrying on a business.

61.          The term 'in the ordinary course of carrying on a business' is not defined in the ITAA 1997. The term therefore, takes its ordinary meaning.

62.          In Doutch v FC of T [2016] FCAFC 166, which was an appeal against the decision of the AAT in respect of small business entity concessions, the Full Federal Court confirmed the following reasoning provided by the Tribunal:

70 The phrase "in the ordinary course of carrying on a business", as it appears in s 328-120(1) of the ITAA 1997, is not defined in the ITAA 1997 and it is necessary to construe those words. In engaging in the exercise of statutory construction, the Court is to consider the text of the statute in context. The High Court in Commissioner of Taxation v Consolidated Media Holdings Ltd (2012) 250 CLR 503 observed as follows at [39]:

"This Court has stated on many occasions that the task of statutory construction must begin with a consideration of the [statutory] text" [Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue [2009] HCA 41; (2009) 239 CLR 27 at 46 [47]]. So must the task of statutory construction end. The statutory text must be considered in its context. That context includes legislative history and extrinsic materials. Understanding context has utility if, and in so far as, it assists in fixing the meaning of the statutory text. Legislative history and extrinsic materials cannot displace the meaning of the statutory text. Nor is their examination an end in itself.

63.          The extrinsic materials to which the High Court referred includes an explanatory memorandum, as follows:

72 The definition of "annual turnover" in s 328-120(1) of the ITAA 1997 was inserted into the ITAA 1997 by Tax Laws Amendment (Small Business) Act 2007 (TLASBA 2007). The "Explanatory Memorandum" to the Tax Laws Amendment (Small Business) Bill 2007 (EM), which Bill was ultimately enacted as the TSLABA 2007, commencing from the 2008 income year, states:

What does 'in the ordinary course of carrying on a business' mean?

2.15 In general, income is derived in the ordinary course of carrying on a business if the income is of a kind that is regularly or customarily derived by the entity in the course of carrying on its business, arising out of no special circumstance or event. Similarly, the income is derived in the ordinary course of carrying on a business if the income although not regularly derived, is a direct result of the normal activities of the business.

64.          Therefore, according to the EM, income is derived in the ordinary course of carrying on a business where:

(a) the income is of a kind that is regularly or customarily derived by an entity in the course of carrying on its business, arising out of no special circumstance or unusual event; and

(b) the income, although not regularly derived, is derived as a direct result of the normal activities of the business.

Question 3:

Request for additional year to purchase replacement asset

65.          The rules covering the small business roll-over are contained in Subdivision 152-E of the Income Tax Assessment Act 1997 (ITAA 1997). The small business roll-over allows you to defer all or part of a capital gain from a capital gains tax ('CGT') event happening to an active asset.

66.          CGT event J5 happens if you choose a small business roll-over under Subdivision 152E of the ITAA 1997 and you have not acquired a replacement asset by the end of the replacement asset period.

67.          As outlined in subsection 104-190(1A), the replacement asset period is the period starting one year before the last CGT event in the income year for which you obtain the roll-over and ending two years after the last CGT event in the income year for which you obtain the roll-over.

68.          As outlined in subsection 104-190(2), the replacement asset period may be extended by the Commissioner.

69.          In determining whether to allow an extended asset replacement period, the Commissioner considers the following factors:

•                whether there is evidence of an acceptable explanation for the period of extension requested and whether it would be fair and equitable in the circumstances to provide such an extension

•                whether there is any prejudice to the Commissioner if the additional time is allowed (however, the mere absence of prejudice is not enough to justify the granting of an extension)

•                whether there is any unsettling of people, other than the Commissioner, or of established practices

•                the need to ensure fairness to people in like positions and the wider public interest

•                whether there is mischief involved, and

•                the consequences of the decision.

Application to your circumstances

Question 1a:

Proceeds from forced sales

70.          In DMM YYYY, the taxpayers' XXX property had a natural disasters resulting in the loss. The taxpayers' primary production business decided to make significant structural changes to their business following the breaking of the most recent drought and Covid-19 lockdowns.

71.          Resources at XXX was lost for the second year in a row. The disaster in both geographic regions meant that the stock was unable to be transferred between properties, and resources in both properties were lost. It was not possible to restore lost resources.

72.          The taxpayers' company was carrying on a primary production business in Australia and was forced to dispose of their livestock because of the natural disasters.

73.          An entity's annual turnover for an income year is the total ordinary income that the entity derives in the income year in the ordinary course of carrying on a business.

74.          Subject to the exceptions in sections 328-115 and 328-120 of the ITAA 1997, a receipt will be included in aggregated turnover if it is both:

1.              'ordinary income', and

2.              derived in the 'ordinary course' of carrying on a business.

75.          For the relevant financial year, the amount of $XX is ordinary income, but it is not derived in the ordinary course of carrying on a business, so it is not included in the aggregated turnover. It does not form part of annual turnover as defined in section 328-20 of the ITAA 1997 or aggregated turnover as defined in section 328-115 of the ITAA 1997. Therefore, the final annual turnover for the relevant year (YYY financial year) totals $XX.

76.          In conclusion, the taxpayers are not required to include the entire proceeds on the sale of livestock received from the forced sale due to loss, in the aggregated turnover for the assessment of meeting the definition of a Small Business Entity ('SBE') for access to the Small Business capital gains tax ('CGT') concessions.

Question 1b:

Small business CGT concessions

77.          For this analysis, we look at whether the conditions of section 152-10 of the ITAA 1997 are met for the taxpayers (specifically subsection 152-10(1A)(a) of the ITAA 1997), such that the aggregated turnover for the YYYY financial year is less than $XX for the purpose of the small business CGT concessions.

78.          Subsection 152-10(1A) of the ITAA 1997 outlines the following:

The conditions in this subsection are satisfied in relation to the CGT asset in the income year if:

(a)           your affiliate, or an entity that is connected with you, is a CGT small business entity for the income year; and

(b)           you do not carry on a business in the income year (other than in partnership); and

(c)            if you carry on a business in partnership - the CGT asset is not an interest in an asset of the partnership; and

(d)           in any case - the CGT small business entity referred to in paragraph (a) is the entity that, at a time in the income year, carries on the business (as referred to in subparagraph 152-40(1)(a)(ii) or (iii) or paragraph 152-40(1)(b)) in relation to the CGT asset.

79.          It is accepted that the Trust is carrying on a primary production business for the purposes of section 328-110 of the ITAA 1997.

80.          To satisfy the condition in subsection 152-10(1A)(a) of the ITAA 1997, it needs to be determined if an affiliate, or an entity that is connected with the taxpayers is a CGT small business entity. This is considered below:

Affiliate, or an entity that is connected

81.          Paragraph 152-10(1A)(a) requires us to determine whether the taxpayers are connected with the Trust. The rules for determining whether an entity is 'connected with' another entity are contained within section 328-125 of the ITAA 1997.

82.          The taxpayers have stated in their application that they are connected to XXXX as Trustee for the Trust for the purposes of section 328-125 of the ITAA 1997.

83.          For the purposes of this ruling, we are considering if the Trust, a connected entity, is a CGT small business entity as per paragraph 152-10(1A)(a) of the ITAA 1997.

84.          The term 'small business entity' is defined in section 328-110 of the ITAA 1997. It requires the entity to carry on a business and have aggregated turnover below $XX. The definition of CGT small business entity is contained in subsection 152-10(1AA) of the ITAA 1997 and requires that the entity be a small business entity with aggregated turnover below $XX. The definition of aggregate turnover is contained in subsection 328-155 of the ITAA 1997 as the sum of the relevant annual turnovers. The relevant annual turnovers are outlined in subsection 328-155 (2) of the ITAA 1997 and exclude any amounts covered by subsection 328-155 (3) of the ITAA 1997.

85.          The aggregated turnover of the Trust must be below $XX as per subsection 152-10(1AA) of the ITAA 1997 to satisfy the definition of a CGT small business entity.

86.          For the year ended DD MM YYYY, the taxpayers have confirmed that the aggregated turnover of the Trust and relevant entities will be less than $XX as per subsection 152-10(1AA) of the ITAA 1997, if the amount of $XXX is excluded from the annual turnover of the Trust. Therefore, it must be considered if this amount, comprising $XXX and $XXX is to be included in the annual turnover of the Trust for the year ended DD MM YYYY.

87.          As both the amounts of $XXX and $XXX totalling $XXX are considered to be ordinary income, but not derived in the ordinary course of carrying on a business, they are not included in the aggregated turnover for the year ending DD MM YYYY.

88.          Therefore, the conditions of section 152-10 of the ITAA 1997 are met for the taxpayers and the Trust (specifically subsection 152-10(1A)(a) of the ITAA 1997), such that the aggregated turnover for the YYYY financial year is less than $XX for the purpose of the small business CGT concessions.

Question 2:

Grants received as compensation for losses

89.          The Australian Government announced Special Disaster Grants of up to $XXX to support the recovery of primary producers impacted by severe disaster events that began on DD MM YYY and DD MM YYYY.

90.          The disaster payments received by the taxpayers were Special Disaster Grants, Australian Government Reference Number (AGRN) - AGRN xxx and AGRN xxx.

91.          The taxpayers were paid $XXX for the natural disasters which occurred in MM YYYY. They received $XXX on DD MM YYYY and a further $XXX on DD MM YYYY.

92.          Whether the grants are non-assessable non-exempt (NANE) income does not affect whether they form part of aggregated turnover for the purposes of section 328-115 of the ITAA 1997. However, for completeness, we note that the grants made for natural disasters which occurred in MM YYYY have not been declared to be non-assessable non-exempt (NANE) income in section 59-99 of the ITAA 1997.

93.          There are 2 criteria in section 59-99 of the ITAA 1997 which must both be met for the grant to be considered NANE:

•                the Grant is a Category D grant under the Disaster Recovery Funding Arrangements 2018 - the Grants the taxpayers received meet this criterion

•                the Grant triggered by events occurring between DD MM and DD MM YYYY during the same period - the Grants the taxpayers received do not meet this criterion.

94.          An entity's annual turnover for an income year is the total ordinary income that the entity derives in the income year in the ordinary course of carrying on a business.

95.          Subject to the exceptions in sections 328-115 and 328-120 of the ITAA 1997, a receipt will be included in aggregated turnover if it is both:

1.              'ordinary income', and

2.              derived in the 'ordinary course' of carrying on a business.

96.          We have not made a decision about whether the grant is considered to be ordinary income as there is not enough information about the grant for us to do so. However, similar to the proceeds from the forced sale of livestock, the Grant of $XXX paid to the taxpayers, is excluded from the turnover calculation as it is not derived in the ordinary course of business, as per the reasoning set out in Doutch v FC of T [2016] FCAFC 166.

97.          Therefore, the grant of $XXX paid to the taxpayers, is also excluded from the calculation of aggregated turnover as it was not derived in the ordinary course of business.

Question 3:

Request for additional year to purchase replacement asset

98.          As outlined in subsection 104-190(1A), the replacement asset period is the period starting one year before the last CGT event in the income year for which you obtain the roll-over and ending two years after the last CGT event in the income year for which you obtain the roll-over.

99.          As outlined in subsection 104-190(2), the replacement asset period may be extended by the Commissioner.

100.       In determining whether to allow an extended asset replacement period, the Commissioner considers the following factors:

•                whether there is evidence of an acceptable explanation for the period of extension requested and whether it would be fair and equitable in the circumstances to provide such an extension

•                whether there is any prejudice to the Commissioner if the additional time is allowed (however, the mere absence of prejudice is not enough to justify the granting of an extension)

•                whether there is any unsettling of people, other than the Commissioner, or of established practices

•                the need to ensure fairness to people in like positions and the wider public interest

•                whether there is mischief involved, and

•                the consequences of the decision.

101.       The taxpayers changed accountants after the preparation of their YYYY financial statements and tax returns. XXXX is yet to finalise the YYYY tax returns for the taxpayers and their connected entity, the Trust.

102.       XXXX has identified anomalies in the YYYY financial statements and tax returns prepared by the previous accountant which may affect the preparation of the YYYY financial statements and tax returns. XXXX has emailed the previous accountants on several occasions to clarify specific tax and accounting transactions, so that the accuracy of the YYYY tax returns and financial statements may be confirmed, but they have been unable to obtain satisfactory explanations for the anomalies identified to date. This has delayed the lodgment of the YYYY income tax returns.

103.       This has also caused an unexpected delay in business planning for the taxpayers and affected their ability to purchase a replacement asset.

104.       In considering all the relevant factors as described above, there is an acceptable explanation for the period of extension requested, and it would be fair and equitable in the circumstances to provide such an extension.

105.       There is also no prejudice to the Commissioner if the additional time is allowed. There is also no evidence of any mischief involved.

106.       In conclusion, the Commissioner will allow an additional X year period from DD MM YYYY to DD MM YYYY for the purchase of a replacement asset by the taxpayers after the sale of the property on DD MM YYYY, pursuant to section 104-190 of the ITAA 1997.

ATO view documents

Taxation Ruling TR 97/11 - "Income Tax: Am I carrying on a business of primary production?"('TR 97/11').

ATO Interpretative Decision ATO ID 2002/780 - "Income Tax: Forced disposal of livestock - drought conditions'.

Other relevant comments

Not applicable