Edited version of private advice

Authorisation Number: 1052370955750

Date of advice: 11 March 2025

Ruling

Subject: CGT - small business concessions

Question 1

Do you qualify for the small business 15-year exemption as set out in section 152-105 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

Yes.

This ruling applies for the following period:

Income year ending 30 June 20XX.

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You purchased land after 20 September 1985 and carried on an XX business on that land.

The business was primarily agricultural, which commenced soon after its acquisition.

The XX business was your only business activity.

The land was located a short distance from facilities required to run your business.

You derived revenue from the sale of the product.

You sold product in before selling the land.

You sold the land. The sale generated a capital gain.

You continuously owned the land from the date of acquisition to the date you sold it, which was more than 15 years.

You were over the age of 55 at the time when you sold the land.

The aggregated turnover of yours and any entities connected with you did not exceed $2 million just before the disposal and the estimated aggregate turnover for the current income year will be less than $2 million.

You have no affiliates within the meaning of section 328-130 of the ITAA 1997.

You worked an average of xxx hours per year on your XX business.

You resolved to retire from your XX business.

You currently hold a small number of part time jobs and work for approximately xx hours in aggregate each year, for which you are paid a fee by some of them. You anticipate ceasing those jobs.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 105-5

Income Tax Assessment Act 1997 subdivision 152-A

Income Tax Assessment Act 1997 subdivision 152-B

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 152-105

Income Tax Assessment Act 1997 section 328-110

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Unless otherwise stated, all legislative references are to the Income Tax Assessment Act 1997.

Division 152 includes a number of concessions that provide relief from CGT. The basic conditions for relief from CGT are specified in subsection 152-10(1). It states:

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 happens 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;

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

Basic condition (a) and (b)

Subsection 104-10(1) provides that CGT event A1 happens if you dispose of a CGT asset. CGT asset is defined in section 108-5 and includes any kind of property or a legal or equitable right that is not property. Land is listed as a CGT asset.

Subsection 104-10(2) provides that, a CGT asset is disposed of if a change of ownership occurs from one entity to another. The time of the CGT event is specified in subsection 104-10(3) and as is relevant, is the time when you enter into the contract for the disposal.

In your case, you entered into a contract to sell the land and the sale generated a capital gain. The basic conditions (a) and (b) are satisfied because CGT event A1 happened on the contract date when you sold the Land, and that CGT event resulted in a capital gain.

Basic condition (c)

This requires consideration of whether you were a CGT small business entity.

CGT small business entity

An entity is a CGT small business entity if the requirements of subsection 328-110(1) and subsection 152-10(1AA) are met.

Subsection 328-110(1) state:

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 aggregate turnover for the previous year was less than $10 million;

(ii)            your aggregate turnover for the current year is likely to be less than $10 million.

Subsection 152-10(1AA) state:

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 $10 million were a reference to $2 million.

Whether or not you were carrying on a business in the income year (income year ending 30 June 2025) is a question of fact. Taxation Ruling 95/6 Income tax: primary production and forestry (TR 95/6) at paragraph 14 states that the planting, tending and felling of trees will only be forest operations if those activities amount to the carrying on of a business.

Paragraphs 86 to 89 of TR 95/6 provide guidelines from the case law for determining whether a taxpayer is carrying on a business. They included a number of elements like, whether the activities have a significant commercial purpose, the scale of activities, the nature of the activities, the profit-making purpose etc.

In your case, you carried on an XX business on the land and worked an average of xxx hours per year on your business. The business was primarily growing product and selling product. Your aggregated turnover for the previous year was less than $2 million and the estimated aggregate turnover for the current year will be less than $2 million. It is concluded that you were a small business entity in previous and current years. It is concluded that you were a small business entity in previous and current years. Therefore, you meet the basic condition (c).

Basic condition (d)

It requires the CGT asset to satisfy the active asset test.

Active asset test

Section 152-35 defines the Active asset test, Subsection 152-35(1) states:

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 period specified in subsection (2); 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 71/2 years during the period specified in subsection (2).

Subsection 152-35 (2) states:

The 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.

Under section 152-40, a CGT asset is an 'active asset' if you own the asset 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 you, your affiliate or another entity that is connected with you. This is subject to the exceptions in subsection 152-40(4). The exceptions did not apply to your case.

In your case, you owned the land for more than 15 years. The land was used by you in your XX business from the time of acquisition until it was sold. This means that the land was an active asset for more than 7.5 years and accordingly, the land satisfies the active asset test, meeting the basic condition (d).

Therefore, it is concluded that you meet the all the basic conditions for the small business CGT concessions in relation to the capital gain on the sale of the Land.

The next step is to consider whether the additional requirements of the 15-year exemption are met in relation to the Land.

The 15-year exemption

Subdivision 152-B deals with the small business 15-year exemption.

Section 152-105 provides for the 15-year exemption for individuals. It states:

If you are an individual, you can disregard any capital gain arising from a CGT event if all of the following conditions are satisfied:

(a)           the basic conditions in Subdivision 152-A are satisfied for the gain;

(b)           you continuously owned the CGT asset for the 15-year period ending just before the CGT event;

(c)           if the CGT asset is a share in a company or an interest in a trust - the company or trust had a significant individual for a total of at least 15 years (even if the 15 years was not continuous and it was not always the same significant individual) during which you owned the CGT asset;

(d)           either:

(i)            you are 55 or over at the time of the CGT event and the event happens in connection with your retirement; or

(ii)            you are permanently incapacitated at the time of the CGT event

In your case, conditions (a) and (b) are met, as we have established above that the basic conditions are satisfied in relation to the capital gain made on the sale of the land, and you owned the land for more than 15 years immediately prior to selling it.

Condition (c) is not applicable to you as you solely conducted your XX business under your name, as an individual.

In relation to condition (d) above, you resolved to retire from your XX business. You were over 55 at the time you sold the land. You currently hold a small number of part time jobs, that take approximately xx hours of your time, in aggregate, each year, for which you are paid a small fee by some of them. You anticipate ceasing those jobs.

You have provided facts to show that the sale of the land happened in connection with your retirement, because you experienced a significant reduction in working hours and a significant change in your everyday activities as a consequence of selling the land and retiring from your XX business.

Conclusion

You are entitled to apply the small business 15-year exemption to disregard the capital gain arising from the disposal of the land, because all the relevant conditions in Subdivision 152-A and 152-B have been met.