Source document: https://docs-lawep.s3.us-east-2.amazonaws.com/1694500415532.pdf (Australia)
Succession Planning Example of Capital Gains Tax - Personal Property Farming land is a high value asset used in carrying on a primary production business which is subject to capital gains tax when sold or transferred.

The first element of a capital gain to work out is the cost base.

This is the purchase price of the property, as well as any associated costs incurred (110-25 ITAA 97).

Commonly, these expenses will include legal fees, searches, stamp duty and inspections.
If no money was paid for the property, its market value at the time will become the cost base (103-5 ITAA 97).

In the case of Example Property, the cost base is $1,650,000.00.

Capital proceeds are amounts received on the sale or transfer of the property (116-20 ITAA 97).

Again, if there is no money received for the property, this is taken at market value.

For the transfer of Example Property to Son, the market value of $6,600,000.00 will be the capital proceeds for Father.
In addition, this market value will be the cost base for Son.

The capital gain or loss of the property is the capital proceeds less the cost base.

Father acquired part of this land, from a family member, before 20 September 1985, so it is a pre-CGT asset, and exempt from capital gains tax.

This date is when the capital gains tax was first introduced in Australia, so any property held before this date is exempt, until transferred to another owner.
As part of the land is pre-CGT, it must be treated as a separate asset even though it is the same property (108-65 ITAA 97).

The remainder of the property was acquired after 20 September 1985, so the capital proceeds must be apportioned between them (112-30 ITAA 97).

On the land subject to CGT, the capital gain is $3,342,770.53.

This capital gain could be reduced if the owner has any unused capital losses from previous years.
If the asset is held for more than 1 year, after any carried forward losses are applied, the gain can be reduced by 50% (115-25 ITAA 97).

There are no carried forward capital losses in this case, though, as the property was held for more than one year, the 50% reduction of the gain applies.

This brings the taxable capital gain for Example Property to $1,671,385.27.

The taxable capital gain is added to the taxpayer’s assessable income for the year.
As this gain will be in addition to Father’s normal farming business income for the year, the estimated tax payable on just this capital gain is $785,551.08.

As no money was exchanged from this property transfer, there is no income from a sale in order to pay this tax bill.

An alternative scenario is for Father to continue to hold the property until his death, and leave Example Property to Son through his will.

Any gain or loss on disposal of an asset due to death is disregarded (128-10 ITAA 97).
The beneficiary of the will will be taken to hold the property from the date of death (128-15 ITAA 97).

If the asset was acquired by the deceased before 20 September 1985, the cost base of the property in the hands of the beneficiary becomes its market value at the date of transfer to the beneficiary.

Otherwise, if the asset is not pre-CGT, the cost base remains the same for the beneficiary as it was for the deceased (128-15 ITAA 97).
The cost base of the property for Son at this time would be $1,114,256.87 + the market value of the portion held by Father before 20 September 1985, at date of transfer.

The proposed changes are to provide rollover relief to the owners of farm land being used to carry on a primary production business when they transfer land at a time of their choosing, to a family member who will continue to use the property to run a farming business.
Instead of the property being transferred at market value, the transfer would be treated similar to if they were transferred upon death; post-CGT assets would retain their cost base, and pre-CGT assets cost base would become its market value at that date.

In the case of Example Property in this scenario, Father would have no assessable gain, and Son’s cost base for the property would be $3,257,229.46.
Inquiry into growing Australian agriculture to $100 billion by 2030Submission 112 Currently, family farm properties aren’t being passed down to the new generation in a timely manner as there is negative incentive to do so.

For this particular family, there’s a $785,551.08 incentive to wait and pass the property on through a will.

Whether farmers transfer their property upon their death, or under the proposed changes, there are no negatives for the Taxation Office or tax they receive.
Either way the owner doesn’t pay capital gains tax when the property is transferred to their children.

This goes on until the property is sold to an unrelated third party, where capital gains will be payable.

Transferring the property earlier makes sense from a succession planning perspective, particularly as the current owner’s approach retirement.

This allows the next generation to continue the family business in their own right.
Inquiry into growing Australian agriculture to $100 billion by 2030Submission 112 Transfer of Example Property CGT Calculation CURRENT MARKET VALUE Date Property Pre-1985 50% of Lot 14 , Lot 16 , Lot 17 , Lot 19 and Lot 24 Nov-1986 50% of Lot 14 , Lot 16 , Lot 17 , Lot 19 and Lot 24 Jul-1987 Lot 7 Jul-1988 Lot 18 COST BASE Date Property Pre-1985 50% of Lot 14 , Lot 16 , Lot 17, Lot 19 and Lot 24 Nov-1986 50% of Lot 14 , Lot 16 , Lot 17 , Lot 19 and Lot 24 Jul-1987 Lot 7 Jul-1988 Lot 18 CAPITAL GAINS Date Property Pre-1985 50% of Lot 14 , Lot 16 , Lot 17 , Lot 19 and Lot 24 Nov-1986 50% of Lot 14 , Lot 16 , Lot 17 , Lot 19 and Lot 24 Jul-1987 Lot 7 Jul-1988 Lot 18 * Pre-CGT Asset - no capital gains tax payable ** Tax rate is highest marginal tax rate of 45% + 2% Medicare Levy Hectares Split Market Value 2019 6,025 6,025 6,050 456 18,556 32.47% $ 2,142,972.62 32.47% $ 2,142,972.62 32.60% $ 2,151,864.63 2.46% $ 162,190.13 100.00% $ 6,600,000.00 Hectares Split 6,025 6,025 6,050 456 18,556 Market Value $ 2,142,972.62 $ $ 2,142,972.62 $ $ 2,151,864.63 $ 162,190.13 $ $ Market Value 1989 535,743.16 535,743.16 537,966.16 40,547.53 32.47% $ 32.47% $ 32.60% $ 2.46% $ 100.00% $ 1,650,000.00 Cost Base 535,743.16 $ 535,743.16 $ 537,966.16 $ 40,547.53 $ Capital Gain - * 1,607,229.47 1,613,898.47 121,642.60 $ 6,600,000.00 $ 1,650,000.00 $ 3,342,770.53 Less 50% CGT Discount -$ 1,671,385.27 Taxable Capital Gain $ 1,671,385.27 Estimated Tax @ 47%** $ 785,551.08 Inquiry into growing Australian agriculture to $100 billion by 2030Submission 112