Private ruling: Capital Gains Tax - Am I in business - Active Asset Test
Date of advice: 9 November 2017
Published: March 2018
Ruling period: Year ending 30 June 2018 | Year ending 30 June 2019
Date scheme commenced: 1 July 2017

Ruling: Q1: Did you carry on a business from the land (the Land) during the period from 19XX to 20XX? | A1: Yes | Q2: Does the land satisfy the active asset test as set out in section 152 - 35 of the Income Tax Assessment Act 1997 (ITAA 1997) for the purposes of applying any small business capital gains tax (CGT) concessions? | A2: Yes

Relevant facts and circumstances: B and their late spouse, C, originally acquired the land as tenants in common in equal shares over two acquisitions: (a) Lot 2 of approximately X hectares was acquired after 20 September 1985; and (b) Lot 1 of approximately X hectares was acquired after 20 September 1985. The lots were restructured into two new lots, being lots 3 and 4, before: (a) Lot 3 of approximately X hectares (about 2.4%) was sold in 20XX (b) Lot 4 of approximately X hectares (about 97.6%) was retained by B and C as co-owners; and (c) Upon C’s death in 20XX, B acquired C’s interest in the Land and B became sole owner of the Land consulting one lot, Lot 4. Activity has been conducted on the land, largely unchanged since 19XX. Between 20XX and 20XX the closing stock was between XX and XX. Between 20XX and 20XX the closing stock was between XX and XX. The activity has made profits in some years and losses in other years, over the time in which it was conducted. Financial data for the activity from the years ended 30 June 20XX through 30 June 20XX shows: (a) The activity was conducted in partnership in the years ended 30 June 20XX, 20Xx and 20XX; and (b) The activity was conducted by B individually for the years ended 30 June 20XX to 20XX. The details of the activity are as follows: ● The stock level is typically between XX and XX. Based on industry information available, the stock level is the optimal level for this type of activity. ● There has been no change to the activity since purchase of the respective lots of the Land in 19XX and 19XX. ● To make sure that the use of the land was optimised, B completed additional activities. ● A manager attends the land to oversee the activity two to three days a week, year-round and during peak times the manager attends two to three times daily. ● There is no written business plan. ● B’s late spouse, C, with whom B jointly owned the land from 19XX in respect of the first lot acquired, and 19XX in respect of the second lot acquired, to 20XX, had very widespread industry experience. B’s industry experience and knowledge was obtained from C over many years and through seeking the assistance and advice of C’s industry colleagues. ● All documents (invoices/receipts) in relation to activity finances are retained and the manager keeps detailed records of all stock. ● Profitability of the activity is dependent on market forces.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 152-35 | Income Tax Assessment Act 1997 section 152-40 | Income Tax Assessment Act 1997 section 995-1

Reasons for decision: Summary: Section 995-1 of the ITAA 1997 defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'. Taxation Ruling TR 97/11 Income tax: Am I carrying on a business of primary production outlines the Commissioner of Taxation's view on whether a business is being carried on for taxation purposes. TR 97/11 is of general application. Its principles are not restricted to questions of whether a primary production business is being carried on. In the Commissioner's view, the factors that are considered important in determining the question of business activity are: ● whether the activity has a significant commercial purpose or character ● 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 regularity and repetition of the activity ● whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business ● whether the activity is planned, organised and carried on in a businesslike manner such that it is described as 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 sporting activity. Whether a business is being carried on depends on the large or general impression gained ( Martin v. Federal Commissioner of Taxation (1953) 90 CLR 470; (1953) 10 ATD 226; (1953) 5 AITR 548) from looking at all the indicators of carrying on a business, and no one indicator will be decisive ( Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922). The question of whether a business is being carried on is a question of fact and degree. In this case, you have provided evidence of the business being carried on as follows: ● The land has been used since at least 19XX and 19XX (in respect of B’s original interests in the land), and 20XX (in respect of B’s inherited interest in the land), to conduct a business activity. ● The activity is unchanged since 19XX, 19XX and 20XX in respect of each interest in the land. ● The repeated and continual attention to quality is evidenced by engaging various service providers to improve and increase production. This action drives the profitability of the activity and leads to greater production volumes and better quality. ● B has employed a manager who attends to the land, sometimes daily, which is an indicator of a profit making intention. ● B was previously in partnership with her late spouse whose extensive industry experience was used in conducting the activity on the land. Since then, as sole land owner, B has sought the input of others, with industry expertise, in conducting the activity. ● There are record keeping practices in place which are maintained by the manager. ● The profitability of the activity is based heavily on market forces. The activity conducted has generated a profit in some years and the fact that profits have been generated from the activity conducted in some years means that the prospect of profit is real, and has been achieved on occasions. After considering the indicators of a business, it is considered that you are carrying on a business on the land. The meaning of an active asset is set out in section 152-40 of the ITAA 1997. It must firstly satisfy one of the 'positive tests' in subsection 152-40(1) of the ITAA 1997 and then also not be excluded by one of the exceptions in subsection 152-40(4) of the ITAA 1997. Under subsection 152-40(1) of the ITAA 1997, a CGT asset is an active asset if it is owned and used, or held ready for use, in the course of carrying on a business by you or another entity that is connected with you. Under subsection 152-35(1) of the ITAA 1997 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 detailed below, 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 7.5 years during the period detailed below. Subsection 152-35(2) of the ITAA 1997 identifies the period that has to be considered in applying the active asset test. It states the period: a) begins when you acquired the asset; and b) ends the earlier of: ● the CGT event; and ● if the relevant business ceased in the 12 months before the CGT event (or such longer time as the Commissioner allows) - when the business ceased. As the activity currently conducted from the land is a business, then that business has been conducted regularly on the land since: ● The 20XX-20XX financial year in the previous partnership; and ● The 20XX-20XX financial year by B as a sole trader (following the death of their late spouse). The activity has also been conducted in the current manner unchanged since B first acquired an interest in the land, being: ● Since 19XX (for the interest attributable to the lot acquired earliest) ● Since 19XX (for the interest attributable to the additional lot acquired). In this case, the land is an active asset at each point in time it has been owned by B and passes the active asset test as the land has been used in a business for at least 7.5 years.