Private ruling: Super CGT cap - small business CGT concessions - pre-CGT asset
Published: March 2012
Ruling period: 1 July 2011 to 30 June 2012.
Date scheme commenced: 1 July 2011.

Ruling: Q1: For the purposes of satisfying the conditions for contributing a capital gain to superannuation under section 292-100 of the Income Tax Assessment Act 1997 (ITAA 1997), would the small business 15-year exemption in section 152-105 of the ITAA 1997 apply to allow you to disregard any capital gain from the sale of the farm in October 2011? | A1: 

Relevant facts and circumstances: You purchased farming land before 19 September 1985. You originally operated a farming enterprise on the property and were later joined by your wife. A few years ago, part of the farm was leased to an unrelated party. Since the date of the lease, you and your wife continued to operate your farming operations on the remainder of the land not subject to the lease. You sold the property in the 2010-11 financial year. The only significant improvement to the property is a residence which is also a pre-CGT asset. You and your connected entities and affiliates satisfy the maximum net asset value test in that the value of your CGT assets is less than $6 million. You were over 55 years old at the time of the event and are retiring from all farming operations.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 102-5. | Income Tax Assessment Act 1997 Section 104-10. | 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 152-330. | Income Tax Assessment Act 1997 Section 292-100.

Reasons for decision: Summary: The framework for calculating a net capital gain is contained in section 102-5 of the ITAA 1997. Under that framework, only those capital gains that are not otherwise disregarded are taken into account under step 1 of that method statement. The relevant CGT event that happens when you dispose of an asset will be an A1 event under section 104-10 of the ITAA 1997. If you acquired the asset before 20 September 1985, any capital gain or capital loss made as a result of CGT event A1 is immediately disregarded under paragraph 104-10(5)(a) of the ITAA 1997. It follows that this disregarded capital gain will not be taken into account at step 1 of the method statement in section 102-5 of the ITAA 1997, and there will be no requirement to reduce it further under the 15-year exemption provisions or any of the other CGT small business concessions. Your eligibility for the small business 15-year exemption will still need to be considered, however, to determine whether you satisfy the conditions for contributing a capital gain to superannuation under section 292-100 of the ITAA 1997, as subsection 292-100(5) of the ITAA 1997 treats the farm as a post-CGT asset for this purpose. Under the small business 15-year exemption in section 152-105 of the ITAA 1997, you can disregard any capital gain in relation to the sale of the farm if all of the following conditions are satisfied: 1. the basic conditions in Subdivision 152-A of the ITAA 1997 are satisfied for the gain 2. you continuously owned the CGT asset for the 15-year period ending just before the CGT event 3. if the CGT asset is a share in a company, the company had a significant individual for 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, and 4. either: · you are 55 or over at the time of the CGT event and the event happens in connection with your retirement, or · you are permanently incapacitated at the time of the CGT event. Condition (1) Section 152-10 of the ITAA 1997 contains the basic conditions to be satisfied. These conditions are: (a) a CGT event happens in relation to a CGT asset of yours in an income year. This condition does not apply in the case of CGT event D1. (b) the event would (apart from Division 152 of the ITAA 1997) have resulted in the gain (c) at least one of the following applies: · you are a small business entity for the income year · you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997, or · 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. (d) the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997. | Detailed Reasoning - Basic condition (a): This condition requires a CGT event to happen in relation to your CGT asset in an income year. The asset in question is your farm which you sold in October 2011. The relevant CGT event will be when you disposed of your farm, which will cause CGT event A1 to happen (section 104-10 of the ITAA 1997). As the CGT event, not being CGT event D1, happened in relation to a CGT asset of yours in the income year in which the disposal occurred, this condition is satisfied. | Detailed Reasoning - Basic condition (b): A capital gain will result from the above CGT event by virtue of subsection 292-100(5) of the ITAA 1997 that states to treat a pre-CGT asset as a post-CGT asset to satisfy subsection (2) or (4), and this condition is satisfied. | Detailed Reasoning - Basic condition (c): You have advised that you satisfy the maximum net asset value test, and this condition is satisfied. | Detailed Reasoning - Basic condition (d): This condition requires that the active asset test in section 152-35 of the ITAA 1997 is satisfied. This test is satisfied if: · 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 · 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 7 ½ years during the period detailed below: The period: · begins when you acquired the asset and · ends at the earlier of: o the CGT event, and o 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. | Detailed Reasoning - Active asset: 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 (subject to the exclusions) if it is owned and used, or held ready for use, in the course of carrying on a business by you or your small business CGT affiliate or another entity that is connected with you under paragraph 152-40(1)(c) of the ITAA 1997. The combined effect of sections 152-35 and 152-40 of the ITAA 1997 is that the property will meet the active asset test if the asset was used, or held ready for use, in the course of carrying on a business for at least 7 ½ years, subject to the exclusions in subsection 152-40(4) of the ITAA 1997. The definition of 'active asset' does not require exclusive use of the asset for business purposes. If you own an interest in a CGT asset and acquire another interest in that asset, the two interests remain separate CGT assets for CGT purposes under Taxation Determination TD 2000/31. You acquired the farm and a residence was constructed on the farm before 19 September 1985. As no additional structure or major improvements have been constructed on the farm since 19 September 1985, the farm is considered one pre-CGT asset. As the entire farm was used exclusively in the business from the date of purchase until you entered into a lease, that is, for more than 10 years, it is considered the farm, including all of the land and the residence, will be an active asset. | Detailed Reasoning - Active asset test: As you have owned the farm for more than 15 years, and as discussed above, the farm was an active asset for more than 7 ½ years, the active asset test in section 152-35 of the ITAA 1997 is satisfied. This basic condition is therefore satisfied. | Detailed Reasoning - Summary for the basic conditions: You satisfy all of the basic conditions in Subdivision 152-A of the ITAA 1997 and condition (1) is satisfied. | Detailed Reasoning - Condition (2): As the farm was acquired by you before 19 September 1985 and was sold in the 2010-11 financial year, this condition is satisfied. | Detailed Reasoning - Condition (3): The CGT asset is not a share in a company. This condition does not need to be satisfied. | Detailed Reasoning - Condition (4): You are over 55 years old and you are selling the farm in connection with your retirement. This condition is satisfied. | Detailed Reasoning - Conclusion: You satisfy all of the conditions for the small business 15-year exemption in section 152-105 of the ITAA 1997. The exemption would therefore apply to allow you to disregard any capital gain from the disposal of the farm for the purposes of satisfying the conditions for contributing a capital gain to superannuation.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Does Part IVA apply to this ruling?: Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable. | We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. | If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply. | For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: 'Part IVA: the general anti-avoidance rule for income tax'.