Private ruling: Capital gains tax – small business 15-year exemption – retirement
Date of advice: 3 May 2019
Published: June 2019
Ruling period: Year ending 30 June 2019 | Year ending 30 June 2020
Date scheme commenced: 1 July 2018

Ruling: Q1: Will the capital gains tax event occurring on the disposal of your ownership interest in the Property be in connection with your retirement under subsection 152-105(d) of the Income Tax Assessment Act 1997 ? | A1: Yes. Based on the information provided, the Commissioner considers that the capital gains tax (CGT) event will occur in connection with your retirement. Further information about the CGT small business 15-year exemption can be found by searching ‘QC 52288‘ on www.ato.gov.au .

Relevant facts and circumstances: The Property was acquired by you and your spouse (Person A) after 20 September 1985 with you each having an equal ownership interest in the Property. The Property was initially used for primary production purposes by the partnership between you and Person A. After a number of years Person A passed away and a testamentary trust was established in accordance with Person A’s will (the Trust). You are the trustee of the Trust. The Property was used by the partnership between you and the Trust, being the Partnership, since Person A passed away. The Partnership also carries on primary production activities on the following properties: ● Property A, owned by Trust X, which is controlled by you; ● Property B, owned by Trust Y, which is controlled by you; and ● Property C, owned by your children, being Persons B, C and D. Persons B and C work full time on the primary production activities. You live away from the Property in a major city, but visit the properties less than two weeks in total per month when you spend up to eight hours undertaking farming operations and farm administration, such as attending to the payment of creditors and wages, maintaining employee records and liaising with accountants. When at your home, you spend on average less than ten hours per week on the primary production activities, being in regular contact with Persons B and C. The Partnership has substantial core debt of more than $4 million, primarily with on bank (Bank XYZ). You are the primary debtor and guarantor for all of the Bank XYZ debt. Persons B and C both consult with you in relation to all capital expenditure in excess of a specified amount. Your involvement in the farm administration activities has been decreasing as Person C’s management role has expanded. You are wishing to retire from your active involvement in the primary production activities and handover the properties and primary production activities to Persons B and C as part of your succession and estate planning strategy. To do this you anticipate undertaking the following: ● you will sell your ownership interest in the Property to Person B. The Trust, will retain its ownership interest in the Property which will be, or the control of the Trust, will be transferred to Person B when you pass away, but not before; ● a partnership will be formed between Person B and/or their nominee and the Trust to carry on primary production activities on the Property, being the Partnership A. The Property will be leased to Partnership A for a non-fixed term in exchange for the payment of all outgoings by the Partnership A; ● you will transfer control of Trust Y to Person C who will take control of Property B, with any debt owed by Trust Y being its responsibility; ● a partnership will be formed between Person C and/or their nominee and you to carry on primary production activities on Property C, being Partnership X. Person B will transfer their interest in Property C to Person C, who along with Person D in Partnership X will have the use of the property. Person C will ultimately buy out Person D’s interest in the property which may occur through an immediate sale on vendor’s terms, or a lease coupled with an option to purchase; ● Persons B and C will be responsible for managing the farming operations on Property A after the effective date for no remuneration. Property A will be sold as soon as practicable; and ● you will not be actively involved in the operations of either Partnership A or Partnership X after the transactions are implemented. It is anticipated that you will dispose of your ownership interest in the Property in the 20XX-XX income year and will have continuously held your ownership interest in the Property for more than 15 years when you transfer your ownership interest in the Property to Person B. Your ownership interest in the Property satisfies the active asset test as it has been used by the you in relation to your primary production activities originally carried on by the partnership with your spouse, and then in relation to the Partnership’s activities for more than seven and a half years. You have agreed to transfer ownership and control of some assets for less than market value as an element of the family succession plan. However, the proposed transactions will still provide you with substantial capital proceeds that you can use to fund your retirement. You are over 55 years of age and as a result of disposing of your ownership interests, with Persons B and C taking over the operations, you anticipate that your involvement in the operations after the settlement date will be around one to two hours per week. While you will retain an interest in Partnership A and Partnership X, and will continue to control Property A until it is sold, your active involvement will be substantially reduced as follows: ● Partnerships A and X will be run by Persons B and C with them being the other partners holding the remaining interests in each partnership; ● the farming operations on Property A will be managed by Persons B and C, with the intention that the property will be sold as soon as practicable; ● you will only be a passive partner in Partnerships A and X and livestock; ● the nature of your involvement in the primary production activities will be significantly changed with the number of hours being worked reducing from an average of 9 hours per week when you are at your home and more than 30 hours per week when on the properties to around two hours per week. The Partnership received the following total income amounts of more than $2 million in both the 20XX-XX and 20XX-XX income years. The Partnership had a total income of less than $2 million for part of the 20XX-XX income year. It is not anticipated that any further income will be derived during the 2018-19 income year. The Partnership will be a small business entity in the 20XX-XX and 20XX-XX income years. You will make a capital gain on the disposal of your ownership interest in the Property.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 152-A | Income Tax Assessment Act 1997 Subdivision 152-B