Private ruling: Small business concessions
Date of advice: 7 June 2018
Published: August 2018
Ruling period: 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Are you eligible for the capital gains tax (CGT) small business concessions on the disposal of your property? | A1: No

Relevant facts and circumstances: You and your spouse purchased land as joint tenants. You carried out a farming activity, under a partnership structure, on the land from date of acquisition for a total of five years. In those five years, the land was used: 1. in a sharefarming arrangement, in which an unrelated third party cultivated the land. The partnership paid for the fertilising and the spraying of the land. This enabled the third party to grow and harvest crops from your fields. Once sold, you received the value of your share of the crop as per the arrangement. You were not actively involved in the sharefarming arrangement; and 2. solely for the purposes of agistment for an unrelated third party who placed animals on your land to feed off the stubble left in the fields after the crops had been harvested. You did not need to provide feed, but were compensated by payment per head. You and your spouse made a decision to move and then leased the property to another unrelated party up to the date the property was sold. You were not carrying on a business when the property was disposed of but you did satisfy the maximum net asset value test.

Relevant legislative provisions: 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

Reasons for decision: Detailed Reasoning - Small business CGT concessions: To qualify for the small business CGT concessions, you must satisfy several conditions that are common to all the concessions. These are called the basic conditions. A capital gain that you make may be reduced or disregarded under Division 152 of the ITAA 1997 if the following basic conditions are satisfied: ● A CGT event happens in relation to a CGT asset of yours in an income year, ● The event would have resulted in a gain, ● The CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997, and ● 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, ● you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an interest in an asset of the partnership, or ● you do not carry on a business, but your CGT asset is used in a business carried on by a small business entity that is your affiliate or an entity connected with you. | Detailed Reasoning - Active asset test: A CGT asset will satisfy 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 test period, 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 7.5 years during the test period. The test period beings when you acquired the asset and ends at the earlier of the CGT event and if the relevant business ceased to be carried on in the 12 months before that time – the cessation of the business. Subsection 152-40(1) of the ITAA 1997 details that a CGT asset is an active asset at a time if it is used, or held ready for use, in the course of carrying on a business that is carried on by you, or your affiliate, or another entity that is connected with you. | Detailed Reasoning - Affiliate: An affiliate is defined by section 328-130 of the ITAA 1997 as being an individual or company who acts or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you, in relation to the affairs of the individual or company. | Detailed Reasoning - Connected entity: An entity is connected with another entity if either entity controls the other entity, or both entities are controlled by the same third entity. Under subsection 328-125(2) of the ITAA 1997, an entity controls a partnership company or trust (except a discretionary trust) if it: ● beneficially owns or has the right to acquire beneficial ownership of, interest in the other entity that give the right to receive at least 40% of any distribution of income or capital by the other entity, or ● if the other entity is a company, beneficially owns, or has the right to acquire beneficial ownership of, equity interests in the company that give at least 40% of the voting power in the company. | Detailed Reasoning - Application to your circumstances: In your case, you and your spouse used the land in the course of carrying on your partnership business for a total of five years. For the next seven years you were not carrying on a business. The land was used for sharefarming and agistment activities involving unrelated third parties. The services you provided were the maintenance and use of your land to cultivate and grow crops and for animal agistment. Taxation Determination TD 95/62 considers situations where a sharefarming arrangement would be considered to be engaged in a business of primary production and states, at paragraph 5: To be carrying on a business, the taxpayer must be involved in the activities that make up that business. This would be evidenced by an element of control over, and/or an ongoing participation in, the business. The involvement should be direct or immediate, rather than passive. The payment of expenses relating to the ownership of the land would not, without more, be sufficient. Your involvement in the sharefarming activity was passive and the services you provided were not sufficient to be considered carrying on a business during this period. Similarly, Taxation Ruling IT 225 considers the nature of agistment income and states, at paragraphs 2 and 4: Whether or not income is derived from a business of primary production will depend on the facts in each case. As a general proposition, however, it may be stated that where income arises from the use of the assets of a business of primary production and the particular use is a recognised incident of carrying on that sort of business, the income may be regarded as forming part of the proceeds of the business… …On the other hand, however, the general proposition would not extend to a situation where property or a substantial part of a property is used solely for agistment, nor would it include receipts for the use of plant by a primary producer in general contract work. You and your spouse decided to move and leased out your property to an unrelated third party until the property was sold. You had no affiliation or connection with any of these unrelated entities and therefore the land was a passively held asset for more than 15 years. You owned the land for more than 20 years and under the active asset test, the property would need to have been an active asset for at least 7.5 years. The land was only used as an active asset for five years and is less than the 7.5 years test period and therefore you do not meet the active asset test. As a result, you do not satisfy the basic conditions and are ineligible to access the small business concessions.