Private ruling: Income tax – CGT small business concessions
Date of advice: 16 August 2018
Published: October 2018
Ruling period: Year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Would Trust A satisfy the conditions in subsection 152-10(1A) of the Income Tax Assessment Act 1997 (ITAA 1997) due to the application of section 152-49 of ITAA 1997? | A1: Yes. Based on the information you have provided the trust is connected with the partnership which is a small business entity for the 2017 financial year. It is also considered the conditions of section 152-49 of the ITAA 1997 will be satisfied as the partnership was winding up a business it previously carried on and the land was used or held ready for use in the course of carrying in the business at a time in the income year in which the business stopped being carried on.

Relevant facts and circumstances: Business activities and land ownership Siblings Individual A and Individual B, their spouses and closely held entities owned land in partnership on which they operated a farming business through another associated partnership. Individual A and Individual B’s family commenced the farming business many decades ago. The siblings decided to wind up the partnership business and sell a majority of the farming land. A parcel of land known as the “ABC” land on which the farming business had been carried out was sold to an unrelated party by way of contract dated XX/XX/ 2016. The land was used for beef cattle farming. The ABC land was originally acquired prior to 20 September 1985 by the wider family, however Individual A and Individual B acquired 2/3rds of the property from other family members in 19XX through their respective family trusts, Trust A and Trust B. The CGT asset that is being queried is the portion of the ABC land owned by Trust A. The trustee of Trust A is Company A. Individual A holds 6/7ths of the voting and capital rights in Company A and also controls the company through him being one of two directors along with Individual B. Individual A determines the actions of this company when the need arises. Individual A also holds the role of secretary. The partnership that carried on business on the ABC land, known as The Partnership, is made up of the following partners: PARTNER OWNERSHIP INTEREST Individual A 26% Individual C 16% Company A 8% Individual B 26% Individual D 12% Company B 8% Company E 4% Individual C is Individual A’s spouse and acts in accordance with the directions of Individual A in relation to their farming business affairs. The total aggregated turnover of The Partnership for the 2017 income year was less than $2 million. The Partnership sold all livestock and fixed assets that were used on the ABC land in the 2016 income year to an unrelated party. At about the same time: ● the same purchasing party purchased an option to acquire the ABC land with an exercise date approximately six months later (the sale of the land occurred in the income year subsequent to that in which the livestock and fixed assets were sold). ● a lease agreement was also entered into between the owners of the ABC land and the same purchasing party to allow the new owners to operate the farming business on the land until the sale of the land settled. In addition to the cattle farming business that had been conducted on the ABC land, the Partnership also conducted a separate crop farming business on a different parcel of land. This crop farming business continued to be carried on in the income year subsequent to that in which the livestock and fixed assets used in the cattle farming business were sold. Winding up the cattle farming business of the partnership There were several elements relating to cessation of the partnership cattle farming activities that extended beyond the sale of stock and equipment and required handover to the purchaser to ensure successful completion of the land transaction that was under option contract. Finalisation of these matters by the partnership included: ● Advising and assisting the purchaser with regard to water licensing and irrigation issues including transition of their knowledge and understanding of the operating and licensing requirements such as pumping times, volumes and restrictions. ● Advising and assisting the purchaser with procurement of drovers and other supplier arrangements to the business. ● Assisting the purchaser with applications for the transfer of an existing item under the Crown Land title and joint sharing of periodic outgoings in the interim period which included handover of knowledge and records and consent to certain applications as required. Until the final completion of the subsequent settlement of the property, the partnership conducted the above activities as well as ongoing consulting and advisory support as and when required to the purchaser as part of the windup and transition of the farming activities. The level of sophistication due to the scale and longevity of farming operations conducted, as well as the importance of an effective handover was critical to assist in successful completion of the land sale which finalised the transition of the farming enterprise. Post sale of stock and equipment, the partnership retained some responsibility for general maintenance and monitoring of the property to ensure it was kept and maintained in good working condition pending the unconditional settlement of the land transaction which included fencing, clearing of timber and overgrown pastures as required for the general upkeep of the property. This maintenance was ad hoc and reduced and subsequently ceased once the sale of land completed. Simultaneous to the above handover and transitional activities between the initial stock and equipment sale and the final settlement of land, the partnership attended to finalisation of commercial matters of the partnership including cessation of supplier arrangements.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 152-10(1A) | Income Tax Assessment Act 1997 Section 152-49