Private ruling: CGT - small business concessions
Date of advice: 30 May 2024
Published: 8 July 2024
Ruling period: Year ending 30 June 20YY
Date scheme commenced: 1 July 20YY

Ruling: Q1: Will you be eligible for the capital gains tax (CGT) small business 50% active asset reduction under section 152-205 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes.

Relevant facts and circumstances: You acquired a property as tenants in common with your three siblings, each with a 25% interest in ownership. A partnership was established with the partners consisting of you and your siblings with a 25% interest each. From 20XX to 20XX, the property was used by the partnership in the course of carrying on a farming business. All the partners in the partnerships had an active role in the farming business. In the 20XX and 20XX income years, the partnership's aggregated turnover was less than $2 million. In 20XX, the partnership sold the property resulting in a capital gain.

Relevant legislative provisions: 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 152-205 | Income Tax Assessment Act 1997 section 328-125 | Income Tax Assessment Act 1997 section 328-130

Reasons for decision: Detailed Reasoning - 50% active asset reduction: Under section 152-205 of the ITAA 1997, the 50% active asset reduction automatically applies if the basic conditions in Subdivision 152-A are met. There are no further requirements. The basic conditions for small business CGT relief, as set out in subsection 152-10 of the ITAA 1997, are: (a) a CGT event happens in relation to a CGT asset of yours in an income year (b) the event would have resulted in a gain (c) at least one of the following applies: (i) you are a small business entity for the income year; (ii) you satisfy the maximum net asset value test; (iii) 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; or (iv) 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. (d) the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997. | Detailed Reasoning - Small business entity: Subsection 152-10(1AA) of the ITAA 1997 outlines that an entity will be a CGT small business entity if: (a) it carries on a business in the current year, and (b) one or both of the following applies: (i) it carried on a business in the income year (the previous year) before the current year and its aggregated turnover for the previous year was less than $2m, and (ii) its aggregated turnover for the current year is likely to be less than $2m. | Detailed Reasoning - Active asset test: Under subsection 152-35(1) of the ITAA 1997, 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 7½ years during the test period. Subsection 152-40(1) of the ITAA 1997 provides 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 - Entity connected with you: Under subsection 328-125(1) of the ITAA 1997, an entity is connected with another entity if either entity controls the other entity. Paragraph 328-125(2)(a) of the ITAA 1997 provides that an entity controls another entity if it or its affiliate (or all of them together) owns, or has the right to acquire ownership of, interests in the other entity that give the right to receive at least 40% (the control percentage) of a. any distribution of income or capital by the other entity, or b. if the other entity is a partnership, the net income of the partnership, or c. if the other entity is a company, owns, or has the right to acquire ownership of, equity interests in the company that give at least 40% of the voting power in the company. | Detailed Reasoning - Meaning of affiliate: Under subsection 328-130(1) of the ITAA 1997, an individual or a company is an affiliate of yours if the individual or company 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 business of the individual or company. Subsection 328-130(2) of the ITAA 1997 also provides that an individual is not your affiliate merely because of the nature of the business relationship shared by the individuals. | Detailed Reasoning - Application to your circumstances: In this case, the property was sold by you and your siblings, which was a CGT event that resulted in a capital gain. Prior to being sold, the property was used by the partnership, which you are a partner of, in the course of carrying on a farming business since its acquisition till its date of sale. Thus, the partnership was operating a business in the year the CGT event occurred. Since the partnership's aggregated turnover was less than $2 million in the 20XX and 20XX income years, and it was carrying on a business in the 20YY income year, the partnership will be taken to be a small business entity for the income year the property was sold. As you only have 25% interest in the net income of the partnership, you will not be taken to be in control of the partnership outright. However, since your siblings are also partners in the partnership, and all of them had an active involvement in the farming business, you will be taken to be acting in concert with each other and thus be considered affiliates. Since all of the partners combined have over 40% interest in the net income of the partnership, then together they will be taken to be in control of the partnership. Therefore, the partnership will be an entity connected with you. In regard to the active asset test, as stated above, the property was used by the partnership in the course of carrying on the farming business since shortly after the property's acquisition until the date of sale. Thus, the property will satisfy the active asset test since it was used in a business carried on by an entity connected with you for more than half of the ownership period. Therefore, as you satisfy the basic conditions for small business relief under subsection 152-10(1) of the ITAA 1997, you be eligible for the CGT small business 50% active asset reduction under section 152-205 of the ITAA 1997.