Private ruling: Capital gains tax small business concessions
Published: May 2012
Ruling period: Year ended 30 June 2010 | Year ended 30 June 2011
Date scheme commenced: 1 July 2009

Ruling: Q1: Does the farm pass the active asset test? | A1: No

Relevant facts and circumstances: You purchased farmland in 2000. Your intention was to conduct farming activities on the land with your spouse, growing commercially viable crops. The farming activities commenced soon after your acquisition of the land. Prior to 2002 your spouse's health deteriorated and you sought assistance from an unrelated party to manage the farm. You spouse passed away in 2002. The unrelated party took over the farming activities and continued to produce crops until the date of the sale of the land. Under an informal agreement with your spouse, the unrelated party agreed to pay you a percentage of the profits received from the sale of the produce from the farm. You also contributed to the farm's operating expenses. You did not carry on any substantial principal work on the farm since the unrelated party took over the management. The land was sold in 2011.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 152-35

Reasons for decision: Summary: The active asset test is contained in section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997). The active asset 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 test 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 least 7.5 years during the test period. The test period: · begins when you acquired the asset, and · ends at the earlier of o the CGT event, and o when the business ceased, if the business in question ceased in the 12 months before the CGT event (or such longer time as the Commissioner allows). A CGT asset is an active asset if it is owned by you and is used or held ready for use in a business carried on (whether alone or in partnership) by you, your affiliate, your spouse or child, or an entity connected with you. In your case, you held the farmland and it was initially used by you in the course of carrying on a primary production business. However, subsequent to the deterioration of your spouse's health, the primary production activities were carried on by an unrelated third party. Under an informal agreement, you received payments from the unrelated party which constituted a percentage of the proceeds from the sale of the farm produce. You also contributed to the operating costs of the farm; however you did not continue to undertake any farming activities on the land yourself. It is considered that you held a passive interest in the land and that you were not carrying on a primary production business on the land. Although the land was still used for primary production activities, it was an unrelated party that conducted these business activities. The unrelated party compensated you for the right to the use of your land to conduct these activities by paying you a portion of their profits. The land was not actively used in any of your business activities or the business activities of any of your affiliates or connected entities. Accordingly the farmland is not an active asset and cannot pass the active asset test under section 152-35 of the ITAA 1997. You will therefore, not be able to access the small business concessions in relation to the sale of the farmland.

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