Private ruling: Capital gains tax - Small business concessions - active asset test
Published: February 2015
Ruling period: Year ending 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Are the rights of easement being disposed of active assets in their own right? | A1: No | Q2: Are the easement rights inherently connected with your farming land under subsection 152-12(2) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A2: Yes

Relevant facts and circumstances: The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are: • Your private ruling application. • Information provided in a phone conversation with your agent. You have used your land in the course of carrying on a primary production business for many years. You granted easement rights over a portion of your farming land by entering into an agreement with a company ('the company') for a period of time. The agreement allows the company use of the land for company purposes. In consideration for granting the easements you received payment of an amount from the company, thus making a capital gain.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-35 | Income Tax Assessment Act 1997 subsection 104-35(3) | Income Tax Assessment Act 1997 subsection 115-25(3) | Income Tax Assessment Act 1997 Division 152 | Income Tax Assessment Act 1997 subsection 152-10(1) | Income Tax Assessment Act 1997 paragraph 152-10(1)(a) | Income Tax Assessment Act 1997 paragraph 152-10(1)(d) | Income Tax Assessment Act 1997 subsection 152-12(1) | Income Tax Assessment Act 1997 subsection 152-12(2) | Income Tax Assessment Act 1997 section 152-35

Reasons for decision: Summary: CGT event D1, in section 104-35 of the ITAA 1997, happened when you entered into the agreement to grant the easement right to the company. You will make a capital gain under subsection 104-35(3) of the ITAA 1997 if the capital proceeds received for granting the right exceeded the incidental costs incurred. For the capital gain to qualify for the small business concessions contained in Division 152 of the ITAA 1997, the four basic conditions in subsection 152-10(1) of the ITAA 1997 must generally be satisfied: (a) a CGT event happens in relation to a CGT asset of yours in an income year; (b) the event would have resulted in the gain; (c) you satisfy the maximum net asset value test; and (d) the CGT asset satisfies the active asset test. However, the effect of subsection 152-12(1) of the ITAA 1997 is that paragraphs 152-10(1)(a) and (d) of the ITAA 1997 do not apply in the case of CGT event D1. Instead subsection 152-12(2) of the ITAA 1997 requires that the right giving rise to CGT event D1 must be inherently connected with another CGT asset which satisfies the active asset test. As you own the land and have always used it in carrying on its business, the land satisfies the active asset test under section 152-35 of the ITAA 1997. The easement right exists only in relation to the land and is permanent and inseparable from the land for the duration of the agreement. This satisfies the ordinary meaning of 'inherently connected', which is not otherwise defined in the ITAA 1997. Therefore, the easement right is inherently connected with the land and satisfies the condition in subsection 152-12(2) of the ITAA 1997. The small business concessions will be available for the capital gain if the other conditions are satisfied. Note 1: The CGT discount is not available for capital gains made from CGT event D1 (subsection 115-25(3) of the ITAA 1997).