Private ruling: Capital gains tax - active asset
Published: April 2013
Ruling period: Year ending 30 June 2010; | Year ending 30 June 2011; | Year ending 30 June 2012; | Year ending 30 June 2013.
Date scheme commenced: December 2011.

Ruling: Q1: Does the property, an asset of the Partnership, qualify as an active asset for the partners of the Partnership under subsection 152-40(1) of the Income Tax Assessments Act 1997 (ITAA 1997) and meet the requirements of the active asset test under section 152-35 of the ITAA 1997? | A1: Yes.

Relevant facts and circumstances: For approximately 30 years, the family has carried on a primary production business. In late 2003, the Taxpayer, and a number of family members entered into a partnership (the Partnership) to acquire land. The interests held by each partner in the assets and the net income/loss of the Partnership is as follows: the Taxpayer (X%), partner (X%) partner (Y%). The intention of the partners in acquiring the Property was to build on the existing strong family bonds through shared involvement in a variety of agricultural enterprises with the overall aim of conducting a profitable farming business on the said property in a sustainable manner. In late 2003, the Partnership entered into a farming arrangement with the Primary Production Business Partnership (the primary production business partnership of the parents) to provide the land comprising the Property to be used for the carrying on of various farming activities for a period of Z years commencing late 2003. In return, the Partnership would receive an annual GST inclusive payment, payable half yearly in advance. This arrangement was formalised under the "Farming Agreement". In late 2003, the Partnership Agreement was established between the partners to formalise the Partnership arrangement with respect to the Property. The Partnership established a "Farm management and development program" detailing the immediate and long term goals for the Property. Due to the poor condition of the pastures, between certain years, the Property was lightly farmed by the Primary Production Business Partnership while the land was brought up to commercial farming operation. Examples of infrastructure upgrades include: Property development planning; Removal of noxious weeds; Application and installation of various riparian grants; Clearing of paddock of tree stumps; Repairing cattle yards; Building cattle drought holding yards; Repairing and replacing existing fencing; Installation of an access road through The Property; Installation of a livestock watering system; Installation of a permanent creek crossing; Repairs on the shearing shed; Installation of temporary shed; Installation of 4 new dams; Vermin control etc. The cost of these infrastructure upgrades including the provision of labour was funded and provided by the partners of the Partnership. The Partnership was also actively involved in the planning of the various farming activities including the assistance with animal and pasture management undertaken on the Property. The partners also provided technical advice and shared ideas with the Primary Production Business Partnership in regards to the farming activities on the Property. The work was unpaid on the basis that the annual payment was sufficient to cover the labour costs of the partners. Further, it was the desire of the partners that the farm became profitable within a reasonable period of time. In early 2008, another business was set up by a partner. This primary production business also undertook farming operations on the Property. The Property was subsequently sold on late 2011.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 152-35; | Income Tax Assessment Act 1997 section 152-40; | Income Tax Assessment Act 1997 section 328-125; | Income Tax Assessment Act 1997 section 328-130.

Reasons for decision: Summary: Section 152-40 of ITAA 1997 provides the meaning of active asset. An active asset is an asset you own and use (or hold ready for use) in the course of carrying on a business or is used in the course of carrying on a business by an affiliate or connected entity. Taxation Determination TD 95/62 provides guidelines on when the owner of land allows the land to be used in a share farming arrangement is considered to be in business. Paragraph 5 of TD 95/62 states: 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. To be considered as carrying on a business, the Taxpayer must be involved in the activities that make up the primary production business carried out on the Property. The Partnership and the Taxpayer were actively involved in the planning of the various farming activities including the assistance with animal and pasture management undertaken on the Property. Many infrastructure upgrades including the provision of labour were funded and provided by the Partnership and the Taxpayer. The Property has been owned for more than 5 years and has been used in business for more than 5 years. A partnership is not a separate legal entity, therefore the Taxpayer, as the individual is taken to have been carrying on of the business. It is therefore considered that the property was used in primary production business and that the Taxpayer was carrying on a business. The conditions for a CGT asset to satisfy the active asset test are contained in section 152-35 of the ITAA 1997. That section requires that the relevant asset must be an active asset of the taxpayer for the relevant period of time. Under subsection 152-35(1) of the ITAA 1997, a CGT asset satisfies 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 period specified in subsection (2); 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 period specified in subsection (2). As per subsection 152-35(2) of the ITAA 1997, the period: (a) begins when you acquired the asset; and (b) ends at the earlier of: (i) the CGT event; and (ii) if the relevant business ceased to be carried on in the 12 months before that time or any longer period that the Commissioner allows - the cessation of the business. The CGT asset, the Property, has been owned for more than 5 years and has been used in business for more than 5 years. In accordance with paragraph 152-35(1)(a) of the ITAA 1997 the property satisfies the active asset test because it was actively used in the business for more than half the period of ownership. The property is an active asset