Private ruling: Small business concessions
Date of advice: 6 December 2018
Published: March 2019
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the applicants meet the basic conditions as set out in Subdivision 152-A of the Income Tax Assessment Act 1997 (ITAA 1997) in order to rely on the Capital Gains Tax (CGT) small business concessions in respect of a capital gain realised from either the sale of, or grant of consecutive leases over the land? | A1: Yes. | Q2: Will the applicants be entitled to disregard the capital gain realised from either the sale of, or grant of consecutive leases over the land (excluding the ‘Crown roads land’) under Subdivision 152-B of the ITAA 1997? | A2: Yes. | Q3: Will the applicants be entitled to reduce the capital gain realised from the sale of the Crown roads land by the general 50% CGT discount in Division 115 of the ITAA 1997 and then further reduce the gain under a combination of Subdivisions 152-C, 152-D and 152-E of the ITAA 1997? | A3: Yes. | Q4: Will the applicants be entitled to reduce the capital gain realised from the granting of consecutive leases over the Crown roads land under a combination of Subdivisions 152-C, 152-D and 152-E of the ITAA 1997? | A4: Yes.

Relevant facts and circumstances: The applicants are over 55 years of age and own land that was purchased over 15 years ago. The applicants have entered into a contract to sell part of the land to the purchaser. A minor part of the land being sold includes former Crown roads (Crown roads land) which was purchased less than 10 years ago. Since its purchase, the land including the Crown roads land has only been utilised for farming. The applicants conducted the farming business in partnership for many years with a family member joining the partnership several years ago. The aggregated turnover of the partnership in the 20XX income year was less than $XXX and is expected to be similar in the 20XY year. The applicants are reaching the end of their working lives which necessitated the introduction of other family into the business. Since their inclusion ln the business, a proportion of the work has been transferred from the applicants to them. The land sale will further facilitate the applicants' retirement from the partnership and the applicants respective working hours in the business will decrease by at least 50%. In order to effect the sale of the land, the applicants entered into a contract for the sale and purchase of land (sale and purchase contract) on X date which requires that the applicants subdivide the land and sell the relevant land to the purchaser. Where subdivision is not achieved due to reasons specified in the contract the contract will proceed on the basis that consideration paid by the purchaser is in respect of the grant of consecutive leases over the land. The consecutive leases were signed by the parties at the time of signing the sale and purchase contract; however, will be held in escrow by the applicants' solicitors until such time as it becomes apparent that the subdivision will not be granted. The parties agreed that as consideration for the sale of, or alternatively the grant of consecutive leaseholds over the land, the applicants are entitled to consideration valued at approximately $Z. If the purchaser/lessee terminates the contract, the consideration paid is non-refundable.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 104-110 | Income Tax Assessment Act 1997 Division 115 | Income Tax Assessment Act 1997 Section 115-25 | Income Tax Assessment Act 1997 Division 152 | Income Tax Assessment Act 1997 Subdivision 152-A | Income Tax Assessment Act 1997 Subsection 152-10(1) | Income Tax Assessment Act 1997 Subsection 152-10(1A) | Income Tax Assessment Act 1997 Subsection 152-10(1B) | Income Tax Assessment Act 1997 Section 152-35 | Income Tax Assessment Act 1997 Section 152-40 | Income Tax Assessment Act 1997 Subdivision 152-B | Income Tax Assessment Act 1997 Section 152-105 | Income Tax Assessment Act 1997 Subdivision 152-C | Income Tax Assessment Act 1997 Subdivision 152-D | Income Tax Assessment Act 1997 Subdivision 152-E | Income Tax Assessment Act 1997 Section 152-430

Reasons for decision: Detailed Reasoning - Small business CGT concessions – basic conditions: Subdivision 152-A of the ITAA 1997 contains the basic conditions to be satisfied in order to access the small business CGT concessions. These conditions are: (a) a CGT event happens in relation to a CGT asset in an income year (apart from CGT event D1); (b) the event would (apart from this Division) have resulted in the gain; (c) at least one of the following applies: (i) you are a CGT small business entity for the income year (that is, your aggregated turnover is less than $2,000,000); (ii) you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997; (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) the conditions in subsection 152-10(1A) or (1B) of the ITAA 1997 are satisfied in relation to the CGT asset in the income year; and (d) the CGT asset satisfies the active asset test (subsection 152-10(1) of the ITAA 1997. Subsection 152-10(1B) of the ITAA 1997 will be satisfied in relation to a CGT asset if: (a) you are a partner in a partnership in the income year; and (b) the partnership is a CGT small business entity for the income year; and (c) you do not carry on a business in the income year (other than in partnership); and (d) the CGT asset is not an interest in an asset of the partnership; and (e) the business you carry on as a partner in a partnership is the same one as referred to in the active asset test. Section 152-35 of the ITAA 1997 states that 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 between when you acquired the asset and the earlier of when the CGT event happens or the relevant business ceased; 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 7 ½ years between when you acquired the asset and the earlier of when the CGT event happens or the relevant business ceased. A CGT asset will be an active asset at a time if, at that time you own the asset and the asset was used or held ready for use by you, an affiliate of yours, or by another entity that is ‘connected with’ you, in the course of carrying on a business (section 152-40 of the ITAA 1997). In this case, the sale and purchase contract provides for the sale of the land (CGT event A1) or alternatively, the granting of a lease over the land (CGT event F1). Section 104-10 states that the time of CGT event A1 is when the contract is entered into. Section 104-110 of the ITAA 1997 states that in relation to CGT event FI, the time of the granting of a lease is when the ‘contract for the lease is entered into’ or if there is no contract, at the start of the lease. Based on the conditions written into the sale and purchase contract, we accept that the time of either the disposal event or the lease event will be the date the contract was entered into. From the information provided, the applicants meet the basic conditions as set out in Subdivision 152-A of the ITAA 1997. | Detailed Reasoning - Small business 15-year exemption: The small business 15-year exemption in Subdivision 152-B of the ITAA 1997 provides that where you are an individual, you can disregard a capital gain arising from a CGT asset where: ● the basic conditions for relief in Subdivision 152-A are satisfied; ● you continuously owned the asset for the 15-year period leading up to the CGT event; and ● you are 55 or over and the event happens in connection with your retirement, or you are permanently incapacitated (section 152-105 of the ITAA 1997). From the information provided, the conditions in Subdivision 152-B of the ITAA 1997 are met and the applicants can disregard the gain made from the sale of, or alternatively the lease of, the land (excluding the Crown roads land). | Detailed Reasoning - Reduction in capital gain – sale of the Crown roads land: Where you are an individual, Division 115 of the ITAA 1997 allows you to apply a discount of 50% to a capital gain made from the disposal of a CGT asset if you have held the asset for at least 12 months. The small business 50% reduction in Subdivision 152-C of the ITAA 1997 allows you to reduce a capital gain by 50% if the basic conditions in Subdivision 152-A of the ITAA 1997 are met. The small business retirement exemption in Subdivision 152-D of the ITAA 1997 allows you to disregard all or part of a capital gain up to a maximum lifetime limit of $500,000 if the basic conditions in Subdivision 152-A of the ITAA 1997 are met. The small business roll-over in Subdivision 152-E of the ITAA 1997 allows you to defer the making of a capital gain from a CGT event happening in relation to a small business asset if the basic conditions in Subdivision 152-A of the ITAA 1997 are met. However, the roll-over does not apply to a capital gain to which the small business 15-year exemption applies as such a gain is entirely disregarded under that provision and there is no need for an additional concession (section 152-430 of the ITAA 1997). From the information provided, in the event of the sale of the Crown roads land, the applicants will be entitled to reduce the resulting capital gain by the general 50% CGT discount in Division 115 of the ITAA 1997 and then further reduce the gain under a combination of Subdivisions 152-C, 152-D and 152-E of the ITAA 1997. | Detailed Reasoning - Reduction in capital gain – lease of the Crown roads land: The granting of a lease is CGT event F1 (under section 104-110 of the ITAA 1997) and any gain made from the event is excluded from being a discount capital gain by section 115-25 of the ITAA 1997. However, in the event of the leases proceeding, the applicants will be entitled to reduce the resulting capital gain by a combination of Subdivisions 152-C, 152-D and 152-E of the ITAA 1997.