Private ruling: CGT - small business concessions - small business rollover
Published: April 2015
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are you eligible for the small business rollover? | A1: No

Relevant facts and circumstances: You acquired a property in October 20XX. Since acquisition a portion of your property (the land) has been used in a share-farming arrangement you have with a sharecropper. In your share-farming arrangement, you are responsible for maintaining crop insurance (if you choose to take up an insurance policy) and fencing. The sharecropper plants, fertilizers and harvests the crop, using their own equipment. Once harvest has been completed and the crop has been sent to market, you receive an invoice showing your share of the harvest income less any levies or transportation costs applicable. You are not affiliated or connected to the sharecropper to whom you have the share-farming arrangement. You are a partner in a partnership which carries on a completely separate business. The land was not used in your partnership business; it was used solely in the share-farming arrangement. In 20XX you sold the portion of the property used for share-farming to the sharecropper. You provided the sharecropper with an interest free loan in order to purchase the land, which was paid off over two years. The final payment was received by you in 20XX. You have now acquired another property with which you have commenced a share-farming arrangement.

Relevant legislative provisions: Income Tax Assessment Act 1997 subdivision 152-A | Income Tax Assessment Act 1997 subsection 152-35(1) | Income Tax Assessment Act 1997 section 152-40

Reasons for decision: Summary: To qualify for the small business CGT concessions, you must satisfy several conditions that are common to all concessions. These are called the 'basic conditions'. The basic conditions are contained in subdivision 152-A of the Income Tax Assessment Act 1997 (ITAA 1997). Firstly, you must first satisfy one of the following: • You are a small business entity • You do not carry on business (other than as a partner) 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 (passively held assets). • You are a partner in a partnership that is a small business entity, and the asset is • An interest in a partnership asset (partnership asset), or • An asset you own that is not an interest in a partnership asset (partner's asset) which is used in the business of the partnership • You satisfy the maximum net asset value test. Secondly, the asset in question (the land) must pass the active asset test. Subsection 152-35(1) of the ITAA 1997 states that a CGT asset satisfies the active asset test 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 period of ownership, or • 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 and a half years. Section 152-40 of the ITAA 1997 provides the meaning of 'active asset'. 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. | Detailed Reasoning - Application to your circumstances: In your case, CGT event A1 happened when you sold the portion of the land used for share-farming to the sharecropper. The CGT event resulted in a capital gain. You would be considered a small business entity in relation to the partnership. However the business of the partnership is separate from the share-farming arrangement and the use of the land so we need to look solely at the share-farming arrangement and determine if you would be considered to be carrying on a business. Taxation Determination TD 95/62 discusses whether the owner of land who allows the land to be used in a share-farming arrangement would be considered to be engaged in a business of primary production. TD 95/62 states: Many arrangements do not amount to the carrying on of a business in partnership. In such cases, the fact that the land is used for cultivation in a business of primary production does not necessarily mean that the owner of the land is also carrying on that business. To be carrying on a business, the taxpayer must be involved in the activities that make up the 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. An example is provided in TD 95/62 to demonstrate the decision: Sharefarmer Y agrees to pay landowner X a designated share of crop proceeds in consideration for the use of land owned by X. X does not participate in the cultivation of the land. Only Y involves himself in the farming activities. Y would be considered to be engaged in the business of primary production. The share of crop proceeds received by X is not considered to be income from primary production. It is not personal exertion income and would in essence be income from property. In your case, the sharecropper plants, fertilizers and harvests the crops, using their own equipment. You do not participate in the cultivation of the land. Your responsibilities in the arrangement are to maintain crop insurance (if you so choose) and fences. You would not be considered to be carrying on the business of primary production in relation to your share-farming arrangement. The land is not a partnership asset nor was it used within your partnership which carries on a separate business activity. Accordingly, the land was not used by you in the course of carrying on a business, as it is considered you were not carrying on a business. The sharecropper is not an affiliate or a connected entity, therefore the share-cropper's use of the land will not make the land an active asset. As the land is not considered an active asset, it would therefore not satisfy the active asset test. As the basic conditions for the small business CGT concessions have not been satisfied, you will not be eligible to apply any of the small business concessions available to reduce or disregard the capital gain that resulted from the sale of your land, including the small business rollover. | Detailed Reasoning - Further issues for you to consider: When settlement occurred for the sale of the land, that is when the last payment of the proceeds were received, you will be required to include the capital gain from that sale in the year in which the CGT event occurred, the relevant financial year. If an assessment has already been made for that year of income, you may need to have the assessment amended.