Private ruling: CGT - small business concessions
Date of advice: 5 March 2024
Published: 15 April 2024
Ruling period: Year ending 30 July 2024
Date scheme commenced: 1 June 2023

Ruling: Q1: Is the partnership a small business entity under section 328-110 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No | Q2: Is person A and person B affiliates of each other under subsection 328-130(1) of the ITAA 1997? | A2: Yes | Q3: Is person A eligible for the CGT Small Business 50% Active Asset Reduction under section 152-205 of the ITAA 1997? | A3: Yes

Relevant facts and circumstances: In 20XX person A and person B acquired farming property as joint owners (the property). In 20XX a partnership was established with the even partners consisting of person A and person B (the partnership). For approximately 4 years, the partnership used the property in the course of carrying on a farming business. In 20XX, person A was unable to continue carrying on the business as a partner due to health issues, and the partnership ceased its business activities. From 20XX to the present date, the farming business has been carried on by person B as a sole trader. Person B continued to occasionally employ person A to assist in carrying on the farming business. In the 20XX-XX income year, person B's aggregated turnover was less than $2 million, and is projected to be less than $2 million in the 20XX-XX income year. The partnership has not received any income from person B's use of the land in the operation of the business or any other business activity. Person B intends to acquire person A's interest in the property.

Relevant legislative provisions: 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(1AA) | Income Tax Assessment Act 1997 section 152-35 | Income Tax Assessment Act 1997 subsection 152-35(1) | Income Tax Assessment Act 1997 subsection 152-40(1) | Income Tax Assessment Act 1997 section 152-205 | Income Tax Assessment Act 1997 subsection 328-130(1) | Income Tax Assessment Act 1997 subsection 328-130(2)

Reasons for decision: Summary: Under subsection 328-130(1) of the ITAA 1997, an individual or a company is an affiliate of yours if the individual or company acts, or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you, in relation to the affairs of the business of the individual or company. Subsection 328-130(2) of the ITAA 1997 also provides that an individual is not your affiliate merely because of the nature of the business relationship shared by the individuals. In this case, person A and person B are joint owners in the property, as well as even partners in the partnership. Person A and person B have also established a family arrangement in which person B would use the property to carry on the farming business as sole trader, employing person A occasionally to assist in carrying on the business. This arrangement was established due to person A's ill health preventing them from operating the business under the partnership. Therefore, due to the nature of their relationship and their actions it can reasonably be expected that person A and person B would act in accordance with each other's' directions or wishes in relation to the affairs of the farming business. Thus, person A and person B will be affiliates of each other. Under section 152-205 of the ITAA 1997, the 50% active asset reduction automatically applies if the basic conditions in Subdivision 152-A are met. There are no further requirements. The basic conditions for small business CGT relief, as set out in subsection 152-10(1) of the ITAA 1997, are: (a) a CGT event happens in relation to a CGT asset of yours in an income year (b) the event would have resulted in a gain (c) at least one of the following applies: (i) you are a small business entity for the income year; (ii) you satisfy the maximum net asset value test; (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) you do not carry on a business, 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. (d) the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997. Under subsection 152-35(1) of the ITAA 1997, a CGT asset will satisfy 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 test period, 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 test period. Subsection 152-40(1) of the ITAA 1997 provides that a CGT asset is an active asset at a time if it is used, or held ready for use, in the course of carrying on a business that is carried on by you, or your affiliate, or another entity that is connected with you. In this case, person B intends to acquire person A's interest in the property, which will be a CGT event that will likely result in a capital gain. Furthermore, the property is used in carrying on a farming business by person B as a sole trader. Since person B's aggregated turnover for the 20XX-XX income year was less than $2 million and is projected to be less than $2 million for 20XX-XX income year, they will be taken to be a small business entity. As outlined under question 2 above, person A and person B will be taken to be affiliates of each other as they can be reasonably expected to act in concert with each other. Moreover, the property has been jointly owned by person A and person B for approximately 18 years and continuously used in the course of carrying on a business since its acquisition. Thus, the property will satisfy the active asset test as it has been owned for more than 15 years and used as an active asset for more than 7½ years. Therefore, if person B acquires person A's interest in the property, resulting in a capital gain, person A will be eligible to apply the CGT Small Business 50% Active Asset Reduction under section 152-205 of the ITAA 1997.

Ruling: Subject: CGT - small business concessions - active asset | Reasons for decision: Subsection 152-10(1AA) of the ITAA 1997 outlines that an entity will be a CGT small business entity if: | (a) it carries on a business in the current year, and | (b) one or both of the following applies: | (i) it carried on a business in the income year (the previous year) before the current year and its aggregated turnover for the previous year was less than $2m, and | (ii) its aggregated turnover for the current year is likely to be less than $2m. | In this case, the property was jointly owned by person A and person B, resulting in them establishing the partnership to use the property in the course of carrying on a farming business. However, from 20XX to the current date, the business has been carried out by person B as a sole trader, and not the partnership. The partnership has ceased all its business activities and has not reported any income in its return since 20XX. | Therefore, as the partnership is not carrying on a business in the current year, the first condition under subsection 152-10(1AA) of the ITAA 1997 will not be satisfied. Thus, the partnership will not be taken to be a small business entity.