Private ruling: CGT - small business concessions
Date of advice: 13 October 2023
Published: 20 November 2023
Ruling period: Year ending 30 June 2024 | Year ending 30 June 2025
Date scheme commenced: 1 July 2023

Ruling: Q1: Will you satisfy the basic conditions in Subdivision 152-A of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the disposal of land at Property A (Land)? | A1: Yes. | Q2: Will you satisfy the basic conditions in Subdivision 152-A of the ITAA 1997 in relation to the disposal of trees (Trees) located at Property A? | A2: No. | Q3: Will the value of the Trees be included in your assessable income under section 70-90 of the ITAA 1997? | A3: Yes.

Relevant facts and circumstances: You are a private company registered after 20 September 1985. You purchased the Land after 20 September 1985 intending to plant the Trees which take X to Y years to mature. The Land was mostly cleared at the time of purchase. The Trees can be harvested for numerous uses. Since purchase, you have planted X hectares of Trees as seedlings, together with host tree seedlings, which are now semi-mature. You planted additional host trees to preparing for more plantings in the future. You have undertaken maintenance and upkeep of Trees, including trimming of host trees, trimming Trees to encourage heartwood growth, wide plantation firebreaks, and slashing between Trees as required. The Land has a total of XX hectares of arable land, of which you lease part of the Land to an unrelated third party for livestock grazing. You lease this part of the Land as it has not yet been planted with Trees. You have received monthly payments under the lease. Your projected income from the harvesting of the Trees at maturity will exceed the income derived under the lease. The aggregated turnover of yours, any entities connected with you, your affiliates or entities connected with your affiliates will not exceed $X million just before the disposal. The net value of the capital gains tax (CGT) assets of yours, any entities connected with you, your affiliates or entities connected with your affiliates will not exceed $X million just before the disposal. You have decided to dispose of the Land and Trees prior to harvest of the first crop. Your director has calculated an estimate of the value of the semi-mature Trees to be $X. You will make a capital gain on the disposal in the year ending 30 June 2024 or in the year ending 30 June 2025.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 70-85 | Income Tax Assessment Act 1997 s ection 70-90 | Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 section 108-5 | Income Tax Assessment Act 1997 section 118-20 | Income Tax Assessment Act 1997 Division 152 | Income Tax Assessment Act 1997 Subdivision 152-A

Reasons for decision: Detailed Reasoning - Detailed reasoning: In your case, the basic conditions contained in Subdivision 152-A of the ITAA 1997 will be satisfied in relation to the disposal of the Land, because: | Summary: You will not satisfy the basic conditions in Subdivision 152-A of the ITAA 1997 in relation to the disposal of the Trees as any capital gain you make will be reduced to zero under section 118-20 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Taxation Ruling TR 95/6 Income tax: primary production and forestry (TR 95/6) provides the Commissioner's view about the extent to which receipts derived from the disposal of timber constitute assessable income. For capital gains tax purposes, the sale of standing timber on land acquired on or after 20 September 1985 results in the original asset (the land with the trees) being split into two post-CGT assets (the land and the timber) (paragraph 73 of TR 95/6). Any net capital gain arising on the disposal of the timber (or land) is assessable income of the year of income in which the disposal occurs or is deemed to have occurred (section 104-10 of the ITAA 1997) (paragraph 75 of TR 95/6). In your case, the disposal of the Trees will result in a CGT event A1 occurring in the income year the Trees are disposed, and the disposal will result in a gain (section 104-10 of the ITAA 1997). However, as the market value of the Trees on the day of disposal is also assessable (section 70-90 of the ITAA 1997), the anti-overlap provisions apply and the capital gain is reduced to zero (section 118-20 of the ITAA 1997). As your capital gain for the disposal of the Trees is reduced to zero (section 118-20 of the ITAA 1997), you will not satisfy the basic conditions in Subdivision 152-A of the ITAA 1997. | Summary: The value of the Trees will be included in your assessable income under section 70-90 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Where an item of trading stock, which is an asset of a business you are carrying on, is disposed of outside the ordinary course of that business, the market value of that trading stock on the day of disposal is included in your assessable income (section 70-90 of the ITAA 1997). Section 70-85 of the ITAA 1997 defines trading stock, for the purposes of section 70-90, to include trees planted and tended for sale. TR 95/6 summarises these rules in paragraph 22 as follows: 'A disposal of trees owned by a taxpayer and which have been planted (not necessarily by the taxpayer) and tended for the purpose of sale may result in the value of those trees being included in the taxpayer's assessable income under section70-90 of the ITAA 1997, in the year the disposal takes place. This may be so whether or not the taxpayer is carrying on a business of forest operations, so long as the taxpayer is carrying on a business and the disposal is not in the ordinary course of carrying on that business. What is required is that the trees constitute the whole or part of the assets of that business.' In your case, you will dispose of standing trees that you planted and tended for sale. These standing trees are considered to be an asset of the forestry business which you are carrying on. The disposal of the Land on which the Trees are growing is a disposal outside the ordinary course of your business. Therefore, you will be required to include the market value of the Trees (standing timber) on the day of disposal, in your assessable income for the income year the Trees are disposed (subsection 70-90(1) of the ITAA 1997) and the amount you actually receive is excluded from your assessable income (subsection 70-90(2) of the ITAA 1997). The gain realised on the disposal of the Trees is also assessable as a capital gain (section 104-10 of the ITAA 1997), however it is reduced to zero by the operation of section 118-20 of the ITAA 1997.

Question 1: You will satisfy the basic conditions in Subdivision 152-A of the ITAA 1997, in relation to the disposal of the Land. | the Land is a CGT asset (section 108-5 of the ITAA 1997) | a CGT event A1 will happen in the income year the Land is disposed | the event will result in a gain | you will be a CGT small business entity for the income year the Land is disposed of, and | the Land will satisfy the active asset test as you will have owned the Land for 15 years or less and the Land will have been used in your business for a total of at least half of the period between when you acquired it and when you dispose of it.