Private ruling: Income Tax – Small Business Concessions
Date of advice: 2 May 2019
Published: June 2019
Ruling period: Year ended 30 June 2017 | Year ended 30 June 2018 | Year ended 30 June 2019 | Year ended 30 June 2020
Date scheme commenced: 1 July 2016

Ruling: Q1: Are you a CGT small business entity? | A1: Yes.

Relevant facts and circumstances: You are a partnership that conducts primary production activities. Your operations consist of forestry, in what would be best described as the harvesting of forestry timber and the tending of forests. You acquired a property approximately 30 years ago. You performed a log yield analysis on the property which revealed that the yield would be sufficient to substantially cover the loan repayments. You commenced logging on the property and the logging and sale of the timber continued for approximately 10 years, when the available mature timber had been harvested. Following the cessation of logging, the property has continued to be maintained as a future forestry operation. The activities post-logging consists of tending and regenerating the forest, the care and maintenance of logging infrastructure (i.e. roads and tracks) and the slashing of grassed areas. You have also been active in protecting existing use rights (i.e. logging) with the council. The expected period of time for the regeneration of the forest and the re-commencement of logging was around 20 years. The forest is nearing the end of the 20-year regeneration period, and thus logging could recommence in the coming years. However you have decided that it is no longer feasible to recommence the logging activities. This is due to the death of one of the partners, the ageing and retirement of the remaining partners and the increasing environmental issues associated with logging in the relevant area. The above factors have reduced the economic viability of future logging activities. Accordingly, the decision was made to undertake an orderly sale of the property. Your annual turnover, including the turnover of any connected entities and affiliates, has always been less than $2million.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 328-110 | Income Tax Assessment Act 1997 subsection 152-10(1AA) | Income Tax Assessment Act 1997 subsection 328-110(5)

Reasons for decision: Summary: The term ‘CGT small business entity’ is defined in subsection 152-10(1AA) of the Income Tax Assessment Act 1997 (ITAA 1997). It provides: You are a CGT small business entity for an income year if: (a) you are a small business entity for the income year; and (b) you would be a small business entity for the income year if each reference in section 328-110 to $10 million were a reference to $2 million. The term ‘small business entity’ is defined in section 328-110 of the ITAA 1997. Broadly, an entity will be a small business entity if: (a) it carries on a business in the current year; and (b) it satisfies one of the aggregated turnover tests. Additionally, there is a special provision under subsection 328-110(5) of the ITAA 1997 that allows an entity to work out whether it is a small business entity in the CGT event year when the entity is winding up a business it previously carried on. The entity will be taken to be still carrying on the business if: ● it is winding up a business it previously carried on, and ● it was a small business entity in the financial year the entity ceased business. | Detailed Reasoning - Application to your circumstances: You operated a forestry business and actively logged your property until all mature timber had been harvested. Following the logging activities you continued to maintain the property as a future forestry operation. At a later date you made the decision to wind-up the forestry business and sell the property. When this decision was made it is considered that you ceased carrying on a business. In the financial year you made this decision you were carrying on a business and, as your aggregated turnover was always less than $2 million, you were a small business entity in that year. As you are winding up a business you previously carried on and were a small business entity in the year you ceased carrying on a business you are a small business entity under subsection 328-110(5) of the ITAA 1997 and consequently also a CGT small business entity.