Private ruling: Small business CGT concessions
Date of advice: 8 December 2020
Published: February 2021
Ruling period: Year ending 30 June XXXX | Year ending 30 June XXXX | Year ending 30 June XXXX
Date scheme commenced: 1 July XXXX

Ruling: Q1: Will the sale of Farm 1 by the legal personal representative of the deceased estate in the circumstances described below be the sale of an asset on 'capital account' for income tax purposes? | A1: Yes Paragraph 35 of Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income states that profits on isolated transactions may be ordinary income if: • the intention or purpose of a taxpayer in entering into the transaction was to make a profit or gain; and • the transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying on a business operation or commercial transaction. Farm Lot 1 purchased pre-CGT with the intent of carrying on a primary production business and has always been used in the primary production business. Following the passing of the individual, the wife and sole legal representative (LPR) of the estate is now retiring from farming and seeking to sell the farm land to provide funds for her retirement. Based on the facts provided there is no suggestion this arrangement was entered into in the course of carrying on a business. Consequently, the proposed sale of the Farm 1 is considered a mere realisation of a capital asset and assessable under Parts 3-1 and 3-3 of the ITAA 1997. | Q2: Should the legal personal representative of the deceased estate apply the Capital Gains Tax (CGT) provisions in Part 3-3 of the Income Tax Assessment Act 1997 (ITAA 97) in determining the amount of the assessable income to declare in respect of the sale of Farm 1? | A2: Yes. On the basis there is no evidence to indicate that the purpose of purchasing the land was to obtain a profit or gain, nor is there any indication of the sale being conducted in the course of carry on a business the subdivision and subsequent sale of Farm 1 is considered a mere realisation of a capital asset. Farm 1 does not require rezoning and will only be developed in accordance with the minimum council requirements. The LPR will engage persons with the requisite skills to attend to the subdivision and selling of the land on her behalf. Paragraph 264 of Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number considers the tax treatment of isolated transactions and refers to the cases of Statham & Anor v. Federal Commissioner of Taxation ( Statham ) and Casimaty v. FC of T ( Casimaty ) to provide some guidance on when activities to subdivide land amount to a business or a profit-making undertaking or scheme. In these cases, farm land was subdivided and sold. Minimal development work was undertaken to meet council requirements and to improve the presentation of certain allotments. On the particular facts of these cases the courts held that the sales were a mere realisation of a capital asset. Based on the facts provided the assessable income derived from the sale of Farm 1 will be assessable under the provisions of Part 3-3 of the ITAA 1997. | Q3: Will the legal personal representatives of the deceased estate be entitled to apply the '50 percent CGT discount' under Division 115 of the ITAA 97 to reduce the gross capital gain made on the sale of Farm 1 assuming the Farm Lot is sold more than one year from the passing of the individual? | A3: Yes. Section 115-25 of the ITAA 1997 states that entitlement to the discount capital gain requires that the capital gain must result from a CGT event happening to a CGT asset that was acquired by the entity making the capital gain at least 12 months before the CGT event. Item 5 of the table in subsection 115-30(1) provides that the CGT asset is treated as acquired on the date the deceased died. Therefore, where the sale of Farm 1 occurs at least 12 months after the deceased passed the LPR will be entitled to apply the discount capital gain. Taxpayer 2 | Q4: Will the sale of Farm 2 by the trustee of the family trust in the circumstances described be the sale of an asset on capital account for income tax purposes? | A4: Yes. As discussed in question 1 for the deceased estate, paragraph 35 of TR 92/3states that profits on isolated transactions may be ordinary income if: • the intention or purpose of a taxpayer in entering into the transaction was to make a profit or gain; and • the transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying on a business operation or commercial transaction. Further clarity is provided in paragraph 264 of MT 2006/1 which considers the tax treatment of isolated transactions and refers to the cases of Statham & Anor v. Federal Commissioner of Taxation ( Statham ) and Casimaty v. FC of T ( Casimaty ). In these cases, farmland was subdivided and sold. Minimal development work was undertaken to meet council requirements and to improve the presentation of certain allotments. On the particular facts of these cases the courts held that the sales were a mere realisation of a capital asset. The proposed subdivision and subsequent sale of Farm 2 shares similar arrangements as described in the above-mentioned cases. No rezoning is required, and minimal development work will be undertaken to meet council requirements. There is no intention or evidence to indicate that the Family Trust is conducting a business other than that of primary production, as such, the sale of Farm 2 is considered a mere realisation of a capital asset and assessable under Parts 3-1 and 3-3 of the ITAA 1997. | Q5: Should the trustee of the family trust apply the CGT provisions in Part 3-3 of the ITAA 97 in determining the amount of the assessable income to declare in respect of the sale of Farm 2? | A5: Yes. Based on the facts provided the assessable income derived from the sale of Farm Lot 1 will be assessable under the provisions of Part 3-3 of the ITAA 1997. | Q6: Will the trustee of the family trust be entitled to apply the '50 percent CGT discount' under Division 115 of the ITAA 97 to reduce the gross capital gain made on the sale of Farm 2 by one half on the basis that the trust has owned the land for more than 12 months? | A6: Yes. Section 115-25 of the ITAA 1997 states that entitlement to the 50 percent CGT discount requires that the capital gain must result from a CGT event happening to a CGT asset that was acquired by the entity making the capital gain at least 12 months before the CGT event. On the basis Farm 2 was acquired in X, the trust has held the CGT asset for greater than 12 months and will be entitled to apply the 50 percent [1] CGT discount. | Q7: Will the trustee for the family trust satisfy the basic conditions for relief under subdivision 152-A of the ITAA 1997 such that the trust may be entitled to apply one or more of the Small Business CGT Concessions to further reduce the assessable capital gain amount on the sale of Farm 2? | A8: 

Relevant facts and circumstances: The deceased and his wife have conducted a primary production business since X. The deceased passed away in X. The primary production business has been conducted through a family trust. The wife is now planning to sell their farmland to provide for her retirement. In order to maximise sale proceeds from the sale of their farmland there will be a subdivision of that land. The farmland is spread over two titles, farm 1 and farm 2 Farm 1 was owned by deceased and is a pre-CGT asset Farm 2 was acquired by wife as trustee for the for the family trust in X. Both farm lots have always been used to conduct a primary production business In order to maximise the sale proceeds from the sale of the farm-land the farms will be subdivided. The planned land subdivisions will not require any re-zoning and the works on the land required to affect the subdivisions will only accord with minimum council requirements. The net value of assets at the time of the land sales (and their respective relevant connected entities and any affiliates for the purposes of section 152-15 of the Small Business CGT Relief provisions in Division 152 of the ITAA 97) will be under $X million. The wife, as the legal personal representative of the deceased estate and the trustee of the family trust will engage persons with the requisite skills to attend to the subdivision and selling of the land on her behalf.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 115 | Income Tax Assessment Act 1997 subsection 115-30(1) | Income Tax Assessment Act 1997 Division 152 | Income Tax Assessment Act 1997 Subdivision 152-A | Income Tax Assessment Act 1997 section 152-15 | Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 Part 3-3 [1] Subsection 115-100(a)(ii) of the ITAA 1997 - Discount percentage


Subdivision 152A sets out the basic conditions that must be satisfied for small business relief to be eligible to access the Small Business CGT Concessions. | You have advised that you will satisfy the maximum net asset value and at all times Farm 2 has been used in carrying on your primary production business, thereby satisfying the active asset test. | Farm 2 is the CGT asset and once sold a CGT event will occur that would otherwise result in a capital gain, satisfying the requirements of the basic conditions. Consequently, the family trust will satisfy the basic conditions for relief under subdivision 152-A of the ITAA 1997 and may be entitled to apply one or more of the SB CGT Concessions to reduce the assessable capital gain.