Private ruling: CGT small business concessions
Published: June 2014
Ruling period: Year ending 30 June 2014 | Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018
Date scheme commenced: 1 July 2013

Ruling: Q1: Will you be entitled to the small business 15 year exemption? | A1: Yes.

Relevant facts and circumstances: You purchased a large farm lot 199X. You obtained an ABN at this stage for primary production. When purchased, the farm was a bare block of land and the partners gradually built up the land to make it ready for farming. A few years later the partners built a house on the farm lot and made this their main residence. The farm has operated continuously since this date and for the entire length of time. Your farming activity involved raising sheep for wool and lambs, and cereal cropping. In 201X the land was subdivided the land to create two separate lots, a small homestead lot and the remaining farm lot. The partners now wish to retire due to their age and a number of health issues. You plan to sell the farm lot as soon as possible. The partners will remain residing in the homestead lot. You are a small business entity with an aggregated turnover of less than $2 million.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 152-B , | Income Tax Assessment Act 1997 Subdivision 152-C, | Income Tax Assessment Act 1997 Section 152-15 and | Income Tax Assessment Act 1997 Section 152-35 .

Reasons for decision: Detailed Reasoning - Basic conditions: To qualify for the small business CGT concessions, you must satisfy several conditions that are common to all the concessions. These are called the basic conditions. Subdivision 152-C of the Income Tax Assessment Act 1997 (ITAA 1997) applies the small business 50% active asset reduction provided the basic conditions are satisfied. A capital gain that you make may be reduced or disregarded under Division 152 of the ITAA 1997 if the following basic conditions are satisfied: • A CGT event happens in relation to a CGT asset of yours in an income year, • The event would have resulted in a gain, • The CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997, and • At least one of the following applies; • you are a small business entity for the income year, • you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997, • you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an interest in an asset of the partnership, or • 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. | Detailed Reasoning - Active asset test: The active asset test is satisfied 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 test period detailed below, 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 7.5 years during the test period. A CGT asset is an active asset if it is owned by you and is used or held ready for use in a business carried on (whether alone or in partnership) by you, your affiliate, your spouse or child, or an entity connected with you. In your case, you satisfy the active asset test as you have owned the land for more than 15 years and the asset was an active asset for more than 7.5 years. Therefore, you satisfy the basic conditions as the land is considered to be an active asset and you are a small business entity. | Detailed Reasoning - 15 year exemption: Subdivision 152-B of the ITAA 1997 provides a small business 15 year exemption as part of the capital gains tax (CGT) small business relief provisions. If you qualify for the small business 15 year exemption, the capital gain is entirely disregarded and it is unnecessary to apply any other concessions. If you are an individual, you can disregard any capital gain arising from a CGT event if all of the following conditions are satisfied: (a) the basic conditions are satisfied, (b) you continuously owned the CGT asset for the 15 year period ending just before the CGT event, (c) if the CGT asset is a share in a company or an interest in a trust, the company or trust had a significant individual for a total of at least 15 years, and (d) either: (i) you are 55 or over at the time of the CGT event and the event happens in connection with your retirement, or (ii) you are permanently incapacitated at the time of the CGT event. In your case, you satisfy the basic conditions, you have owned the farming land for more than 15 years and you are both 55 years or older and the sale will happen in connection with your retirement. Therefore the 15 year exemption will apply to disregard the capital gain you will make on the sale of the farm land.