Private ruling: Capital Gains Tax (CGT) small business concessions - active asset test
Date of advice: 5 January 2018
Published: May 2018
Ruling period: Year ending 30 June 20XX.
Date scheme commenced: Date/mth/year.

Ruling: Q1: Does Lot Z of the property satisfy the active asset test? | A1: No.

Relevant facts and circumstances: You inherited several hectares of land, from your partner upon their passing less than XX years ago. The property had been used for primary production for more than XX years. More than XX years ago, your partner acquired ownership of the property and continued to use the land for primary production purposes until their passing. Since your acquisition of the property, your primary production activities have included cattle farming and various primary production activities. During your ownership period, a consolidation of older land titles and a newer subdivision was undertaken at the behest of the of the local council to tidy up boundaries, redefine access, and freshen up holdings into allowable allotments. There were no changes to boundaries of paddocks at this stage. Lot Z along with the other lots contains large specific trees which frame the boundaries of paddocks across all of the landholding. On subdivision of the land, a number of parcels including a parcel identified as Lot Z were created. Lot Z is less than 1 hectare in size and contains a dwelling which has been situated in its current location since prior to your acquisition. The area of the dwelling is less than 5% of the total area of Lot Z. The dwelling has had various uses, however has been rented out prior to your ownership period commenced. You continued to rent out the dwelling during your ownership period until a few years ago. A retrospective valuation recently conducted, valued the property as at the date of your acquisition. A copy of your rates notice provides the property’s value, with limited capital improved value. Both the property and Lot Z have current specified market values. You have provided the details of income derived from the property, including primary production income across all titles and rental income from Lots Z & Y. You ran cattle at the property for a number of years, but ceased of all livestock operations due to the onerous and labour intensive nature of the activities. Since ceasing livestock operations, you have increased your cultivation and production activities. You recently introduced horticulture, as this was a less intensive primary production activity. For the most recent income year, you expect gross income from primary production, with expenses equal approximately half of gross income. You do not have a formal business plan but plan to continue with your horticulture and primary production activities. You are not engaged in any other form of employment. You have other interests, which you carrying out from your residence but do not treat as a commercially significant activity. You reside at the property and have had hands on involvement in relation to the primary production activities. Your GST registration was recently cancelled but you maintain an ABN. You do not have any other land that is used for primary production purposes. You do not have any formal qualifications but gained experience, having been involved in primary production activities at the property since your partner’s acquisition. You are a member of some relevant organisation. You have a Property Identification Code issued under the National Livestock Identification System. Produce from your horticulture activities is sold at Farmers Markets. Your product is sold to contract buyers. ● In a recent year you were very productive. ● In another recent year you were not very productive. You have previously advertised your product through a newspaper. You had an aggregated turnover of less than $$$ million from your primary production activities.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 995-1(1) | Income Tax Assessment Act 1997 Section 152-35 | Income Tax Assessment Act 1997 Section 152-40

Reasons for decision: Summary: The subdivided block, known as Lot Z, does not satisfy the active asset test. It is the view of the Commissioner that the main use of Lot Z was to derive rent. Furthermore, your primary production activities do not amount to carrying on a business and therefore you are not eligible to access the CGT small business concessions. | 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. The test period is from when the asset is acquired until the CGT event. If the business ceases within the 12 months before the CGT event (or such longer time as the Commissioner allows) the relevant period is from acquisition until the business ceases. 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 ● an intangible asset that is inherently connected with a business carried on (whether alone or in partnership) by you, your affiliate, your spouse or child, or another entity that is connected with you, carries on; for example, goodwill. Subsection 152-40(4)(e) of the Income Tax Assessment Act 1997 (ITAA 1997) states, however, that an asset whose main use in the course of carrying on the business is to derive rent cannot be an active asset unless the main use for deriving rent was only temporary. Taxation Determination TD 2006/78 Income tax: capital gains: are there any circumstances in which the premises used in a business of providing accommodation for reward may satisfy the active asset test in section 152-35 of the Income Tax Assessment Act 1997 notwithstanding the exclusion in paragraph 152-40(4)(e) of the Income Tax Assessment Act 1997 for assets whose main use is to derive rent? discusses the circumstances in which premises used in the business of providing accommodation for reward can be active assets notwithstanding the exclusion in paragraph 152-40(4)(e) of the ITAA 1997. If an asset is used partly for business and partly to derive rent at any given time, it will be a question of fact depended on all the circumstances as to whether the main use of the asset at that time is to derive rent. No one single factor will necessarily be determinative, and resolving the matter is likely to involve a consideration of a range of factors such as: ● the comparative areas of use of the premises (between deriving rent and other uses); and ● the comparative levels of income derived from the different uses of the asset. A pplication to your situation It is accepted that you have owned Lot Z since the passing of your partner as part of a larger land holding before it was subdivided. Therefore, as you have owned the asset for less than XX years, Lot Z is required to have been an active asset for at least half of your ownership period for the purposes of the active asset test. However, in this situation it is considered that the main use of Lot Z was to derive rent. Lot Z had been rented out since acquisition and prior to subdivision until recently. During this time, the habitable dwelling and outhouses represented less than 5% of the total area of Lot Z. We note that in the income year where you reported your highest gross primary production income, and had the entire available area of Lot Z been used for primary production purposes, an apportionment of the income derived from the land would result in only a small amount for the year being attributable to Lot Z; this is contrasted to a much larger amount received from rent. Over the years, any primary production income would equate to less than 0.5% of the income attributable to Lot Z during the years it had been rented out. Since you ceased renting out Lot Z, its main use cannot be considered to derive rent for that period, however for your total ownership period; it is considered that the main use of Lot Z has been to derive rent. Furthermore, to be considered an active asset, Lot Z (or the property prior to subdivision) would need to be used or held ready for use in the course of carrying on a business, among other criteria. While Lot Z (or the property prior to subdivision) was used for primary production activities, these activities do not necessarily amount to the carrying on of a business and therefore, may not satisfy the active asset test by this use. | Detailed Reasoning - Carrying on a business: Subsection 995-1(1) of the ITAA 1997 defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'. The question of whether a business is being carried on is a question of fact and degree. The courts have developed a series of indicators that are applied to determine the matter on the facts. Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? provides the Commissioner’s view of the indicators that are taken into account when determining when a taxpayer is carrying on a business of primary production. These indicators are not confined to primary production activities but also are applied to all manner of business activities. The factors considered important are: ● whether the activity has a significant commercial purpose or character ● whether the taxpayer has more than just an intention to engage in business ● whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity ● whether there is regularity and repetition of the activity ● whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business ● whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit ● the size, scale and permanency of the activity, and ● whether the activity is better described as a hobby, a form of recreation, or sporting activity. No one indicator is decisive. The indicators must be considered in combination and as a whole. Whether a 'business' is carried on depends on the large or general impression. Application to your situation Based on your circumstances and the information provided, you are not considered to be carrying on a business of primary production. The information provided in relation to previous years does not provide sufficient evidence that you were carrying on a business for those years. Your activities lack commercial character, and were of limited size and scale. You have also been involved in a number of different agricultural activities at various times with limited regularity, although your hay baling operations show some levels of repetition and regularity albeit on small scale. Your contentions You have stated that the property now known as Lot Z has been used or been available for primary production for a number of decades (prior to your ownership period). However, the relevant circumstances are those which are during your ownership period, where it appears that your activities do not amount to the carrying on of a business, and that the main use of Lot Z was to derive rent. We acknowledge that primary production activities at the property were impacted since the passing of your spouse, when you acquired the property. However, the relevant facts in this situation are in relation to the activities you carried out during your ownership period which involved the land now known as Lot Z. Although the value of the dwelling on Lot Z is limited in contrast to the land as noted in your valuations, this does not preclude from the main use of Lot Z being to derive rent. While you have provided that you receive a Primary Production Land Tax Exemption, access to CGT small business concessions does not necessarily follow. There are differences in the test to access the CGT small business concessions, and it your case, would be required to be carrying on a business. Furthermore, there is a significant difference, as there is a requirement that the land be used or held ready for use in the course of carrying on a business for income tax purposes. The test to determine the “main use” of an asset for income tax purposes differs from “dominant use” for state based Land Tax legislation. As previously discussed, the Commissioner has considered the follow elements in determining the main use of Lot Z: ● the comparative areas of use of the premises (between deriving rent and other uses); and ● the comparative levels of income derived from the different uses of the asset. | Detailed Reasoning - Conclusion: The main use of Lot Z during your ownership period is considered to have been to derive rent. Furthermore, the primary production activities that have been carried on at the property (including Lot Z) do not amount to the carrying on of a business, and therefore, as the property was not used or held ready for use in the course of carrying on a business it cannot be considered an active asset.