1 Was Partnership A and B carrying on a business of horse agistment in the 20XX-XX and 20XX-XX income years for the purpose of accessing Small Business CGT Concessions under Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997)?
1 Yes. Question 2 Is Person A eligible for the small business 15-year exemption in section 152-105 of the ITAA 1997 to disregard the capital gain made on the sale of Property X? Answer 2 Yes. Question 3 Is Person B eligible for the small business 15-year exemption in section 152-105 of the ITAA 1997 in relation to the sale of Property X? Answer 3 No. This ruling applies for the following periods: Year ended 30 June 20XX Year ending 30 June 20XX The scheme commenced on: 1 July 20XX
Person A and Person B formed Partnership A and B (You) trading as Business X. You do not have a formal partnership agreement; however, you have a verbal agreement that everything will be split 50/50. You have a business plan and a joint bank account for the horse agistment activity. Person A acquired a property on a specified date, in their name only. Several years after the purchase, the local council changed the address to Property X (the Property). The Property is XX acres. You provided a list of features and buildings present on the Property at the time of acquisition. Person A and Person B built a home on the Property. At the time of acquiring the Property, there was an agricultural business that had been established and wound up by the previous owner. You did not earn any income from this agricultural business. Business X Person B moved to the Property in January 200X. Shortly after Person A reached the age of XX years old in 200X, they ceased employment and decided to move to the Property. Person A resided at the Property full-time from late 200X. You registered for the partnership ABN in July 200X. You were registered as a partnership for GST commencing from 1 July 200X.
You provided documents that outlined the proposal and business plan for the horse agistment and riding facility at Property X. The plan outlines the activity you intend to provide, who is your client base, what improvement and new facilities and amenities you intend to develop, and the revenue and expenses forecast. Person A undertook a course in pasture management, and relied on their experience from agisting their family horses at other properties to ensure that you met industry standards. Horse agistment Person A established the horse (including pony) agistment activity when they moved to the Property full-time in 200X. You advertise online through a social media site and through your own website. The website displays services offered and facilities available with a range of pictures for visual representation. Within the first few years you: • built fencing for the property and paddocks. • built a new machinery shed. • built a private tack storage room for private lock-up storage of saddles, bridles, rugs etc. • the tack storage shed was expanded outside with the addition of undercover tie-up areas.
• extensions along the side of all sheds to provide under-cover float parking bays. • built a new all-weather sand arena. • set-up a jumps area. • created riding trails with cross-country jumps. • installed fully electric fenced paddocks. • planted trees. You agisted approximately XX horses for the first XX years whilst you built up business and finalised the improvements listed above. The entire Property is used for agistment and riding except for the principal place of residence area around Person A and Person B's residence which is approximately 2 acres. When an agistee chooses your services, you issue to them a written contract (the Contract) and additional documentation. The Contract provides that the additional information is incorporated in the Contract. It is a detailed document of the various topics that agistees are required to know about the agreement. You also request them to complete an application and induction.
The agistee provides their name and contact details, a self-assessment of their horse-riding level and their horse riding/handling background and experience on the application form. The Contract states the agistee owns or legally possesses the horse and foal (if any). The agistee acknowledges the land and the facilities are suitable for the horse. The agistee has the right to agist the horse on the land during the stated dates, unless the contract ends by the agistee providing four weeks prior notice. The agistee is allowed on the Property during hours stated on the contract or at other times by prior arrangement if the horse is sick or injured. The agistee may have limited or no access to the Property by reason of infectious or contagious disease. Under the Contract you have the obligation to provide the horse with a drinkable water source. A benefit to the location of the Property are the riding trails accessible in the bushland surrounding the Property. You carry out the following on the Property: • tractors used to deliver round bales to paddocks. • paddock weed spraying. • fallen tree removal.
• fixing fences and gates • maintaining road and pathway surfaces, jumps maintenance. • hay and general rubbish removal • irrigation and drinking water maintenance Agistees are allocated a private paddock and have shared access to the riding facilities. Owners choose which paddocks are to be used and which paddocks are rested. Agistees are shifted between paddocks accordingly. Agistees are required to clean their paddock of manure at least X times a week, or they can pay you to carry out the cleaning duties. All paddocks are permanently fenced with treated pine posts and electric wire. Each paddock consists of X number of separate grazing strips that attach to a central post-and-rail home yard. The smallest paddock available for agistment is X acre and the largest paddock is X acres. The facilities available for agistees include: • Use of the paddock • Dedicated lock-up tack room and feed storage • Full use of riding Facilities including arena lights and float storage You only offer long term agistment.
Agistees have the right to 24 x 7 x 365 access to the property. Out of courtesy you ask that agistees notify you by text prior to out of usual hours access. Your hours can vary depending on the season and the weather. Person A spends approximately XX hours per week on the horse agistment activity and is responsible for all property maintenance and improvements and bookkeeping. These are Person A's approximate hours for the last X years. Person B spends approximately XX hours per week on the horse agistment activity and is responsible for client liaison. When Person B was providing horse lessons, they would work approximately XX hours a week. Person A and Person B have engaged other people to assist them carrying on the activity as they have grown older. For the most part, these people are current agistees who carry out work and duties on the Property and receive a discount off their monthly agistment fee. If required, when you are away, they will contact an external handyman if a maintenance or repair issues arises. You provided the specific rates that you charge for horse agistment for small and large paddocks. The services included in your agistment fee includes:
• a feed-up run once a day with feed supplied by the owner. The standard feed service is an evening feed that includes putting out hay, and/or a hard feed mixed with water. • nightly lock up the horse, if requested by owner. • undercover parking areas for floats are allocated to agistees on a first-come, first-served basis. Agistees can cleaning their floats in this area. If an agistee does not have an undercover parking area for their float, they can arrange with the Property owner to park the float elsewhere. • manure collection service from the clean-up of the paddock carried out by the agistee. • use of equipment available on the property. You also offer additional services including daily care of a horse at additional costs and provided a detailed list of those services. The agistment payment is due in advance on the XX of the month. XX month payment is required to be paid as bond until the agistee gives notice of leaving.
If the agistee's contract is terminated and the agistee has unpaid fees or owes you a debt, you will exercise a lien over the horse and goods until the debt is paid or the liability is satisfied. You have XX paddocks and during the 20XX income year agisted XX horses, X of which you provided full livery services which include all aspects and services of day-to-day care of the horse outlined earlier. Agistees were not invoiced separately for the full livery services. The monthly agistment fee was increased in consideration of the extra services. After entering the contract of sale on the Property in July 20XX, you continued to carry on your business activities and gradually had X horse owners cease using your agistment services. Horse riding Business X provided horse riding lessons on the Property from approximately the 200X calendar year to the 20XX calendar year. Lessons were X hours in duration and were instructed by Person B. Approximately XX lessons were conducted each week.
Your business plan outlined the riding lessons were initially conducted by a qualified horse-riding instructor. Person B was working on attaining the relevant qualification to carry on the riding lessons themselves. You ceased your horse-riding activity due to your pony's getting too old for riding lessons. Person B has previous experience in horse riding as they were a horse rider as a child. Your horse riders were required to agree and sign a risk warning, waiver and indemnity form. Profit and loss from activities carried on The agistee is normally paying the fee electronically. You do not issue an invoice or receipt for the payment received from the agistee. Person A completes the bookkeeping for the activity. Each quarter Person A provides the bookkeeping records to the tax agent. The tax agent completes the business activity statement each quarter and the income tax return annually. You have provided information that shows the amount of income you have derived from your activity in recent years and the expenses incurred. Contract of sale Person A entered a contract to sell the Property on a specified date. The settlement date and sale price were provided in your application.
The farm and equipment were included as goods sold with the land in the contract of sale. There was no separate contract for the sale of Business X. CGT Concessions At the time of the CGT event Person A was XX years old and Person B was XX years old. Person A and Person B had net assets of less than $6 million just before the sale of the Property. Upon settlement, Person A and Person B will be fully retired and intend to use the proceeds from the sale of the property to make contributions to their superannuation funds.
Income Tax Assessment Act 1997 Division 152 Income Tax Assessment Act 1997 section 152-10 Income Tax Assessment Act 1997 paragraph 152-10(1)(a) Income Tax Assessment Act 1997 paragraph 152-10(1)(b) Income Tax Assessment Act 1997 paragraph 152-10(1)(c) Income Tax Assessment Act 1997 subparagraph 152-10(1)(c)(i) Income Tax Assessment Act 1997 subparagraph 152-10 (1)(c)(ii) Income Tax Assessment Act 1997 paragraph 152-10(1)(d) Income Tax Assessment Act 1997 section 152-15 Income Tax Assessment Act 1997 section 152-35 Income Tax Assessment Act 1997 subsection 152-35(1) Income Tax Assessment Act 1997 subsection 152-35(2) Income Tax Assessment Act 1997 section 152-40 Income Tax Assessment Act 1997 section 152-105 Income Tax Assessment Act 1997 section 152-330 Income Tax Assessment Act 1997 secti
Question 1 Summary You have carried on the activities of horse agistment and horse-riding lessons on Property X. The services and facilities you provide for the horse agistment and the business manner how you carry on the activity demonstrates you were carrying on an activity that is more than an agistment activity. Therefore, the Commissioner considers you carried on a business as a partnership in relation to the horse agistment activities for the relevant income years. Detailed reasoning The capital gains tax (CGT) provisions provide some small business relief in Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997) for taxpayers who were carrying on a small business. The definition of a small business entity is relevant for Division 152 purposes. Small business entity Subsection 328-110(1) of ITAA 1997 provides the definition of a small business entity: You are a small business entity for an income year (the current year) if: (a) you carry on a business in the current year; and (b) one or both of the following apply:
(i) you carried on a business in the previous year and your aggregated turnover for the previous year was less than $10 million (ii) your aggregated turnover for the current year is likely to be less than $10 million. Therefore, in your case, we need to consider if you were carrying on a business in the 2023-24 income year. Carrying on a business Business is defined in section 995-1 of the ITAA 1997 to be 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'. Taxation Ruling TR 97/11 Income Tax: am I carrying on a business of primary production? (TR 97/11 ) provides the Commissioner's view of the factors used to determine if a taxpayer is in business for tax purposes. In the Commissioner's view, the factors that are considered important in determining the question of business activity as outlined in TR 97/11 are as follows: • 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. The above factors must be considered in light of one another, with no single factor being determinative of whether the taxpayer is engaged in carrying on a business. Even where any one factor is not present, this will not necessarily mean that a business is not carried on: Evans v Federal Commissioner of Taxation (1989) 20 ATR 922. Primary production business
Subsection 995-1(1) of the ITAA 1997 provides that a taxpayer carries on a primary production business if the taxpayer carries on a business of maintaining animals for the purpose of selling them or their bodily produce (including natural increase). Agistment business The Macquarie dictionary defines agist as 'to take in and feed or pasture (livestock) for payment'. Agistment is defined as 'the act of agisting' or 'the price paid for pasturing livestock'. Agriculture Victoria defines agistment in relation to horses as 'A landholder allows another person's horse to be kept, or agisted, on his or her property for a fee'. Agriculture Victoria also states the 'horse owner may also be liable for the costs of feed, exercising, training and caring for their horse'. The nature of agistment activities has been considered in a number of cases which are relevant in the circumstances of this application. 'Agistment' was defined in Sinclair v Judge [1930] St R Qd 220 ( Sinclair case ) as '...the act of taking another's stock to graze, pasture or feed on land with an implied agreement to redeliver it to the owner on demand.'
Taxation Ruling IT 225 states that agistment income may be part of primary production income if agistment is part of the normal activities of primary production or arises from the use of the assets of primary production. However, the leasing out of land for agistment does not constitute the carrying on of a business. The question of whether agistment activities amount to carrying on a business was discussed in the AAT decision of Case 47/95 95 ATC 404; 31 ATR 1146 ( Case 47/95 ), in which Associate Professor Fayle stated: Agisting another's livestock does not ordinarily constitute the carrying on of a business. Agistment fees ordinarily are in the nature of rent. However, where the land owner is charged with management, maintenance and care of the animals agisted then it is possible that the person is carrying on a business, the reward for which is the agistment fee. This is more likely if the level of the agistment fee depended on the effective management, maintenance and care of the animals. 31 ATR 1146 at 1152.
Case 47/95 involves a partnership that owned 400-acre (180 hectare) property. The partnership contended it was carrying on a primary production business and the only income it derived was from agistment. Based on the evidence, the Tribunal's Senior Member found the partnership was not carrying on a business. There are also a number of cases where agistment activities were considered to amount to carrying on a business. In Hope v Bathurst City Council , (1980) 144 CLR 1 ( Hope v Bathurst City Council case)
, the taxpayer was the owner and occupier of land near Bathurst. He appealed to the Land and Valuation Court against the decision of the Bathurst City Council that his land was not rural land, and therefore he was not entitled to the benefit of a lower general rate. 'Rural land' was defined as '...a parcel of ratable land... which is wholly or mainly used for the time being by the occupier for carrying on one or more of the businesses or industries of grazing...'. Over 80% of the land's total area (15.47 acres) was used by the appellant for the agistment of other persons' cattle or horses. Most of the land had been pasture improved and maintained; the appellant erected fences to ensure good stock control, kept the fences in repair and installed and maintained troughs for stock watering. The appellant had agisted stock on the land continuously since 1965 and had advertised the availability of the land since this time. The appellant kept detailed records of income and expenditure and sought and received expert advice on the care and use of the land.
Rath J. observed there appeared to be a minimum of activity on the appellant's land and held that 'as a matter of fact the appellant's use of the land, albeit for commercial purposes and for the purpose of profit, was not significant enough to bring it within the scope of the common or general meaning of either of the words 'business' or 'industry''. This decision was appealed to both the Court of Appeal and High Court. The High Court allowed the appeal, and held that the appellant was in fact carrying on a business: Transactions were entered into on a continuous and repetitive basis for the purpose of making a profit. The activity had a permanent character in that it had been carried on without interruption since 1965. The appellant sought customers by advertising and kept appropriate financial records. The land, though small in area, was put to its best potential use and the pastures were improved and facilities including fences were provided for that use. There is nothing in the findings to suggest that the activities were other than genuine and real. Application to your circumstances
In your circumstances, you were not carrying on a business of primary production as you were not maintaining animals for the purpose of selling them or their bodily produce. In the relevant income years, you carried on activities relating to the agistment of horses. We will now consider your facts and circumstances to determine if you were carrying on a business of agistment. Each of the indicators outlined in TR 97/11 for a taxpayer to be carrying on a business activity will be applied to your facts and circumstances: • whether the activity has a significant commercial purpose or character.
you prepared a business plan and a proposal for funding. The business plan contained information about the activities you would provide at the Property. Construction and improvements to the Property you intended to make for the purposes of carrying on the horse agistment and horse-riding activities. The business plan considered who would be your client-base looking for quality pasture with well irrigated paddocks, manure and daily feed service, personal lock-out tack storage and a variety of riding locations. Your business plan also included estimated cashflow from activities over the first few years and detailed how you intended to service the loan. the Property you operated the activity from is approximately XX acres. The Property had XX paddocks, a machinery shed, private tack storage room, feed shed, sand arena, and riding trails. The facilities and services offered were sufficient for your size and scale to generate a profit. • whether the taxpayer has more than just an intention to engage in business.
you carried on the activities of horse agistment and provided additional services either as included in the fees charged or as an additional fee for each service provided. Agistees also have access to riding and storage facilities available on the Property. you had prepared a written contract between you and the agistee and provided additional documentation. These documents outlined each parties' rights and obligations and also the instructions about the day to day operation of the activity. agistees complete an application form providing personal information, horse riding and handling background, experience, and a self-assessment. The document also contains an induction section that records what information was provided to the agistee and what they were shown on the Property to ensure they were knowledgeable about the day-to-day operation of the activity. the business plan provides a clear purpose and understanding of the activities you intended to carry on. The business plan detailed how you proposed the activities would be profitable and how you intended to service the loan especially in the first few years.
• whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity. your business plan detailed how you expected the activities to make a profitable activity. you carried on the activities in a business-like manner establishing the necessary documentation and procedures for the activities to operate on a day-to-day basis. You provide clear communication to all parties what is expected as you carry on the activities. the quality of the pastures and location of the property are key characteristics of the property that are main contributors to the prospect of profit gained from the activity. You regularly carry out maintenance of the Property to ensure the paddocks and surrounding land are good quality and the environment is safe for agistees and visitors. Your agreement ensures the agistees contribute to the quality of the paddocks and a safe environment. You are located sufficiently near a wide population from where you may attract your client-base.
apart from the services you provide, the facilities, amenities and the nearby horse-riding trails available for your clients assist in attracting a client base to your horse agistment activity. you have recorded in your record keeping your activity making a profit at least in the last four years. • whether there is repetition and regularity of the activity. you carry out the care for the horses and property maintenance in your activity in a repetitious and regular manner. The activity has continued because your paddocks tend to be occupied with agistees arranging with you to keep their horse there at the Property. You carry out the daily feed and the nightly lock-up of the horse, if the agistee has requested it. Daily you are maintaining the Property and responding if something needs to be fixed or repaired to ensure you provide a safe environment for visitors to the Property. What and the amount of maintenance carried out to the Property is also dependent on the season.
you are ensuring the care and safety of the horse regardless of if the agistee is attending the Property or is away from the Property. The agreement you put in place outlines the obligations of the agistee and yourself in the care of the horse. You require the agistee to provide the contact details of their vet. In the case of emergencies and when the agistee can't be contacted, you'll contact the vet if the agistee's horse is sick or injured.
you carry out client liaison in your activity in a repetitious and regular manner. You have up to XX paddocks available for agistees to contract with you to use to keep their horse. You have from time-to-time new agistees that you need to discuss with them their rights and obligations under the contract and how the activity is carried on daily. You would require the new agistee to complete a new application and you would carry out an induction with them. You would also need to manage the client relationship upon termination of the contract. On a day-to-day basis, you need to work and communicate with your clients to ensure the activity can continue in a safe and healthy manner. You may need to remind your clients when they are not meeting their responsibilities as per the contract. • whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business.
the contract states the agistee is permitted on the Property between specified hours or at other times by prior arrangement with you such as when the horse is sick or injured. The agistees are allocated a private paddock by you. You may request the agistee to move to another paddock if the paddock is required to be rested. The agistee is allocated storage facilities during their induction. The allocation of an undercover float parking bay is based on a first come, first serve basis. The agistee is sharing facilities on the Property with other agistees. There are specified areas on the Property that the agistees are not allowed to access. the contract between you and the agistee does not provide the agistee a right to exclusive possession of the paddock or the Property and its facilities. You continue to exercise general control of the Property and who you permit to access the Property. The agistees are sharing facilities and need to negotiate with other agistees the use of facilities while on the Property. • whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit.
you prepared a business plan when you decided to acquire the Property and to carry out proposed improvements for the purposes of carrying on the horse agistment and horse-riding activities. The business plan includes a funding proposal outlining how you needed to borrow funds to acquire the property and carry out improvements. you organise and prepare for the agistee and yourself a formal written contract. Each party's rights and obligations are set in the contract. you require the agistee to complete an application form where they provide their name and contact details, their vet's contact details and complete a self-assessment and provide background details of their horse riding and handling. you carry out an induction with the agistee when they initially agree to use your services. The induction includes showing the Property to the agistee and making them aware of the areas and facilities they can use and how the Property operates day to day.
you will keep and maintain records for tax and other purposes. Person A completes the bookkeeping for the activity. Person A provides the records to the tax agent each quarter who to prepares and lodge the business activity statement (BAS) and the income tax return. you do not issue invoices or receipts to agistees when they pay their agistment fee at the start of the month. The agistee are paying your electronically from their bank account and you believe in doing this they have a record. you have opened a separate bank account for the activity. you have a website that displays to users the services you provide and the facilities that are available. The website shows pictures of the Property providing users visual knowledge of what they can expect if they choose your Property and services. • the size, scale and permanency of the activity. your activity would be considered reasonable in scale and size. The Property is X acres and has XX permanent paddocks. It's acknowledged that the similar activity is carried on by others that are smaller and larger in size and scale.
the activity is generally operated by yourself, or you engage X agistees to assist you to carry out work on the Property as you have grown older or when you are away. you have been carrying on the activity for approximately XX years from the Property. • whether the activity is better described as a hobby, a form of recreation or a sporting activity. agistees are required to know and understand the risks that exist when handling horses. You have included this in your contract. The risks associated with horse ownership and handling is also outlined in other documents such as the application and induction. the activity requires lengthy hours of your time to carry on the activity. you have numerous documents that have various purposes. You ensure the administration of the activity is established. it is the agistees who are likely to gain the recreation from the activity carried on. Conclusion On the balance of the facts and circumstances applied to the above indicators, the Commissioner is satisfied that you are carrying on the horse agistment activity as a business. Your activities can be likened to that of the
Hope v Bathurst City Council case where a large percentage of your land was used for horse agistment activities, and transactions were entered into on a continuous and repetitive basis for the purpose of profit. You made improvements to the land such as erecting fences, storage bays, and an arena, and maintained these improvements along with irrigation and drinking water. You built relevant facilities and amenities on the Property for your clients. In addition to standard services, you also provide extra services such as day-to-day services to care for horse for additional charges if required by agistees. Customers were sought by advertising through an online website, and you have kept detailed records of income, expenditure, and customer contracts. You would not be considered to be carrying on a primary production business because your activity does not involve the maintaining of animals for the purpose of selling them or their bodily produce. The Partnership would be considered a small business entity in accordance with section 328-110 of the ITAA 1997. In your case, in the relevant income years, • you carried on a business in the current year; and
• you carried on a business in the previous year and your aggregated turnover for the previous year was less than $10 million. Your affiliates and connected entities have been considered in the calculation of your aggregate turnover. Question 2 and Question 3 Summary As the Property title was in Person A's name only, upon the sale of the Property there is no CGT event for Person B as such they do not meet the basic eligibility conditions for Small Business CGT Concessions. Person A satisfies all basic conditions for the Small Business CGT Concessions and is also eligible for the small business 15-year exemption under section 152-105 of the ITAA 1997. Detailed Reasoning Division 152 includes several small business concessions that allow capital gains to be reduced by the various concessions in the Division. To qualify for the small business CGT concessions, the 'basic conditions' that are common to all the concessions must be satisfied. In addition, some of the concessions have additional specific conditions that must also be satisfied. Basic Conditions The basic conditions are specified in Subdivision 152-A. Subsection 152-10(1) states:
A capital gain (except a capital gain from CGT event K7) you make may be reduced or disregarded under this Division if the following basic conditions are satisfied for the gain: (a) a CGT event happens in relation to a CGT asset of yours in an income year; (b) the event would (apart from this Division) have resulted in the gain: (c) at least one of the following applies: (i) you are a CGT small business entity for the income year; (ii) you satisfy the maximum net asset value test; (iii) you are a partner in a partnership that is a CGT small business entity for the income year and the CGT asset is an interest in an asset of the partnership; (iv) the conditions mentioned in subsection (1A) or (1B) are satisfied in relation to the CGT asset in the income year; (d) the CGT asset satisfies the active asset test. We will consider how the basic conditions apply to each party: Person A In this case, Person A is the sole owner of the Property. The basic conditions in subsection 152-10(1) are applied to Person A's circumstances: Paragraph 152-10(1)(a) - A CGT event happens
CGT event A1 has happened on the sale of the Property. The Property is solely in Person A's name. Consequently, Person A has satisfied the condition that a CGT event has occurred. Paragraph 152-10(1)(b) -The event results in capital gain Subsection 104-10(4) states you make a capital gain if the capital proceeds from the disposal are more than the asset's cost base. A capital gain will be made by Person A on the disposal of the Property. This condition has been satisfied. Paragraph 152-10(1)(c) - one of the requirements listed is satisfied One of the requirements listed at subparagraphs 152-10(1)(c)(i) to (iv) must be satisfied. Subparagraph 152-10(1)(c)(i): whether you are a CGT small business entity A CGT small business entity, as defined in subsection 152-10(1AA) is: (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. Person A is not carrying on a business as an individual. Person A is carrying on a business as a partner in partnership with Person B. Therefore, Person A does not satisfy this requirement.
Subparagraph 152-10(1)(c)(ii): whether you satisfy the maximum net value asset test The maximum net value asset test is specified in section 152-15 as follows: You satisfy the maximum net asset value test if, just before the *CGT event, the sum of the following amounts does not exceed $6,000,000: (a) the net value of the CGT assets of yours; (b) the net value of the CGT assets of any entities connected with you; (c) the net value of the CGT assets of any affiliates of yours or entities connected with your affiliates (not counting any assets already counted under paragraph (b)). An entity is 'connected with' an entity if either entity controls the other, or both are controlled by another entity, in a way described in section 328-125 of the ITAA 1997. Broadly, a company will be directly controlled by another entity, if that other entity, its affiliates, or that other entity together with its affiliates, own or have the right to acquire at least 40% of the company's income distribution, capital distribution or its voting rights.
An individual or a company is an affiliate of yours if the individual or company acts, or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you, in relation to the affairs of the business of the individual or company (section 328-130). Immediately prior to the sale of the Property, the net value of the relevant CGT assets of Person A, any connected entities, and affiliates, did not exceed $6 million. Consequently, the maximum net value asset test is satisfied. Paragraph 152-10(1)(d) - CGT asset satisfies the active asset test To satisfy this condition, the CGT asset must be an 'active asset' and it must satisfy the 'active asset test'. Section 152-40 provides that a CGT asset is an 'active asset' at a time, if at that time you own the asset and it is used, or held ready for use, in the course of carrying on a business that is carried on by you, your affiliate, or another entity that is connected with you. Subsection 152-35(1) states: A CGT asset satisfies the active asset test if:
(a) 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 period specified in subsection (2); or (b) 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 1/2 years during the period specified in subsection (2). Subsection 152-35(2) states the period begins when the asset is acquired and ends at the earlier of the CGT event or the cessation of the business. The Property is a CGT asset, and it is an active asset as defined in section 152-40. The Property was acquired in April 200X and was used in the course of carrying on of business activities from approximately 200X to 20XX calendar year. Therefore, the active asset test in subsection 152-35(1) is satisfied because the asset has been owned for more than 15 years and was an active asset for a total of at least 7 ½ years. This requirement is satisfied. Person B
In this case, Person B is not an owner of the Property. The business of horse agistment has not been sold separately to the Property. As the Property is not Person B's CGT asset, the basic conditions in subsection 152-10(1) cannot be applied to Person B's circumstances. 15-year exemption: whether Person A is entitled to apply the small business 15-year exemption Section 152-105 of the ITAA 1997 states you can disregard a capital gain from a CGT event happening to a CGT asset if you: • satisfy the basic conditions for the CGT small business concessions • continuously owned the CGT asset for the 15-year period ending just before the CGT event happened. If you are an individual, you must have been: • at least 55 years old at the time of the CGT event and • the CGT event happened in connection with your retirement, or permanently incapacitated at the time of the CGT event.
Whether a CGT event happens in connection with an individual's retirement depends on the particular circumstances of each case. There would need to be at least a significant reduction in the number of hours the individual works or a significant change in the nature of their present activities to be regarded as a retirement. However, it isn't necessary for there to be a permanent and everlasting retirement from the workforce. A CGT event may be in connection with your retirement, even if it occurs at some time before retirement. Whether particular cases satisfy the conditions depends very much on the facts of each case. The Explanatory Memorandum to the New Business Tax System (Capital Gains Tax) Bill 1999 makes the following comments about the requirement to be permanently incapacitated or retiring as one of the conditions for the concession: 1.68 One of the requirements of this concession for an individual small business taxpayer is that they must be either permanently incapacitated at the time of the CGT event, or at least 55 years old and using the capital proceeds for their retirement.
This wording would suggest that the funds arising from the disposal of the asset must predominantly be intended to fund the retirement of the individual (whether or not supplemented by other monies). In this case the Property's use was an integral part of the agistment business activities conducted in a partnership between Person A and Person B and it is reasonable to conclude from the information provided Person A will be fully retired on the sale of the Property and the proceeds from the sale will be used for their superannuation contributions. If a CGT event occurs in connection with an individual's retirement, under the small business concessions, an individual can choose to apply the retirement concession or the 15-year exemption. If an individual applies the retirement concession, the lifetime time limit of $500,000 is applied to their choice. In accordance with section 152-330 of the ITAA 1997, the 15-year exemption has priority. The lifetime limit is not applied because under the 15-year exemption the entire gain is disregarded. Conclusion
The Property was purchased and sold solely in Person A's name. There was no separate contract of sale for Business X, and Person B was not listed on the title of the land. A CGT event did not occur for Person B as they were not the owner of the CGT asset and therefore does not satisfy paragraph 152-10(1)(a) of the ITAA 1997. Consequently, Person B is not eligible for any Small Business CGT Concessions in relation to the sale of the Property. As outlined above, Person A satisfies all the basic conditions for the Small Business CGT concessions outlined in section 152-10 of the ITAA 1997 in respect to the disposal of the Property. As Person A is over the age of 55, and the disposal is in connection with his retirement, Person A is eligible for the small business 15-year exemption in section 152-105 of the ITAA 1997 to disregard the capital gain made on the sale of the property.