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Capital Gains Tax on the Disposal of Farmlands or Small Business Assets

This article highlights certain key issued to be considered, but does not cover all the rules in detail. It is important to get specific advice tailored to your circumstances before attempting to rely on these concessions.

There have been many changes to the law in this area over recent years which have impacted the Capital Gains Tax (CGT) status of the sale of small business assets, including farmlands. The changes introduced a number of small business concession.

Due to these changes it is worthwhile considering all your options and getting advice in this very complex area before making any decision.

Basic conditions

There are a number of tests associated with the concession. The basic conditions include:

  • You, your connected entities and your affiliates and their connected entities have net assets worth less than $6 million.
    • Your net assets do not generally include your principal place of residence or superannuation.
    • Specialist advice needs to be obtained concerning “what is an affiliate?”
    • Some debts may be taken into account when considering whether the assets exceed or fall below the $6 million threshold.
  • Alternatively, if your assets are greater than $6 million, you must show that you are a “small business entity”.
    • To be considered a small business entity you must show that you’ve carried on a business in the relevant year and that your aggregated turnover has or is likely to be less than $2 million.
      • Your aggregated turnover includes the turnover of entities connected with you, your affiliates and entities connected with your affiliates.
  • That the asset which has been disposed of was an active asset.
    • An active asset must be used or ready for use in a business you carry on.
    • If you are involved in a farming business or actively involved in a share farming arrangement, the farm will be classed as an active asset. However if the property is leased for a long period, this can lead to the seller being disqualified from CGT Small Business Rollover concessions. Advice should be obtained as to how to satisfy these criteria.
    • An active asset must have been active for at least half the time you’ve owned it, or seven-and-ahhaf years if you’ve owned it for longer then 15 years.
  • Where a company or trust disposes of an asset, an individual seeking to qualify for concessions must satisfy the requirement of holding 20% of the control of a company.

Available Concessions

If you do satisfy the basis tests you may be eligible for one or more of the following small business concessions/discounts: 

  • A 50% general discount on any capital gain, provided the assets have been held for 12 months.
  • A further 50% active asset discount, leaving a gain of 25%.
  • The business roll-over concession which allows certain excess capital gains to be rolled over into the cost base of a newly acquired assets.
  • The retirement concession which allows you to effectively roll the capital gain into a superannuation fund if you are under 55. There is a limit to how much capital gain you can ignore under this concession.
  • The 15-year concession which allows you to completely ignore any capital gain relating to an asset which has been owned for at least 15 years and you are 55 or over and retire at the time of selling the asset.

The rules relating to the CGT small business concessions are complicated. In addition to the basic tests, each particular concession has certain rules which affect how and when it can be used.