ATO Interpretative Decision

ATO ID 2003/485

Income Tax

• This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Can the taxpayer apply the small business CGT concessions in Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997) to a capital gain made on the disposal of shares in a non-resident company that carried on a business in Australia?

Decision

No. Paragraph 152-40(3)(a) of the ITAA 1997 provides that a share in a company that is an Australian resident can be an active asset. Shares in a non-resident company will not qualify as active assets. Consequently the taxpayer will not be able to satisfy all of the basic conditions in Subdivision 152-A of the ITAA 1997 for the small business CGT concessions to apply.

Facts

The taxpayer, an Australian resident individual, owned shares in a company that was not a resident of Australia for tax purposes.

The company carried on businesses in Australia and other countries.

The taxpayer sold the shares and made a capital gain. The taxpayer wanted to reduce or disregard the capital gain by applying one or more of the small business concessions in Division 152 of the ITAA 1997.

The taxpayer satisfied the maximum net asset value test just before the shares were sold for the purposes of section 152-15 of the ITAA 1997.

The taxpayer was also a CGT asset concession stakeholder of the company within the meaning given in section 152-60 of the ITAA 1997.

The company satisfied the controlling individual test just before the time the shares were sold for the purposes of sections 152-50 of the ITAA 1997.

Reasons for Decision

To qualify for the small business CGT concessions, all of the basic conditions in Subdivision 152-A of the ITAA 1997 must be satisfied. One of the basic conditions is that the CGT asset that gives rise to a capital gain must satisfy the active asset test (paragraph 152-10(1)(d) of the ITAA 1997).

Section 152-35 of the ITAA 1997 provides that an asset satisfies the active asset test if it was an active asset at a particular time and for a particular period. Section 152-40 of the ITAA 1997 specifies when an asset is an active asset. Broadly an asset is an active asset if it is used or held ready for use in the course of carrying on a business.

Subsection 152-40(3) of the ITAA 1997 sets out the circumstances when a share can be an active asset. Paragraph 152-40(3)(a) of the ITAA 1997 specifically requires that the share must be a share in a company that is an Australian resident.

Therefore, shares in a non-resident company do not qualify as active assets.

Consequently, the taxpayer is unable to apply the small business CGT concessions to reduce or disregard a capital gain made from the disposal of shares in a non-resident company because all of the basic conditions in Subdivision 152-A of the ITAA 1997 have not been satisfied.

Year of income:  Year ended 30 June 2003

Legislative References:
Income Tax Assessment Act 1997
   Division 152
   Subdivision 152-A
   paragraph 152-10(1)(d)
   section 152-15
   section 152-35
   section 152-40
   paragraph 152-40(3)(a)
   section 152-50
   section 152-60

Keywords
Active asset test
Basic conditions for relief
Capital gains
CGT small business relief

Business Line:  Losses and Capital Gains Tax Centre of Expertise

Date of publication:  27 June 2003

ISSN: 1445-2782