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Edited version of your private ruling

Authorisation Number: 1012606444071

Ruling

Subject: Small business concessions

Question

Is the company entitled to apply the small business active asset reduction to the capital gain made in relation to the property?

Answer

No.

This ruling applies for the following period

Year ending 30 June 2013

Year ending 30 June 2014

The scheme commences on:

1 July 2012

Relevant facts and circumstances

The company purchased a block of land.

The company intended to redevelop, subdivide and build houses on the land. The company intended to sell the houses for a profit.

The company decided to invite new shareholders, with relevant expertise, into the company.

Various inquiries concerning redeveloping the land were made to surveyors, property experts, agents and the local council.

However, the company was notified that there were some legal restrictions and limitations for building houses and subdividing the land.

One of the directors observed the surrounding area and found that other suburbs were developing gradually as more and more people moved into the area.

After studies and discussions with experts, the company believed development restrictions and limitations imposed by the local council would be changed in the near future.

While waiting for the change in restrictions, the company considered introducing more shareholders as the development of the land required additional capital.

The local council proposed resumption of the property for environmental reasons.

The company objected to the proposed resumption, however after lengthy negotiations the local council progressed with their plans.

The land was compulsorily acquired in the relevant financial year.

The local council has made several compensation payments to the company by instalments in the relevant financial years.

The company does not own any other land that it intends to develop.

The company has not previously been involved in the development of land.

The property has remained vacant since the date of acquisition.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 subdivision 152-C

Income Tax Assessment Act 1997 section 152-15

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 subsection 152-40(1)

Reasons for decision

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:

Active asset test

A capital gains tax (CGT) asset will satisfy the active asset test if:

The test period beings when you acquired the asset and ends at the earlier of the CGT event and if the relevant business ceased to be carried on in the 12 months before that time - the cessation of the business.

Subsection 152-40(1) of the ITAA 1997 details that a CGT asset is an active asset at a time if it is used, or held ready for use, in the course of carrying on a business that is carried on by you, or your affiliate, or another entity that is connected with you.

Carrying on a business

Taxation Ruling TR 97/11 provides the Commissioner's view of the factors that are considered important in determining if you are in business for tax purposes. The factors are:

No one indicator is decisive. The indicators must be considered in combination and as a whole.

Application to your circumstances

In this case, the company purchased and in the relevant financial year it was compulsorily acquired by the local council. For this asset to satisfy the active asset test, it must have been used in the course of carrying on a business by the company for at least half of the ownership period.

Having regard to the circumstances and facts outlined above, we do not consider that the company was carrying on a business of property development. The company has not embarked on a definite and continuous cycle of operations designed to lead to the sale of the land. The activities undertaken by the company are preparative and there have been no council approvals, construction or other works conducted on the land. The land has remained vacant for the entire ownership period and we do not consider that the company has more than just an intention to engage in business.

As the company was not carrying on a business, the property has not been used in the course of carrying on a business for at least half of the ownership period. Therefore, the company is not entitled to apply the 50% active asset reduction.


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