1051236914587 | Legal database

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Edited version of your written advice

Authorisation Number: 1051236914587

Date of advice: 13 June 2016

Ruling

Subject: Small business CGT concessions

Question

Will the Commissioner excise his discretion under subparagraph 152-35(2)(a)(ii) of the Income Tax Assessment Act 1997 to allow a longer period than 12 months between the cessation of the business and the relevant CGT event, that is, to shorten the active asset test period?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2015

Year ended 30 June 2016

The scheme commences on

1 July 2014

Relevant facts and circumstances

Company A

In 199X company A was incorporated. The initial shareholders were individuals.

In 199X the individuals disposed of their shares and A, B and C acquired shares company A.

Company A carried on a business.

Company B

In 200X the following transaction occurred:

● A sold all of their shares in company A to company B

● B and C sold some of their shares in company A to company B

In 200X the A Trust acquired all of B’s shares in company A.

In 200Y company A issued shares to company B and various other minority shareholders.

In 200Y the A Trust sold X% of the issued shares in company A to another minority shareholder.

In 200Z the A Trust repurchased the shares it sold in 200Y.

Between the period of 200Z and 20XX a dispute arose between C and company B in respect of the management and operation of company A.

In 20XX, C, the A Trust and the other minority shareholders initiated Court proceedings against company B.

In 20YY, company A was placed into external administration at the behest of company B. The business ceased to operate on or around this date.

In 20YY, company A entered into a Deed of Company Arrangement by which company B (through a subsidiary) acquired the business of company A. These actions rendered the shares in company A effectively worthless.

Under the court proceedings C, the A Trust and the other minority shareholders claimed that company B engaged in oppressive conduct in respect of company A.

The court proceedings were on foot for many years until their final resolution in 201X.

In 201X the Court found that C and the A Trust had been oppressed by company B and that they were entitled to an order that their shares in company A be purchased by company B.

The Court left the parties to determine the exact form of that order.

In late 201X C and the A Trust entered into a Settlement Deed with company B.

Pursuant to the Settlement Deed:

● The court proceedings were discontinued

● Company B agreed to pay the sum of $X (the settlement sum)

In late 20ZZ company A was deregistered with ASIC. On or around that time C and the A Trust’s shares were cancelled by the administrator.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 116-20

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 subparagraph 152-35(2)(b)(ii)

Reasons for decision

Section 102-20 of the ITAA 1997 provides that you make a capital gain or capital loss as a result of a CGT event happening to an asset in which you have an ownership interest. Section 108-5 of the ITAA 1997 provides that a CGT asset is any kind of property; or a legal or equitable right that is not property.

CGT event C1 happens if a CGT asset you own is lost or destroyed. The time of the event is when you first receive compensation for the loss or if you received no compensation, when the loss is discovered.

CGT event C2 happens if your ownership of an intangible CGT asset ends including by the asset being redeemed or cancelled. The time of the event is when you entered into the contracts that result in the asset ending or if there is no contract – when the asset ends.

Under section 116-20 of the ITAA 1997 the capital proceeds from a CGT event are the total of the money you have received or are entitled to receive in respect of the event happening.

In this case we consider that CGT event C2 occurred when the shares were cancelled. The proceeds received under the settlement deed are the capital proceeds that were received in respect of the event happening.

The active asset test

The active asset test is contained in section 152-35 of the ITAA 1997. 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 least 7.5 years during the test period.

The test period:

● begins when you acquired the asset, and

● ends at the earlier of

● the CGT event, and

● when the business ceased, if the business in question ceased in the 12 months before the CGT event (under subparagraph 152-35(2)(b)(ii) of the ITAA 1997 the Commissioner can allow a longer period than 12 months).

In this case, the shares acquired by C on 30 June 199X were owned for more than 15 years and were active for at least 7 and a half years. Therefore these shares satisfy the active asset test.

The shares acquired by C and the A Trust in 200X were owned for just over 13 years and were active for less than 5 years. The A Trust also acquired shares in 200Z which were owned for just over 11 years and were active for less than 3 years. These shares will not satisfy the active asset test unless the Commissioner exercises his discretion under subparagraph 152-35(b)(ii) of the ITAA 1997.

In determining if the discretion should be exercised, the Commissioner considers the following factors:

● whether there is evidence of an acceptable explanation for the period of extension requested and whether it would be fair and equitable in the circumstances to provide such an extension;

● whether there is any prejudice to the Commissioner if the additional time is allowed, however the mere absence of prejudice is not enough to justify the granting of an extension;

● whether there is any unsettling of people, other than the Commissioner, or of established practices;

● fairness to people in like positions and the wider public interest;

● whether there is any mischief involved; and

● the consequences of the decision.

Having considered your circumstances and the factors outlined above the Commissioner will exercise the discretion set out under section 152-35(2)(b)(ii) of the ITAA 1997. Until the court proceedings were finalised the shares could not be dealt with. Accordingly the Commissioner will exercise his discretion to allow a longer period than 12 months between the cessation of the business and the relevant CGT event, that is, to shorten the active asset test period.

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