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Ruling

Subject: Active Asset Test

Question 1

Will your property used by a connected entity's business satisfy the requirements of Subdivision 152-C of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the small business 50% reduction?

Answer

No.

Question 2

Will the Commissioner allow under subparagraph 152-35(2)(b)(ii) a longer period after the business has ceased to dispose of the premises?

Answer

No.

This ruling applies for the following period

Year ending 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts

You purchased a property after September 1985.

Shortly before the purchase of the premises, you approached the Council Department of Town Planning to discuss the proposed commencement of a business at the premises. The Department of Town Planning provided you with strong endorsement and support to commence a service business on the premises.

As soon as the sale of the property was advertised the Department of Town Planning suggested that, rather than only operating a small service business, the size of the premises that you intended to purchase would allow you to operate a larger business as there was great demand for services in the area. Such an operation, however, required both the suspension of activities in offering services through a smaller business, and an extension of the existing building on the premises.

Following the Department of Town Planning's suggestion, you organised finance for the purchase of the property and extension works, and organised the requisite planning, building permits and contracts for the extension works. Though you held legal title to the property, a connected entity was able to use the property for their business purposes. You have at all times since the purchase of the property made it available to the connected entity for the use by the business.

Rather than commencing advertisements for the smaller service business, advertisements for the business were delayed until the extension works were in an advanced stage.

The connected entity commenced the service business after renovations were completed.

Unfortunately, due to the ill health of a family member the connected entity was not able to continue running the service business and sold the business.

You have advised that your net asset value is less than $6 million.

You now intend to sell the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 152-35

Income Tax Assessment Act 1997 Section 152-40

Income Tax Assessment Act 1997 Section 152-10

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: 'Part IVA: the general anti-avoidance rule for income tax'.

Reasons for decision

Unless otherwise stated, all legislative references in the following Reasons for Decision are to the Income Tax Assessment Act 1997.

Summary

You cannot apply the small business 50% reduction as discussed in Subdivision 152-C to your property.

Detailed reasoning

Subdivision 152-C tells you how to apply the small business 50% reduction. A capital gain is reduced by 50% if the basic conditions in Subdivision 152-A are satisfied. No other specific conditions must be satisfied in order to apply the 50% reduction.

Subsection 152-10(1) contains the following basic conditions to be satisfied:

o a capital gains tax (CGT) event happens in relation to a CGT asset of yours in an income year. This condition does not apply in the case of CGT event D1.

o the event would (apart from Division 152) have resulted in the gain

o at least one of the following applies:

o you are a small business entity for the income year

o you satisfy the maximum net asset value test in section 152-15

o you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an interest in an asset of the partnership

o the conditions in subsection 152-10(1A) or (1B) are satisfied in relation to the CGT asset in the income year

o the CGT asset satisfies the active asset test in section 152-35.

All of these basic conditions need to be satisfied for you to qualify for the small business CGT concessions.

In your case a CGT event A1 will occur upon disposal of the premises, the occurrence of CGT event A1 would, apart from the application of Division 152, have resulted in a capital gain and you satisfy the net asset value test.

Active asset test

The active asset test in section 152-35 requires the CGT asset that gave rise to the capital gain to be an active asset for a particular period. The period begins when you acquire 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 or any longer period that the Commissioner allows - the cessation of the business.

As you owned your property for more than 15 years, this test will be satisfied if the property was an active asset of yours for a total of 7 ½ years during your period of ownership.

Active asset

Section 152-40 discusses the meaning of the term 'active asset', and at subsection 152-40(1) states, in part, 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 or your affiliate, or another entity that is connected with you.

There are two aspects to this:

· the asset needs to be 'held ready for use' - in a state of preparedness so that a business is able to be carried on from it, and

· there must be a business already being carried on, as indicated by the words 'in the course of'.

After the property was purchased, renovations commenced and during that time the activities of the connected entity were only preparatory in nature as they had not yet started carrying on a business. It is not sufficient that the asset is held ready for use in a future business, or one that has not yet commenced.

The asset may have been 'held ready for use' when you purchased it, but as the connected entity did not commence carrying on a business until a later time, it was initially not held ready for use in the course of carrying on a business.

You have owned the property for more than XX years, as such to satisfy the active asset test the property needs to be an active asset for X years.

The period the property was used by the connected entity is less than X years and therefore does not satisfy the requirements of the active asset test under section 152-35, unless the Commissioner exercises the discretion under subparagraph 152-35(2)(b)(ii), to treat a particular date as the end date for the active asset test.

The sale of the premises did not occur within 12 months of the cessation of the business of the company therefore, the active asset test will only be satisfied if the Commissioner allows a longer period under subparagraph 152-35(2)(b)(ii).

Commissioner's discretion

You have requested that the Commissioner apply his discretion to extend the period of time beyond the 12 months allowed for under subparagraph 152-35(2)(a)(ii). You are requesting an extension of more than five years.

In determining if the discretion to allow a period longer than 12 months would be exercised, the Commissioner has considered 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.

These factors have been applied to the taxpayer's circumstances as follows:

an extension of the period is sought due to the delay in selling the property because of the a family members illness. We appreciate that this would have been a very difficult time and is the reason the business was sold, however, the premises has still not been sold several years after the business was sold.

· a decision to allow extra time would not be expected to prejudice the Commissioner.

· a decision to allow extra time could involve the unsettling of people, other than the Commissioner, or of established practices as the granting of an extension of time for more than 5 years for similar situations is not an established practice.

· a decision to allow this extra time to sell the property would be unfair to people in like positions and be detrimental to the wider public interest, and

· the consequence of not allowing the extra time is that upon the sale of the premises the active asset test will not be satisfied.

In the interest of fairness to other taxpayers, combined with the significant length of the extension sought, the Commissioner has decided not to exercise the discretion.

You cannot apply the small business 50% reduction as discussed in Subdivision 152-C to your property.