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Ruling

Subject: Small business CGT concessions

Question

Can you apply the small business capital gains tax concessions to roll-over the capital gain received from the sale of your vacant block of land?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2012

The scheme commences on:

01 July 2011

Relevant facts and circumstances

You acquired a vacant block of land.

You intended to build on the land and lease it to a business.

You are connected with the business.

After some time you purchased another vacant block of land which was in a more suitable location.

You bought this land with intention to build on it rather than your original block of land.

You still intend to lease it to the same business.

You sold the original block of land which resulted in a capital gain.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 section 152-40

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

Reasons for decision

Summary

Your original vacant block of land does not satisfy the requirements of an 'active asset'; accordingly you are not entitled to roll-over the capital gain received from the sale of the land.

Detailed reasoning

One of the conditions for the Small Business Concessions that must be met by an entity is that the capital gain must relate to the disposal of an 'active asset'. Subsection 152-40(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states that an asset will be an active asset if it is used or held ready for use in the course of carrying on a business.

The expression 'held ready for use' is not defined in the legislation, nor is the meaning of the expression discussed in the Explanatory Memorandum to the New Tax System (Capital Gains Tax) Bill 1999 which introduced Division 152 into the ITAA 1997.

The expression 'held ready for use' has been used in other places in the income tax legislation. For example, the expression occurred in former subsection 82KZC(4) of the Income Tax Assessment Act 1936 (ITAA 1936) in relation to land used for rent producing purposes.

This subsection stated that land will be taken to be used for rent producing purposes if 'at that time the land is used, or held ready for use.for the purposes of producing rent'.

In the Explanatory Memorandum to the Taxation Laws Amendment Act 1986 , which introduced this provision, it is noted that the condition of 'readiness' would not be satisfied while a building was under construction on the land, but would generally be satisfied once construction finished and tenants were being sought.

A similar expression was used in former subsection 54(1) of the ITAA 1936. This subsection allowed a deduction for depreciation of items of plant used for the purpose of producing assessable income that '.has been installed ready for use for that purpose and is during that year held in reserve'. The meaning of 'installed ready for use' has been discussed in a number of Taxation Board of Review cases.

In (1956) 6 CTBR(NS) Case 24 the Board of Review held that unfinished property was not depreciable property. At P 157, Mr. J F McCaffrey said:

Thus, under the Assessment Act prior to 1936, ordinary depreciation was allowable on property being plant etc. owned and used for the production of income(s.23(1)(e)(i) ). Thus as a fundamental requirement for the allowance the relevant 'property' had to be functionally operative in the taxpayer's business. This idea was preserved in the 1936 Act, which, as well, extended the allowance to property being plant, etc., installed ready for use and held in reserve (vide S. 54). The choice of the word 'ready' in that section is indicative of the requirement of functional operability at relevant times...

A similar conclusion was reached in (1964) 11 CTBR(NS) Case 103 . In that case the taxpayer carried on a business as a primary producer. On 30 June 1961 the taxpayer commenced construction of a building to provide accommodation for future employees. The building was not completed till after 30 June 1962 and during the year was not used for the purpose of producing assessable income. The taxpayer had sought to claim a deduction for depreciation for the year ended 30 June 1962. It was held by the Board that since construction was not complete the building could not be said to be 'ready for use'.

In your situation, you acquired the original vacant block of land with the intention of building on the property and then leasing it to a connected entity.

For the vacant block of land to be considered an active asset it has to be held 'ready for use' which means that it enabled you or a connected entity to operate a business on the property.

The mere intention without actually doing so is not sufficient to obtain the exemption.

Accordingly as your original vacant block of land does not satisfy the requirement of an 'active asset', you are not entitled to roll-over the capital gain received from the sale of the land under Division 152 of the ITAA 1997.