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Ruling

Subject: capital gains tax concessions for small business

Question 1

Does the licence satisfy the active asset test?

Answer

No.

Question 2

Are you entitled to apply the small business capital gains tax (CGT) retirement exemption to the capital gain from the sale of the licence?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

You purchased a licence. At the time, the licence was being leased by an entity and the existing lease continued.

You began operating the licence yourself.

You ceased operating and from this point in time until the sale of the licence on, the licence was again leased to an entity.

You owned the licence for less than 15 years and used it to operate yourself for less than half of the ownership period.

You are over 60 years of age.

You satisfy the maximum net asset value test.

You have a turnover of less than $2 million and therefore satisfy the small business entity test.

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 152-40(1),

Income Tax Assessment Act 1997 section 152-40(4) and

Income Tax Assessment Act 1997 Subdivision 152-D.

Reasons for decision

Question 1

Summary

The licence is not considered an active asset as it was not being used or held ready for use in the course of carrying on a business by you, an affiliate or another entity connected with you.

Detailed reasoning

Active asset test

A requirement of the active asset test contained in section 152-35 of the ITAA 1997 is that the CGT asset must be an active asset for at least half of the period from when you acquired it until the earlier of the CGT event or when you ceased business, if the relevant business had ceased to be carried on in the 12 months before the CGT event.

The meaning of an active asset is set out in section 152-40 of the ITAA 1997. It must firstly satisfy one of the 'positive tests' in subsection 152-40(1) of the ITAA 1997 and then also not be excluded by one of the exceptions in subsection 152-40(4) of the ITAA 1997.

Under subsection 152-40(1) of the ITAA 1997 a CGT asset is an active asset (subject to the exclusions) if it is owned and used, or held ready for use, in the course of carrying on a business by you or your small business CGT affiliate or another entity that is connected with you under paragraph 152-40(1)(c) of the ITAA 1997.

The combined effect of sections 152-35 and 152-40 of the ITAA 1997 is that the asset will meet the active asset test if the asset was used, or held ready for use, in the course of carrying on a business for at least half of the time period it was owned, subject to the exclusions in subsection 152-40(4) of the ITAA 1997.

The following assets cannot be active assets (subsection 152-40(4) of the ITAA 1997):

· interests in a connected entity (other than those satisfying the 80% test)

· shares in companies and interests in trusts (other than those satisfying the 80% test)

· shares in widely held companies unless they are held by a CGT concession stakeholder of the company

· shares in trusts that are similar to widely held companies unless they are held by a CGT concession stakeholder of the trust or other exceptions for trusts with 20 members or less apply

· financial instruments, including loans, debentures, bonds, promissory notes, futures contracts, forward contracts, currency swap contracts, rights and options

· an asset whose main use in the course of carrying on the business is to derive interest, an annuity, rent, royalties or foreign exchange gains. However, such an asset can still be an active asset if it is an intangible asset that has been substantially developed, altered or improved by the taxpayer so that its market value has been substantially enhanced or its main use for deriving rent was only temporary.

Application to your circumstances

In your case, you owned a licence for less than 15 years. For more than half the period of ownership, you leased the license to another entity. The licence is not considered an active asset during the period it was leased as it was not being used or held ready for use in the course of carrying on a business by you, an affiliate or another entity connected with you.

The leasing of an asset on its own does not ordinarily constitute the carrying on of a business. Even if it did, subsection 152-40(4)(e) of the ITAA 1997 prevents assets whose main use is to derive rent from being an active asset.

Therefore, the licence will not satisfy the active asset test in section 152-35 of the ITAA 1997.

Question 2

As the licence does not satisfy the active asset test, you are not entitled to the small business retirement exemption under Subdivision 152-D of the ITAA 1997.