Edited version of your private ruling

Authorisation Number: 1012441262753

Ruling

Subject: Active asset test

Question

Will the Commissioner exercise his discretion in relation to the active asset test and extend the time period?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 2013

The scheme commenced on:

1 July 2012

Relevant facts and circumstances

You are shareholders in the company. The company carried on a business.

You purchased the business from X. The terms of the sale required you to make a number of payments to X over a period of Y financial years.

In the 20ZZ financial year you were approached to sell your business to a third party (the purchaser). The negotiations took several months and an agreement to sell the business was entered into in the relevant financial year.

You ceased to operate the business in the relevant financial year; however your obligations to pay remained outstanding.

Your shares in the company were active assets up to the point the business ceased.

You intend to place the company into liquidation; however this could not proceed until the company's pre-existing obligations were met and the unresolved issues between the company and the purchaser were resolved.

It is anticipated that the company will be liquidated in by the end of the subsequent financial year.

Factors that have contributed to the delay in liquidating the company have included:

· Obligations under the contract with X, including potential legal action

· Ongoing obligations to the purchaser of the business

· Additionally the company needed to comply with its tax obligations

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 152-35

Income Tax Assessment Act 1997 Subparagraph152-35(2)(b)(ii)

Reasons for decision

The active asset test is contained in section 152-35 of the Income Tax Assessment Act 1997 (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

o the CGT event, and

o 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 in the company were active assets up to the point the business ceased. The CGT event will occur when the company is liquidated and your shares are disposed of. As you were not in a position to liquidate the company within 12 months of the business ceasing, the active asset test will only be satisfied if the Commissioner allows a longer period under subparagraph 152-35(b)(ii) of the ITAA 1997. You anticipate that the CGT event will occur by the end of the subsequent financial year.

In determining if the discretion to allow a period longer than 12 months 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.

After considering the relevant factors against your circumstances, it is considered that you have provided a reasonable and acceptable explanation for the delay in the liquidation of the company. It is accepted that the pre-existing obligations between the company and X and the purchaser, in addition to potential legal action, prevented the liquidation of the company.

The Commissioner will exercise the discretion set out under section 152-35(2)(b)(ii) of the ITAA 1997 and extend the time period. Accordingly, if the CGT event occurs by this date, the test period for the active asset test will end on the date the business ceased.