Edited version of your private ruling

Authorisation Number: 1012493495835

Ruling

Subject: Active asset test

Question 1

Will the Commissioner exercise his discretion under subparagraph 152-35(2)(b)(ii) of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the property?

Answer

No

Question 2

Does the property satisfy the active asset test?

Answer

No

Question 3

Can the small business retirement exemption be applied to the sale of the property?

Answer

No

This ruling applies for the following period:

Year ended 30 June 2012

The scheme commenced on:

1 July 2011

Relevant facts and circumstances

The trust acquired a property.

The company operated a business from the property. However after a few years of operation the business was sold.

The purchaser was not in a position to acquire the property at the time they purchased the business. Accordingly, the trust entered into a lease agreement with the purchaser to lease the property.

The property was sold to an unrelated party during the 2011-12 financial year.

At the time of the disposal of the property, the trust had two significant individuals, X and Y.

X and Y controlled both the trust and the company for the purposes of the small business concessions.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 Section 152-10

Income Tax Assessment Act 1997 Section 152-35

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

Income Tax Assessment Act 1997 Section 328-125

Reasons for decision

To qualify for the small business capital gains tax (CGT) concessions contained in Division 152 of the ITAA 1997, you must satisfy several conditions that are common to all the concessions. These are called the 'basic conditions' and are contained in section 152-10 of the ITAA 1997. One of the basic conditions is that the asset must satisfy the active asset test.

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).

A CGT asset is an active asset if it is owned by you and is used or held ready for use in a business carried on (whether alone or in partnership) by you, your affiliate, your spouse or child, or an entity connected with you.

An entity is connected with another entity if either entity controls the other entity, or if both entities are controlled by the same third entity (section 328-125 of the ITAA 1997).

The trust and the company are connected entities as they are both controlled by the same third entities, being X and Y. As they are connected entities, the property will be active while it is being used in the business carried on by the company.

In this case, the property was an active asset for a period of time up until the sale of the company's business. The property was not placed on the market as the property was leased to the purchaser of the business. The property was sold during the 2011-12 income year.

As the disposal of the property did not occur within 12 months of the cessation of the business being carried on by the company, the test period ends at the time of the CGT event. The asset was not active for at least half of the test period. Therefore, the active asset test will only be satisfied if the Commissioner allows a longer period under subparagraph 152-35(2)(b)(ii) of the ITAA 1997, allowing the test period to end at the time the business ceased. 

Commissioner's discretion

In determining if the discretion under subparagraph 152-35(2)(b)(ii) of the ITAA 1997 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 a reasonable and acceptable explanation for the delay in the transfer of the property has not been provided.

In this case, a significant extension has been requested. An extension of such a period of time is well in excess of usual practice for taxpayers in similar circumstances. The property was not placed on the market after the sale of the business. Additionally, the trust continued to hold the property as a passive investment and received rental income from the new business owners.

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 to extend the period beyond the 12 month period as set out under section 152-35(2)(b)(ii) of the ITAA 1997.

Therefore, as discussed above, the active asset test will not be met in relation to the property. Accordingly, the basic conditions contained in section 152-10 of the ITAA 1997 have not been met and the trust will not be able to apply the retirement exemption to the sale of the property.