Edited version of your written advice

Authorisation Number: 1012838588955

Date of advice: 14 July 2015

Ruling

Subject: Whether you were in business and whether the assets you used in the business were active assets

Question 1

Were your activities considered a business?

Answer

Yes

Question 2

Does the property pass the active asset test?

Answer

Yes

This ruling applies for the following period

Year ended 30 June 2014

The scheme commenced on

1 July 2013

Relevant facts

You registered a business name and obtained an ABN.

You intended to operate a business.

Initial plans were prepared which incorporated a number of different activities.

A vacant block of land without improvements was identified and was purchased.

You and another person are joint owners of the property.

You are a small business entity and you satisfy the maximum net asset value test.

The property was considered suitable for your purpose based on a number of relevant factors.

Early periods

You, with assistance from others prepared the property.

You conducted many activities.

Small scale income was generated from various activities.

The activity did not perform to your expectations so you ceased your retail activity and changed to wholesale.

Later periods

After an unsuccessful retail launch, some stock was sold off in bulk whilst other stock was retained.

You re-designed your activity by reducing various activities to enable income to be brought forward with a focus on redirecting the activities to focus more on wholesale markets.

Changes and additions to the facility were slower than expected for a number of reasons beyond your control.

By XXXX you were almost ready for a re-launch having added a number of facilities and advertising.

Preparation for the re-launch continued until XXXX. By this stage you:

• had been running an internet marketing campaign for a number of years

• had developed a wholesale customer data base and personal industry network

• had a large number of stock

• had acquired plant and equipment

• had estimated you had spent approximately $XX on the property

Fearing further cash flow drain of increased rates and taxes due to the re-zoning combined with the threat of compulsory acquisition you decided to sell the property.

On XXXX the property (including all improvements) was sold.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Subsection 152-35(1)

Income Tax Assessment Act 1997 Subsection 152-35(2)

Income Tax Assessment Act 1997 Section 152-40

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

Reasons for decision

Question 1

Taxation Ruling TR 97/11 discusses the issues to be considered in determining whether you are carrying on a business of primary production. The factors used are relevant for all business activity. Paragraph 13 of TR 97/11 lists the following indicators as relevant:

• whether the taxpayer has more than just an intention to engage in business

• whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

• whether there is repetition and regularity of the activity

• whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business

• whether the activity is planned, organised and carried out in a business-like manner such that it is directed at making a profit

• the size, scale and permanency of the activity

• whether the activity is better described as a hobby, a form of recreation or a sporting activity

• whether the activity has a significant commercial purpose or character; this indictor comprises many aspects of the other indicators.

Other indicators which support the main indicators include:

• whether records are kept

• whether a business plan exists

• whether there has been commercial sales of the product

• the taxpayer's knowledge or skill.

In your case it was your intention to have a successful business. You initially had plans to incorporate a number of activities. You purchased a number of acres and set about setting up the business. From the date of acquiring the property you put in place all the necessary steps to establish, and maintain the business activity. The way you conducted your business was similar to others in the industry. It is considered that you planned, organised and carried out your activities in a business-like manner and it was always your intention to make a profit. The sheer scale of your activities indicates that it is far in excess of a hobby or a form of recreation.

It is considered that your activities amounted to a business.

Question 2

There are four CGT concessions for small businesses which can apply to CGT events. To qualify for CGT concessions for small business you must satisfy a number of conditions. One of the basic conditions is whether the asset satisfies the active asset test.

Subsection 152-35(1) of the ITAA 1997 states a CGT asset satisfies the active asset test if:

(a) 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 period specified in subsection (2); or

(b) you have owned the asset for more than 15 years and the asset was an active asset of yours for the total of at least 71/2 years during the period specified in subsection (2).

(c) Subsection 152-35(2) of the ITAA 1997 states the period:

(d) begins when you acquired the asset; and

(e) ends at the earlier of:

(i) the CGT event; and

(ii) 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.

Section 152-40 outlines the meaning of the term "active asset".

Subsection 152-40(1) of the ITAA 1997 states a CGT asset is an active asset at a time if, at that time:

(a) you own the asset (whether the asset is tangible or intangible) and it is used, or held ready for use, in the course of carrying on a business that is carried on (whether alone or in partnership by:

(i) you; or

(ii) your affiliate; or

(iii) another entity that is connected with your or;

(b) If the asset is an intangible - you own it and it is inherently connected with a business that is carried on (whether alone or in partnership) by you, your affiliate, or another entity that is connected with you.

In this case, you as joint owner with another person purchased the property. The property was used in the course of carrying on a business which was carried on by you. The property meets the definition of "active asset".

In relation to whether you pass the active asset test, you acquired the property on XX. The property was sold on XX. This period is less than 15 years. It is considered you operated a business using the active asset for more than half of the period specified.

It is considered that the property was an active asset and you pass the active asset test.

Further issues for you to consider

If you intend to use one of the CGT concessions for Small Business you are only entitled to use the value of your interest in the property.