| Disclaimer This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law. You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4. |
Edited version of your written advice
Authorisation Number: 1012881370012
Date of advice: 18 September 2015
Ruling
Subject: Capital Gains Tax
Question 1
Is the company eligible for the small business concessions under Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
No.
This ruling applies for the following period
30 June 2014
The scheme commences on
1 July 2013
Relevant facts and circumstances
The company purchased the property in XXXX.
The company sold the property and derived a capital gain.
The property has been at all times, vacant land during the ownership period.
The company operated a business prior to the purchase of the property and continued to do so until XXXX.
At this time the business activity was transferred to a unit trust structure which was wholly owned by the same individuals who owned the company.
The company made available to the unit trust all the land and premises it owned to enable the trust to continue the business under a hire agreement.
The property was purchased by the company with the intention of developing it into a business premises site where the business would operate.
During the period of ownership the development never commenced.
The company satisfies the maximum net asset value test.
Relevant legislative provisions
Income Tax Assessment Act 1997 Division 152
Income Tax Assessment Act 1997 Subdivision 152-C
Income Tax Assessment Act 1997 Section 152-40(1)
Income Tax Assessment Act 1997 Subsection 152-10(1)
Reasons for decision
In order to be eligible for the small business CGT concessions, a number of basic conditions must be satisfied. The basic conditions for the small business CGT concessions are outlined in subsection 152-10(1) of the ITAA 1997:
(a) a CGT event happens in relation to an asset that the taxpayer owns
(b) the event would otherwise have resulted in a capital gain
(c) one or more of the following applies
(i) the taxpayer satisfies the maximum net asset value test
(ii) the taxpayer is a "small business entity" for the income year
(iii) the asset is an interest in an asset of a partnership which is a small business entity for the income year, and the taxpayer is a partner in that partnership, or
(iv) the special conditions for passively held assets in sub-sections 152-10(1A) or 152-10(1B)are satisfied in relation to the CGT asset in the income year, and
(d) the asset satisfies the active asset test.
In this case, a CGT event occurred when the contract of sale was entered into and the CGT event resulted in a capital gain. Additionally, the company will satisfy the maximum net asset value test before the CGT event.
Active asset test
A capital gains tax (CGT) asset will satisfy 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 test period, or
b) you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of at least 7½ years during the test period.
Subsection 152-40(1) of the ITAA 1997 details that a CGT asset is an active asset at a time if it is used, or held ready for use, in the course of carrying on a business that is carried on by you, or your affiliate, or another entity that is connected with you.
For an asset to be held ready for use in the course of carrying on a business, it needs to be in a state of preparedness for use in the business and functionally operative. As such, premises still under construction, or land upon which it is intended to construct business premises, could not be said to be 'held ready for use' and would, therefore, not be active assets at that time.
Accordingly, the property has not been 'held ready for use' during the ownership period and is not considered to be an active asset. Therefore, the basic conditions have not been satisfied and the company is not eligible to access the small business concession in regards to the sale of the property.