Edited version of private advice

Authorisation Number: 1051863760484

Date of advice: 8 July 2021

Ruling

Subject: Small business concessions - active asset

Question 1

Will the Property satisfy the active asset test under section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997) if the Trust enters into a contract for the disposal of it prior to 1 September 2021?

Answer

Yes

Question 2

If the answer to Question 1 is 'no', will the Commissioner exercise his discretion under subparagraph 152-35(2)(b)(ii) of the ITAA 1997 to allow a longer period than 12 months between the cessation of the relevant business of the Trust and its entry into a contract for the disposal of the Property prior to 1 September 2021 (i.e. to shorten the active asset test period under subsection 152-35(2) of the ITAA 1997)?

Answer

Not required to answer

This ruling applies for the following period:

Income year ending 30 June 20XX

Relevant facts and circumstances

The Trust operated a business through various leased properties.

The Trust then entered into a contract on XX XXXX 20XX to purchase a property (the Property) for the purpose of carrying on its business on the Property. Prior to settlement, the Trust leased the Property from the seller as part of a long settlement. Settlement of the Property occurred on XX XXXX 20XX.

Following a period during which the Trust carried on its business on the Property, a company connected with the Trust in accordance with section 328-125 of the ITAA 1997 commenced carrying on that business on the Property pursuant to a licensing arrangement between it and the Trust.

The Trust entered into a contract to sell the business' goodwill and various assets to a third party on XX XXXX 20XX. The Property was not sold as part of that transaction.

Following the Trust's entry into the contract of sale, the Trust and the company continued to use the Property to carry on various commercial activities in order to wind down the business and repatriate the Property for future use. Those activities wound down by XX XXXX 20XX.

The Property was advertised for lease in XXXXX 20XX and subsequently leased to a third party on XX XXXX 20XX.

The Trust is now considering disposing of the Property.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 109

Income Tax Assessment Act 1997 Subdivision 109-B

Income Tax Assessment Act 1997 subsection 109-5(1)

Income Tax Assessment Act 1997 subsection 109-5(2)

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 paragraph 152-10(1)(d)

Income Tax Assessment Act 1997 section 152-35

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

Income Tax Assessment Act 1997 paragraph 152-35(1)(a)

Income Tax Assessment Act 1997 paragraph 152-35(1)(b)

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

Income Tax Assessment Act 1997 paragraph 152-35(2)(a)

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

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

Income Tax Assessment Act 1997 paragraph 152-40(1)(a)

Income Tax Assessment Act 1997 subsection 152-40(4)

Income Tax Assessment Act 1997 paragraph 152-40(4)(e)

Income Tax Assessment Act 1997 subsection 152-40(4A)

Income Tax Assessment Act 1997 section 328-125

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for Decision

Summary

The Property will satisfy the active asset test because it was an active asset of the Trust for more than half the period specified in subsection 152-35(2) of the ITAA 1997.[1]

Detailed reasoning

Subdivision 152-A sets out the 'basic conditions' which must be satisfied in order for small business entities to qualify for any of the CGT small business concessions under Division 152 to reduce or disregard a capital gain they make. One of the basic conditions, at paragraph 152-10(1)(d), is that the CGT asset satisfies the active asset test in section 152-35.

Subsection 152-35(1) provides that:

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 a total of at least 7½ years during the period specified in subsection (2).

Subsection 152-35(2) states that the period:

(a) begins when you acquired the asset; and

(b) 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.

Subsection 152-40(1) defines an active asset as follows:

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 you; or

(b) if the asset is an intangible asset - 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.

However, subsection 152-40(4) lists CGT assets that cannot be active assets. Of relevance, paragraph 152-40(4)(e) states that the following CGT asset cannot be an active asset:

(e) an asset whose main use by you is to derive interest, an annuity, rent, royalties or foreign exchange gains unless:

(i) the asset is an intangible asset and has been substantially developed, altered or improved by you so that its market value has been substantially enhanced; or

(ii) its main use for deriving rent was only temporary.

Further, subsection 152-40(4A) states that:

For the purposes of paragraph (4)(e), in determining the main use of an asset:

(a) disregard any personal use or enjoyment of the asset by you; and

(b) treat any use by your *affiliate, or an entity that is *connected with you, as your use.

Was the Property an active asset?

The Property was an active asset of the Trust at a time pursuant to paragraph 152-40(1)(a) as it was:

•                    purchased (and therefore owned) by the Trust for use in the business on XX XXXX 20XX, being the date on which settlement of the Property occurred; and

•                    used as from that date in the course of carrying on the business that was carried on by the Trust initially, and then (pursuant to a licensing arrangement) a company, being an entity connected with the Trust.

The Property is considered to have been an active asset of the Trust at a time pursuant to paragraph 152-40(1)(a) at least until such time as the beginning of XX XXXX 20XX, being the time at which activities relating to the winding up of the business began to slow down and the Property was listed for leasing.

Does the Property satisfy the active asset test?

As the Property was owned by the Trust for less than 15 years, it will satisfy the active asset test pursuant to paragraph 152-35(1)(a) if it was an active asset of the Trust for a total of at least half of the 'active asset test period', beginning when the Trust acquired the Property and ending at the time the CGT event happens in relation to the Property.[2]

When did the Trust acquire the Property?

The term 'acquire' is defined in subsection 995-1(1) with "reference to the circumstances and at the time worked out under Division 109 (including a provision listed in Subdivision 109-B)". Relevantly, subsection 109-5(1) defines acquired as:

In general, you acquire a *CGT asset when you become its owner. In this case the time when you *acquire the asset is when you become its owner.

The table at subsection 109-5(2) sets out specific rules for the circumstances in which, and the time at which, an entity acquires a CGT asset as a result of a CGT event happening.

In relation to CGT event A1, the table at subsection 109-5(2) states that when one entity disposes of a CGT asset to another entity, the transferee entity is taken to acquire the asset when the disposal contract is entered into or, if none, when the transferor stops being the asset's owner.

In this case, the question arises as to whether the word 'acquired' in paragraph 152-35(2)(a) refers to the earlier deemed acquisition as at the date the contract to purchase the Property was entered into (on XX XXXX 20XX) or to when the Property was actually acquired by the Trust (on XX XXXX 20XX).

Subsections 152-35(1) and (2) between them operate to determine the period during which an asset must be an active asset in order to satisfy the active asset test. If the asset has been owned for more than 15 years paragraph 152-35(1)(b) applies. If not, subparagraph (a) applies.

The meaning of the word 'acquired', in its paragraph 152-35(2)(a) context, should therefore be determined by reference to the interrelationship between subsections 152-35(1) and (2) and in particular by reference to the word 'owned' in paragraphs 152-35(1)(a) and (b) and to the nature of the active asset test itself, which considers (in general) how an asset is used. This suggests that the period of actual ownership, rather than a period commencing at a deemed acquisition, is the relevant period.

For the purposes of paragraph 152-35(2)(a), the Trust therefore acquired the Property when settlement of the Property occurred, on XX XXXX 20XX.

Was the Property an active asset for at least half of the active asset test period?

If the Trust enters into a contract for the disposal of the Property by 1 September 20XX (the time CGT event A1 happens in relation to the Property), the active asset test period will end no later than 31 August 20XX.

If the Trust is to enter into a contract for the disposal of the Property as late as 31 August 2021, the active asset test period (beginning on XX XXXX 20XX and ending on XX XXXX 20XX) will be ABC days.

During that active asset test period, the Property was an active asset of the Trust for a total of at least DEF days, from XX XXXX 20XX to XX XXXX 20XX. This equates to more than half of the active asset test period.

[1] All legislative references are to the ITAA 1997.

[2] The time referred to in subparagraph 152-35(2)(b)(ii) is not relevant as the business ceased to be carried on more than 12 months before the CGT event.