Edited version of private advice

Authorisation Number: 1052251337883

Date of advice: 15 May 2024

Ruling

Subject: Commissioner's discretion - active asset

Question

Will the Commissioner exercise his discretion under subparagraph 152-35(2)(a)(ii) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow a period longer than 12 months between the cessation of the business and the relevant CGT event?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2023

Year ended 30 June 2024

The scheme commenced on:

1 July 2022

Relevant facts and circumstances

You own shares in a company.

The company sold its business, comprising capital and intangible assets and ceased its business on this date.

When the company's business was sold, a verbal agreement was reached where the company agreed to provide services to the purchaser.

An invoice was provided for the services performed however key staff members from the purchaser who negotiated the agreement were no longer employed by them.

It was decided to write the debt off as bad and then for liquidation to commence once the financials were completed.

Entering into liquidation was delayed because it was determined that commercially the director of the company acting in that capacity had a much better chance of negotiating a settlement than if the company was placed into any form of administration. That is, the debtor would think they were dealing with a distressed party and liquidators they did not know. Further, the cost of administration is expensive, and the directors did not want to add to the cost by paying external parties to chase the debt which they otherwise thought they were best placed to recover, given the debt being disputed was an overseas debtor.

Had the trade debtors amount been settled within a reasonable time from when the invoice was issued, the company would have been able to proceed with the winding up process. This would have given the company the opportunity to complete the winding up process in such time that the shares would have passed the active asset test at the time of liquidation.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-35

Reasons for decision

Active asset test

The active asset test is contained in section 152-35 of the ITAA 1997. The active asset test is satisfied 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 detailed below, 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 least 7.5 years during the test period.

The test period:

(a)  begins when you acquired the asset, and

(b)  ends at the earlier of

(i)            the CGT event, and

(ii)           when the business ceased, if the business in question ceased in the 12 months before the CGT event or any longer period that the Commissioner allows.

Commissioner's discretion

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 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 has been any mischief involved, and
• the consequences of the decision.

In considering whether to exercise his discretion, the Commissioner needs to be satisfied that there were circumstances beyond your control that prevented the CGT event from occurring within 12 months after the business ceased.

You stated that the delay was due to trying to recover trade debtors amounts. While we acknowledge that there were some benefits to the company trying to recover the funds themselves and delaying appointing a liquidator, we do not accept that the delay was outside of your control and that it prevented the CGT event from happening.

After considering both the relevant factors for determining whether to exercise the Commissioner's discretion and the specific circumstances of this case, we consider that your circumstances do not warrant an extension of time. This is for the following reasons:

• In your case it is difficult to say there is evidence of an acceptable explanation for the period of extension requested. You have not provided details of any circumstances beyond your control that prevented the cancellation of the shares.
• To allow an extension of time in your case is likely to unsettle people for the reasons discussed above, that is, lack of evidence of an acceptable explanation.
• While there is no suggestion of mischief in this case, it could not be considered fair to people in like positions to allow you an extension of time. Another application with similar circumstances would be denied.

The Commissioner will not exercise the discretion under subparagraph 152-35(2)(b)(ii) of the ITAA 1997. Therefore, the test period for the active asset test will end when the CGT event occurs.