ATO ID 2002/354: Capital Gains Tax - Small Business Rollover Relief - Active Assets - Asset 'held ready for use'.
Date of decision: 21 February 2002
Year of income: Year ended 30 June 2001
Business line: Private Groups and High Wealth Individuals

Issue
Can land, on which minor earthworks have been carried out in preparation for the construction of a shed to be used in a business, but sold prior to the construction of the shed, be 'held ready for use' for the purposes of the CGT Small Business Concessions under section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
No. The land is not regarded as being 'held ready for use' in the course of carrying on a business under section 152-40 of the ITAA 1997.

Facts
The taxpayer acquired a property, which consists of 10 acres of land that included a private dwelling. Shortly after settlement the taxpayer was approached by another entity that wished to acquire it as a buffer to its future operations. The taxpayer carried on a business at various customer on-site locations. No business was carried on from the property. The taxpayer commenced earthworks to erect a shed with the intention to run its business from the property. The property was subsequently sold to the other entity without any further work to complete the construction of the shed. A capital gain was realised.

Reasons for decision
Summary: One of the conditions for the Small Business Concessions that must be met by an entity is that the capital gain must relate to the disposal of an 'active asset'. Paragraph 152-40(1)(a) of the ITAA 1997 states that an asset will be an active asset if it is used or held ready for use in the course of carrying on a business. The expression 'held ready for use' is not defined in the legislation, nor is the meaning of the expression discussed in the Explanatory Memorandum to the New Tax System (Capital Gains Tax) Bill 1999 which introduced Division 152 into the ITAA 1997. The expression 'held ready for use' is used in other places in the income tax legislation. For example, the expression occurs in the former subsection 82KZC(4) of the Income Tax Assessment Act 1936 (ITAA 1936) in relation to land used for rent producing purposes. The subsection says that land will be taken to be used for rent producing purposes if 'at that time the land is used, or held ready for use.........for the purposes of producing rent...'. In the Explanatory Memorandum to the Taxation Laws Amendment Act 1986 , which introduced this provision, it is noted that the condition of 'readiness' would not be satisfied while a building was under construction on the land, but would generally be satisfied once construction finished and tenants were being sought. A similar expression has been used in the former subsection 54(1) of the ITAA 1936. The subsection allowed a deduction for depreciation of items of plant used for the purpose of producing assessable income that '...has been installed ready for use for that purpose and is during that year held in reserve....'. The meaning of 'installed ready for use' has been discussed in a number of Taxation Board of Review cases. In (1956) 6 CTBR(NS) Case 24 the Board of Review held that unfinished property was not depreciable property. At P 157, Mr. J F McCaffrey said: 'Thus, under the Assessment Act prior to 1936, ordinary depreciation was allowable on property being plant etc. owned and used for the production of income(s.23(1)(e)(i) ). Thus as a fundamental requirement for the allowance the relevant 'property' had to be functionally operative in the taxpayer's business. This idea was preserved in the 1936 Act, which, as well, extended the allowance to property being plant, etc., installed ready for use and held in reserve (vide S. 54). The choice of the word 'ready' in that section is indicative of the requirement of functional operability at relevant times...' A similar conclusion was reached in (1964) 11 CTBR(NS) Case 103 . In that case the taxpayer carried on a business as a primary producer. On 30 June 1961 the taxpayer commenced construction of a building to provide accommodation for future employees. The building was not completed till after 30 June 1962 and during the year was not used for the purpose of producing assessable income. The taxpayer had sought to claim a deduction for depreciation for the year ended 30 June 1962. It was held by the Board that since construction was not complete the building could not be said to be 'ready for use'. The land which was acquired by the taxpayer with the intention of constructing a shed from which to operate its business was not in a state of preparedness from which the business could be carried on. The land was not ready for use unless it enabled the taxpayer to operate the business on it. Therefore the land cannot be considered to be held 'ready for use' in the course of carrying on a business and, by definition, cannot be regarded as an 'active asset' under section 152-40 of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1997 Division 152 subsection 152-10(1) subsection 152-40(1) paragraph 152-40(1)(a)
Case references: Case 24 (1956) 6 CTBR(NS) 154