ATO ID 2010/90: CGT small business concessions: active asset test - company liquidations and cancellation of shares - relevant business ceases
Date of decision: 16 March 2010
Year of income: Year ended 30 June 2007
Business line: Private Groups and High Wealth Individuals

Issue
For the purpose of determining whether a share in a company that has ceased to carry on its business satisfies the active asset test, is the relevant business referred to in subparagraph 152-35(2)(b)(ii) of the Income Tax Assessment Act 1997 (ITAA 1997) the business previously carried on by the company?

Decision
Yes. For the purpose of determining whether a share in a company that has ceased to carry on its business satisfies the active asset test, the relevant business referred to in subparagraph 152-35(2)(b)(ii) of the ITAA 1997 is the business previously carried on by the company.

Facts
The taxpayer is the controlling individual of an Australian resident company and acquired shares in the company after 19 September 1985. The company's business is sold in winding-up the company in October 2006. Six months later the shares in the company are cancelled and the taxpayer makes a capital gain on the cancellation. Just before the sale of the company's business, the market value of the active assets of the company was at least 80% of the market value of all the assets of the company.

Reasons for decision
Summary: For the small business CGT concessions in Division 152 of the ITAA 1997 to apply, the CGT asset must satisfy the active asset test in section 152-35 of the ITAA 1997. A requirement of the active asset test in subsection 152-35(2) of the ITAA 1997 is that the CGT asset must be an active asset from the time when the asset was acquired until the time of either the CGT event giving rise to the capital gain or, if the relevant business had ceased to be carried on in the 12 months before the CGT event, the cessation of that business. The Commissioner can allow a longer period than 12 months. The reference to the relevant business ceased to be carried on in subparagraph 152-35(2)(b)(ii) of the ITAA 1997 is not limited to a business that ends, in the sense that no one continues to carry it on, and includes a reference to a business that has ceased to be carried on by a taxpayer because the taxpayer has sold that business. For the purpose of determining whether a share in a company that has ceased to carry on a business satisfies the active asset test, the 'relevant business' referred to in subparagraph 152-35(2)(b)(ii) of the ITAA 1997 is the business previously carried on by the company. Therefore, if a CGT event happens to a share in a company in the 12 month period (or such longer period as the Commissioner allows) after the company has ceased to carry on its business, the relevant test time for subparagraph 152-35(2)(b)(ii) of the ITAA 1997 purposes is just before the cessation of the business because that pre-dates the CGT event. That is, the share must be an active asset just before the cessation of the business and not just before the CGT event.

Legislative references: Income Tax Assessment Act 1997 Division 152 section 152-35 subsection 152-35(1) subsection 152-35(2) subparagraph 152-35(2)(b)(ii) subsection 152-40(3) paragraph 152-40(3)(b)
Subject references: Active asset test Basic conditions for relief Capital gains tax CGT small business relief