Private ruling: Small business concessions
Published: March 2014
Ruling period: Year ending 30 June 2013 | Year ending 30 June 2014
Date scheme commenced: 1 July 2012

Ruling: Q1: Is the company entitled to apply the small business active asset reduction to the capital gain made in relation to the property? | A1: No.

Relevant facts and circumstances: The company purchased a block of land. The company intended to redevelop, subdivide and build houses on the land. The company intended to sell the houses for a profit. The company decided to invite new shareholders, with relevant expertise, into the company. Various inquiries concerning redeveloping the land were made to surveyors, property experts, agents and the local council. However, the company was notified that there were some legal restrictions and limitations for building houses and subdividing the land. One of the directors observed the surrounding area and found that other suburbs were developing gradually as more and more people moved into the area. After studies and discussions with experts, the company believed development restrictions and limitations imposed by the local council would be changed in the near future. While waiting for the change in restrictions, the company considered introducing more shareholders as the development of the land required additional capital. The local council proposed resumption of the property for environmental reasons. The company objected to the proposed resumption, however after lengthy negotiations the local council progressed with their plans. The land was compulsorily acquired in the relevant financial year. The local council has made several compensation payments to the company by instalments in the relevant financial years. The company does not own any other land that it intends to develop. The company has not previously been involved in the development of land. The property has remained vacant since the date of acquisition.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 152 | Income Tax Assessment Act 1997 subdivision 152-C | Income Tax Assessment Act 1997 section 152-15 | Income Tax Assessment Act 1997 section 152-35 | Income Tax Assessment Act 1997 subsection 152-40(1)

Reasons for decision: Summary: To qualify for the small business CGT concessions, you must satisfy several conditions that are common to all the concessions. These are called the basic conditions. Subdivision 152-C of the Income Tax Assessment Act 1997 (ITAA 1997) applies the small business 50% active asset reduction provided the basic conditions are satisfied. A capital gain that you make may be reduced or disregarded under Division 152 of the ITAA 1997 if the following basic conditions are satisfied: • A CGT event happens in relation to a CGT asset of yours in an income year, • The event would have resulted in a gain, • The CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997, and • At least one of the following applies; - you are a small business entity for the income year, - you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997, - you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an interest in an asset of the partnership, or - you do not carry on a business, but your CGT asset is used in a business carried on by a small business entity that is your affiliate or an entity connected with you. 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. The test period beings when you acquired the asset and ends at the earlier of the CGT event and if the relevant business ceased to be carried on in the 12 months before that time - the cessation of the business. 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. Carrying on a business Taxation Ruling TR 97/11 provides the Commissioner's view of the factors that are considered important in determining if you are in business for tax purposes. The factors are: • whether the activity has a significant commercial purpose or character • whether the taxpayer has more than just an intention to engage in business • whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity • whether there is regularity and repetition of the activity • whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business • whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit • the size, scale and permanency of the activity, and • whether the activity is better described as a hobby, a form of recreation or sporting activity. No one indicator is decisive. The indicators must be considered in combination and as a whole. Application to your circumstances In this case, the company purchased and in the relevant financial year it was compulsorily acquired by the local council. For this asset to satisfy the active asset test, it must have been used in the course of carrying on a business by the company for at least half of the ownership period. Having regard to the circumstances and facts outlined above, we do not consider that the company was carrying on a business of property development. The company has not embarked on a definite and continuous cycle of operations designed to lead to the sale of the land. The activities undertaken by the company are preparative and there have been no council approvals, construction or other works conducted on the land. The land has remained vacant for the entire ownership period and we do not consider that the company has more than just an intention to engage in business. As the company was not carrying on a business, the property has not been used in the course of carrying on a business for at least half of the ownership period. Therefore, the company is not entitled to apply the 50% active asset reduction.