Private ruling: Dispose of an asset and still satisfy the active asset test
Published: September 2011
Ruling period: 1 July 2009 to 30 June 2010

Ruling: Question and answer | Will the Commissioner allow you, under subsection 152-35(2)(b)(ii) of the ITAA 1997, a period longer than 12 months after the cessation of your business within which you can dispose of an asset and still satisfy the active asset test in section 152-35 of the ITAA 1997? | No.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. On xx xx xx you and your spouse purchased a freehold building. You commenced a café. In late xx you decided to sell the café and freehold. The advertisement stated the sale was for the business and freehold property You received an offer but the purchaser was not in a position to purchase both the business and freehold. On xx xx xx the business was sold on the understanding the freehold building would also be purchased within 12 months. You did not write into the contract the agreement between you and the purchaser that they were to purchase the freehold building within 12 months. You live in a small community and arrangements of this nature are still entered into on a trust basis. You were unable to enforce the purchase of the freehold building within 12 months as you did not have the commitment in writing. On xx xx xx the freehold building was sold; due to matters outside of your control it was sold outside of the 12 months time limit for the active asset test. You owned the building for 904 days and the business was owned for 500 days. The asset was not valued in excess of $6 million The business turnover was less than $2 million.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 152-35 | Income Tax Assessment Act 1997 subsection152-35(2) | Income Tax Assessment Act 1997 Subsection152-35(2)(a) | Income Tax Assessment Act 1997 subsection152-35(2)(b) | Income Tax Assessment Act 1997 subsection152-35(2)(b)(ii) Reason for Decision | The CGT active asset test is contained in section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997). A CGT asset satisfies the active asset test if it meets both of the requirements of paragraphs 152-35(a) and 152-35(b) of the ITAA 1997. Paragraph 152-35(a) of the ITAA 1997 requires that the CGT asset was an active asset of yours just before the earlier of the relevant CGT event, and the cessation of the business, if it ceased to be carried on in the last 12 months. Under subparagraph 152-35(2)(b)(ii) of the ITAA 1997 the Commissioner can allow a longer period than 12 months. | You have stated in your application that the active asset is a freehold building purchased in xx in which you used to run a café. You sold the cafe in xx xx with the understanding the freehold building would be purchased also within 12 months. | The freehold building was sold on xx xx xx. | As the disposal of the property has not occurred within 12 months of the cessation of the business being carried on by you, that is your business ceased in xx xx and the purchase of the freehold building did not occur until xx xx, the active asset test will only be satisfied if the Commissioner allows a longer period under subparagraph 152-35(a)(ii) of the ITAA 1997. | 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 requested 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 is any mischief involved; and | · the consequences of the decision. | After considering the relevant factors against your circumstances, it is considered that you have not provided a reasonable and acceptable explanation for the delay in the transfer of the property. | In particular, it is noted that the main reason for the delay in the transfer of the property was that, although you had a contract, you omitted to include in that contract a clause stipulating the purchase of the freehold building must occur within 12 months. | Based on the facts and your submissions, the Commissioner will not exercise his discretion, as it would not be fair or equitable, to extend the period beyond the 12 month period as set out under section 152-35(2)(b)(ii).

Reasons for decision: Summary: The CGT active asset test is contained in section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997). A CGT asset satisfies the active asset test if it meets both of the requirements of paragraphs 152-35(a) and 152-35(b) of the ITAA 1997. Paragraph 152-35(a) of the ITAA 1997 requires that the CGT asset was an active asset of yours just before the earlier of the relevant CGT event, and the cessation of the business, if it ceased to be carried on in the last 12 months. Under subparagraph 152-35(2)(b)(ii) of the ITAA 1997 the Commissioner can allow a longer period than 12 months. You have stated in your application that the active asset is a freehold building purchased in xx in which you used to run a café. You sold the cafe in xx xx with the understanding the freehold building would be purchased also within 12 months. The freehold building was sold on xx xx xx. As the disposal of the property has not occurred within 12 months of the cessation of the business being carried on by you, that is your business ceased in xx xx and the purchase of the freehold building did not occur until xx xx, the active asset test will only be satisfied if the Commissioner allows a longer period under subparagraph 152-35(a)(ii) of the ITAA 1997. 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 requested 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 is any mischief involved; and · the consequences of the decision. After considering the relevant factors against your circumstances, it is considered that you have not provided a reasonable and acceptable explanation for the delay in the transfer of the property. In particular, it is noted that the main reason for the delay in the transfer of the property was that, although you had a contract, you omitted to include in that contract a clause stipulating the purchase of the freehold building must occur within 12 months. Based on the facts and your submissions, the Commissioner will not exercise his discretion, as it would not be fair or equitable, to extend the period beyond the 12 month period as set out under section 152-35(2)(b)(ii).

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.