Private ruling: Active asset test
Date of advice: 18 January 2016
Published: March 2016
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Does the Land satisfy the active asset test in section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No.

Relevant facts and circumstances: You purchased Land in the 200X-X, financial year. You were the sole directors and shareholders of the Company. The Company used the Land in their business activities. You sold your shares in the business during the 200Y-0Y financial year. The Land was listed and actively marketed for sale through real estate agents prior to you selling your shares. Numerous buyers expressed interest in purchasing the land and you entered into sale contracts with some potential purchasers. However the contracts did not proceed due to the buyers being unable to obtain finance or other reasons. You entered into a contract for sale during the relevant financial year which was settled successfully.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 152-35 | Income Tax Assessment Act 1997 Section 152-40 | Income Tax Assessment Act 1997 Section 328-125

Reasons for decision: Summary: The Land was an active asset for four years and one month. As this is less than half of the test period, the Land does not meet the active asset test. | Detailed Reasoning - Detailed reasoning: To qualify for the small business capital gains tax (CGT) concessions, you must satisfy several conditions that are common to all the concessions. One of the conditions to be satisfied is the active asset test contained in section 152-35 of the ITAA 1997. The active asset test is satisfied if: • 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 • you have owned the asset 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 detailed below. The test period: • begins when you acquired the asset; and • ends at the earlier of: • the CGT event, and • when the business ceased, if the business in question ceased to be carried on in the 12 months before the CGT event. Under subparagraph 152-35(2)(b)(ii) of the ITAA 1997 the Commissioner can allow a longer period than 12 months. The asset does not need to be an active asset just before the CGT event occurred. The Land as an active asset A CGT asset is an active asset at a time if you own the asset and it is used, or held ready for use, in the course of carrying on a business that is carried on by you, your affiliate or another entity that is connected with you. Vacant land is a CGT asset. Entering into a contract to sell the Land triggers CGT event A1. The CGT event A1 occurs at the time the contract is signed. In your case, the successful contract to sell the Land was signed in the relevant financial year. The Company used the land in its business activities and is considered to be connected with you as you were the only directors and shareholders of the Company. Your connection with the Company ceased in the 200X-0X, financial year when you sold your shares in the company. For the purposes of the active asset test, this is the business cessation date. Thus, the Land is considered to have been an active asset during the period you both owned the land and the business cessation date. Determination of test period The test period began when you acquired the Land. The CGT event occurred when you entered into the contract to sell the Land. As stated above, where a business has ceased more than 12 months prior to the CGT event, the Commissioner may allow the business cessation date to be the end date for the test period, that is, extending the 12 month period. In determining this, 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 allow an extension, 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 state that you were unable to sell the Land until the relevant financial year due to potential purchasers being unable to obtain finance and the effects of the global financial crisis (GFC). Whilst it is accepted that you took appropriate steps to sell the Land, we consider that your circumstances do not warrant an extension of time. This is for the following reasons: • the inability of potential purchasers to obtain finance is a normal commercial risk when selling property and is an insufficient reason for the Commissioner to grant an extension • there is insufficient evidence to prove the GFC prevented the sale of the Land at an earlier date • whilst 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. Satisfying the active asset test Based on the above, the Land was an active asset for less than half of the test period. Therefore the active asset test has not been satisfied.