Private ruling: Small Business CGT concessions - Active Asset / Extension of time
Date of advice: 6 June 2016
Published: July 2016
Ruling period: 30 June 2016. | 30 June 2017.
Date scheme commenced: After 20 September 1985.

Ruling: Q1: Would you and your late spouse have been entitled to apply the small business capital gains tax concessions had the property been sold prior to your spouse's death? | A1: No. | Q2: Will the Commissioner exercise his discretion under subsection 152-80(3) of the Income Tax Assessment Act 1997 (ITAA 1997) to extend the time limit from two years after the date of death by roughly another 19 months? | A2: No.

Relevant facts and circumstances: 1. The property is located in Australia (the property). 2. You and your late spouse bought the property sometime after 20 September 1985. 3. The size of the property is more than 16 hectares (approx. 40 acres). 4. The vast majority of the property is vacant land, roughly 15 hectares. You have said that in one year you tried to crop this area, however it was unsuccessful and you made no money from this cropping attempt. Over the years you managed the grass on this area of land (because you have stated that you had no livestock and did not use the land for agistment), you have said that when your spouse was alive they used to mow the grass. The grass was cut and not turned into hay. You now get a person to cut the grass for you. 5. The land area that contains the houses and the shed is approximately 4 acres (1.6 hectares). The shed is located on the property boundary. 6. One house is your main residence. This dwelling was built more than 25 years ago and has been your main residence since that time. 7. The other house was built about 17 years ago and has been described as two units of accommodation that is the main residence of your adult children. Your adult children live in this house rent free. 8. You carried on a small business partnership until about 20 years ago and then you transferred the business to a private company. You and your late spouse were both directors and shareholders of the company. 9. The company still operates as a business. 10. You remain a director and shareholder of the company. 11. The property has not been used by any other business. 12. The shed dimensions are approximately 30.5 metres X 7.5 metres. 13. The company does not pay you any rent for any use of the shed. 14. The shed is used as a warehouse in the following ways: • Store tools; • Plant and equipment; and • Motor vehicles. 15. There are less than five containers outside the shed containing material supplies. 16. Only a small portion of the property was used in the running of your business. The vast majority of the property was not used for business purposes at all. 17. The vast majority of the property does not produce any sort of income, let alone business income. 18. The majority of your business activities were conducted off site. 19. In a private ruling application lodged with the Australian Taxation Office (ATO) on behalf of you and your late spouse sometime in 20XX you said that you were considering selling the property to a property developer and retaining a number of hectares of land as a part of your main residence. 20. In a private ruling application lodged with the ATO for you sometime in 20ZZ, you again stated that you were considering selling the property to a property developer and retaining a number of hectares of land as a part of your main residence. 21. In both these private ruling applications you stated as a fact that the property was an active asset. This active asset aspect of those private ruling applications was not examined at that time. This statement was accepted on face value as correct. 22. You do not own any other adjacent land to this property. 23. Your spouse's date of death was sometime in 20YY. 24. Your solicitor has not applied for probate. 25. Your spouse's half share of the property has passed to you at their date of death because you had joint tenancy of the property with them. 26. You have received verbal offers for the sale of the property; the offers did not proceed further when the vendor discovered that the Precinct Structure Plan (PSP) had not been completed. There have been no offers to buy the property for a lower price without the PSP. 27. A PSP has been described as a master plan which shows the location of future land uses, such as residential, schools, shops, open space and community facilities. 28. Your property is included in the proposed PSP. 29. Sometime in 20XX, you as a landowner were sent a letter from a project management company (X) providing an update on land re-zoning issues and progress. X advised that they would be writing a submission to have your property area included in the draft re-zoning submissions. 30. In 20AA, the relevant Minister approved a larger area to be in the initial stages of land sub-division re-zoning. Your property is located in this area. 31. A short time later in 20AA X notified you that your area was included in the initial stages of re-zoning and requested that landowners sign a form confirming their individual support of the process. The letter advised that another company (Y) and X had paid all production costs and consultancy fees associated with the submissions. 32. Later in 20AA, Y also confirmed that your property was included in the expanded land initial stages of re-zoning area. 33. Later in 20AA X wrote to you as a landowner of the property inviting you to engage them (X) to provide project management services to introduce and negotiate with purchasers of your property on your behalf. The agreement discussed that any offer to purchase would include a sharing of a non-refundable option fee. On achieving a sale X would charge you a total management fee of X% plus GST of the sale price, this fee was based on X% for management and submissions for the land re-zoning process plus X% for management of the sale. As a result of this invitation you signed with X, the details of which are described below at dot point 34. 34. Later in 20AA you and your spouse appointed X to act on your behalf in negotiating the terms of sale for your property for a period of less than five months. In this agreement with X you agreed to accept a sale price for your property in a certain range per acre, with a deposit of a certain percentage and sale period/terms of three to four years. 35. In 20YY a document from X advised you as a landowner that you had been included in a petition along with other landowners in the area lobbying various authorities and the Council to recognise the development potential in your area and commit to the preparation and approval of a PSP so that the general development layout for the area could be determined. 36. In 20ZZ X wrote to you confirming their services to manage the sale of your property exclusively for a certain period. The letter advised buyer interest in a certain price range was achievable. 37. In 20VV X wrote to you confirming the extension of their services to manage exclusively the sale of your property until the end of 20VV. 38. Later in 20VV X advised you that they had recently introduced your property area development to a large property developer. The document included details of a meeting with Council to advise and update on the PSP. Council advised that once they received an initial payment from a developer to fund the PSP that the PSP would commence. The Council anticipated that once the funding was received that the PSP would be completed in about a 24-30 month period. 39. Later in 20VV the large property developer wrote to X confirming interest in purchasing properties, including yours. 40. Later in 20VV X wrote to you and advised of delays in the PSP process commencing and in relation to marketing advised you to formally cancel the sale authority with a certain real estate agent, so that X could market to other agents for prospective buyers. You signed a letter authorising the cancellation of the sale authority with the real estate agent. 41. Later in 20VV in a letter addressed to you from the Council, you were advised that the pre-planning work of the PSP had commenced, however it had been put on hold due to significant delays with third party funding. The letter stated that there had been a re-commencement of various background reports and assessments. The letter stated that a preliminary plan will be prepared by mid-20WW. After this report there would be land owner consultation, and review of all the documents by relevant government agencies and community. It is later, after this process is completed that the PSP document will be prepared. 42. The current status of the PSP is that a developer has paid a certain amount to Council for the PSP to be completed but it has not commenced. 43. You will not undertake any sub-division of the property yourself. 44. You will sell the property as one lot and will agree or accept to sell the property for a certain sale price. 45. The property is currently listed for sale with a different real estate. The property was first listed publicly for sale sometime in 20AA. The property is marketed as follows: • Prime Position - about 16 hectares (approx. 40 acres) in the initial stages of re-zoning for land sub-division; • The site represents an excellent development opportunity and land banking opportunity; • The property is well-placed to provide its future owner with a variety of opportunities to develop this substantial site; Key Features: • Potential yield circa over 250 residential allotments STCA; • Suitable for residential land development; • Property is located within the initial land sub-division re-zoning; • It is a short drive from a Shopping Centre; • Located in close proximity to all of the local suburb's amenities; • A train station is nearby; • Close to a freeway with direct access to a City; • Within close proximity to the proposed new town centre and new residential estates; • The block of land comes with an additional 3 separate houses; • The precinct structure plan suggests these sites will suit residential lots (STPA) in the near future; • It is commuter distance to a city and airport; • At a close proximity to a well known shopping strip and within the radius are primary and secondary schools, parks, recreation facilities and local amenities; • This site represents an unparalleled opportunity to secure a unique development site in a one of the fastest growth corridors; • The vendors are considering reasonable offers with negotiable settlement terms.

Relevant legislative provisions: Income Tax Assessment Act 1997, Section 152-10 | Income Tax Assessment Act 1997, Section 152-35 | Income Tax Assessment Act 1997, Section 152-40 | Income Tax Assessment Act 1997, subsection 152-80(3) | Income Tax Assessment Act 1997, Section 152-105 | Income Tax Assessment Act 1997, Section 328-110 | Income Tax Assessment Act 1997, Section 328-130

Reasons for decision: Summary: The property is not an active asset for CGT purposes. | Detailed Reasoning - Basic Conditions: To qualify for the small business CGT concessions in Division 152 of the ITAA, you must satisfy several conditions that are common to all the concessions. These are called the basic conditions and are as follows: The basic conditions, contained in section 152-10 of the ITAA 1997, are as follows: • 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. | Detailed Reasoning - Passively-held assets: The conditions in subsection 152-10(1A) are satisfied in relation to the CGT asset in the income year if: a) your affiliate, or an entity that is connected with you, is a small business entity for the income year; and b) you do not carry on a business in the income year (other than in partnership); and c) if you carry on a business in partnership - the CGT asset is not an interest in an asset of the partnership; and d) in any case - the small business entity referred to in paragraph (a) is the entity that, at a time in the income year, carries on the business (as referred to in subparagraph 152-40(1)(a)(ii) or (iii) or paragraph 152-40(1)(b)) in relation to the CGT asset. | Detailed Reasoning - Application to your situation: In your case a CGT event will happen when you sell the property and the event will result in a gain. You hold your interest in the asset (the property) passively. This does not preclude you from accessing the small business CGT concessions where the asset (the property) is used in the business of your CGT affiliate that is a small business entity for the relevant income year and the property is held to be an active asset. These tests are considered below. | Detailed Reasoning - CGT affiliate: It is accepted that the company is your affiliate as defined in section 328-30 for the ITAA 1997. | Detailed Reasoning - Active Asset: For the sale of the property to qualify for any of the small business CGT concessions, the CGT asset must also satisfy the active asset test in section 152-35 of the ITAA 1997. In this case, the active asset test is satisfied if: • You have owned the property for more than 15 years and the asset was an active asset of yours for at least 7.5 years during the test period. The test period: • begins when you acquired the asset; • ends at the earlier of: • the CGT event, and • when the business ceased, if the business in question ceased in the 12 months before the CGT event (or such longer time as the Commissioner allows). The meaning of an active asset is given in subsection 152-40 (1) of the ITAA 1997. Paragraph 152-40(1) (a) states that a CGT asset is an active asset at a given time if at that time, you own it and: • use it in the course of carrying on a business, or • hold it ready for use in the course of carrying on a business by: i. you; or ii. your affiliate; or iii. another entity that is connected with you Accordingly, for the property in this case to be considered an active asset it must satisfy one of the above conditions. | Detailed Reasoning - Application to your situation: The central issue to be determined in this case is whether the property was being used, or held ready for use, in the course of carrying on your business. The property was used, as a matter of fact, as a venue for storing tools and equipment as well as providing a storage space for vehicles. The property was also used as a main residence for you and your late spouse and your two adult children. | Detailed Reasoning - Was the property being used?: The term use is not explained in either the legislation or the Explanatory Memorandum to the New Tax System (Capital Gains Tax) Bill 1999 which introduced Division 152 into the ITAA 1997. The Shorter Oxford English Dictionary uses an expression make use of a thing, especially for a particular end or purpose to express the ordinary meaning of the word use. The ordinary English meaning of the term would cover the storage of some tools, equipment and motor vehicles in the shed on the property. This was a physical use of the shed on the property that was connected with the conduct of the business. However, this does not mean that the use to which the shed on the property was being put was contemplated by subsection 152-40(1) of the ITAA 1997 because the use may not have had the required connection with your business. | Detailed Reasoning - The relevant connection: Paragraph 152-40(1)(a) of the ITAA 1997 requires an asset to be used in the course of carrying on a business. This requirement does not require exclusive use of the asset for business purposes but a use that is sufficient to establish the required connection between the asset and the operations of the business. The degree of connection required is expressed by the words in the course of , which connotes the idea that the use of the asset is an integral part of the process by which the business is carried on. In the present case, you acquired the property sometime after 20 September 1985. The purpose of you keeping the property and dwellings for the significant period was to provide a home to you and your late spouse and your two adult children. It is acknowledged that during your period of ownership your business and affiliated company also used the shed on the property to store relevant tools, equipment and materials for the business. The question now is whether storing materials, some equipment and motor vehicles in the shed on the property was integral to the process by which the business was conducted. If it was, the use of the she don the property in such circumstances constitutes a use as contemplated by paragraph 152-40(1) (a) of the ITAA 1997 and the property would qualify as an active asset. | Detailed Reasoning - Conclusion: The property was not an active asset of yours or the company. The reasons are: • The property with a land size of over 16 hectares was used in a manner that was incidental to the conduct of the business. However, the property was not used in the course of carrying on the business as required by paragraph 152-40(1)(a) of the ITAA 1997. • The degree of connection required by paragraph 152-40(1)(a) ITAA 1997 is expressed by the words 'in the course of' which mean 'integral to the process by which the business was carried on'. • The relevant question, in this case, is whether storing tools, equipment and motor vehicles in the shed on the property was integral to the process by which the business was conducted? The answer is that the activity was not integral to the process by which the business was conducted, but was instead merely incidental. • The main purpose of the property was to provide you and your late spouse and your adult children a place to live. • The shed on the property was merely a convenient place to: • Store tools; • Plant and equipment; and • Motor vehicles. • The containers outside the shed was a convenient place to store material supplies on a small scale. • Only a very small portion of the property (the shed) was used in the running of your business. The vast majority was not used for business purposes at all. We consider the fact that you used a small portion of the property, to store tools, plant, equipment and motor vehicles in the shed to have been a convenient option for you, rather than an essential activity in the running of your business. • No other business activities were conducted on the property and all the essential activities were conducted elsewhere off site as relevant. All the profit generating work was undertaken away from the property. The property was not used in generating income. • The requisite degree of connection has not been established. An incidental connection between the business and the asset is insufficient to establish that it was used or held ready for use in the course of carrying on the business. | Summary: The Commissioner will not exercise his discretion under subsection 152-80(3) of the ITAA 1997 to extend the time limit from two years after the date of death by more than a further 18 months. | Detailed Reasoning - Detailed reasoning: Section 152-80 of the ITAA 1997 allows either the legal representative of an estate or the beneficiary to apply the small business CGT concessions in respect of the sale of the deceased's CGT assets in certain circumstances. Specifically, the following conditions must be met: • the asset devolves to the legal personal representative or passes to a beneficiary • the deceased would have been able to apply the small business concessions themselves if they had disposed of the asset immediately prior to their death, and • a CGT event happens within 2 years of the deceased's death unless the Commissioner extends the time period in accordance with subsection 152-80(3) of the ITAA 1997. In your circumstances the deceased (your late spouse) would not have been able to apply the small business CGT concessions if they had disposed of the asset just prior to their death because the property is not considered an active asset. | Detailed Reasoning - The following reasons for decision are provided for completeness only: In your private ruling application of recent date you have requested that the Commissioner exercise his discretion to extend the two year period from two years after the date of death to a further period of greater than 18 months. | Detailed Reasoning - Extension to apply small business CGT concessions: Your late spouse passed away more than two and half years ago and the property remains unsold. This is longer than the two year limit required by paragraph 152-80(1)(d) of the ITAA 1997. The Commissioner may exercise his discretion to allow an extension of time under subsection 152-80(3) of the ITAA 1997 in situations where: • there is a significant delay in obtaining probate • the will is contested or challenged • the complexity of a deceased estate delays the completion of administration of the estate • a trustee or beneficiary is unable to attend to the deceased estate due to unforeseen or serious personal circumstances arising during the two-year period (for example, the taxpayer or a family member has a severe illness or injury), or • settlement of a contract of sale is unexpectedly delayed or falls through for circumstances outside the beneficiary or trustee's control. In determining whether the discretion to allow further time would be exercised, the Commissioner considers the following factors: • evidence of an acceptable explanation for the period of the extension requested and whether it would be fair and equitable in the circumstances to provide such an extension • prejudice to the Commissioner which may result from the additional time being allowed but the mere absence of prejudice is not enough to justify the granting of an extension • unsettling of people, other than the Commissioner, or of established practices • fairness to people in like positions and the wider public interest • whether any mischief is involved, and • consequences of the decision. You and your late spouse first became aware of your property being re-zoned sometime in 20XX. Just after this time in a private ruling application to the ATO you advised that you were considering the sale of your property to a property developer. You first listed the property for sale sometime in 20AA. You are seeking a sale price for the land based on it having a PSP. The delay in selling the property has been caused by the fact that the PSP has not been completed and it is unclear when this may be finalised. It is not considered reasonable to continue extending the time limit for the sale of the property whilst you await for the finalisation of the PSP and thus enabling the sale of the property at a market value relevant to having a PSP. The Commissioner will not exercise his discretion under subsection 152-80(3) of the ITAA 1997 to extend the limit because of two reasons, the first being that the property is not considered an active asset and the second because the grounds for the extension of time are not considered reasonable.