Private ruling: CGT - Small business concessions - Active asset test
Published: June 2012
Ruling period: Year ended 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Will the Commissioner exercise his discretion in relation to the active asset test? | A1: No

Relevant facts and circumstances: Your company purchased a franchise after 1 January 1984 and leased a business premises from a third party. After 1 July 1993, you purchased the premises and continued to lease the property to your company. Under the franchise agreement, it was a requirement that you performed the manager's role and physically worked in the store. You were advised by your doctors, that due to your ill health you were both incapable of continuing to work in the store. You were therefore required to sell the franchise under the terms of the franchise agreement. You signed a contract with an unrelated third party to sell the franchise in after 1 July 1997 income year with settlement occurring after 1 July 1998. The new franchisee indicated that they were interested in purchasing the premises from you upon signing the contract for the franchise, however due to the lengthy delays in settlement for the franchise; they would not be in a financial position to do so for another 12 months. You agreed to delay putting the property on the market and remained the owners of the premises. You leased the property to the new franchisee at market rental rates. In 12 months time, the new franchisee advised you that they were still not ready to purchase the premises and asked you to hold off selling for another 12 months. You agreed to this arrangement. After 1 July 2000 income year the new franchisee was still not in a position to make an offer, at this point however, you did not agree to wait any longer and the property was put on the market. You marketed the property both locally and nationally, however there was very little interest. The property was placed on and off the market and you only received two offers. The first offer fell through due to finance. The second offer was from a developer, however at the last minute this deal fell through due to personal circumstances of the purchaser. After 1 January 2009 the lease agreement with the franchisee was due to expire and only had a five year option. At this time you amended the lease agreement to include a ten year option. After 1 July 2010 income year the property was sold.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 152-35 | Income Tax Assessment Act 1997 Subparagraph152-35(2)(b)(ii)

Reasons for decision: Summary: The active asset test is contained in section 152-35 of the Income Tax Assessment Act 1997 (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 for more than 15 years and the asset was an active asset of yours for a total of least 7.5 years during the test period. | Detailed Reasoning - 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 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). In your case, the property was an active asset of yours for less than five years from when you purchased the property to when you ceased your business. You did not place the property on the market for two years you had intended to sell the property to the new franchisee. After this date the property was on and off the market due to minimal interest and received two offers which both fell through. The property was eventually sold in the 2010-11 income year. As the disposal of the property did not occur within 12 months of the cessation of the business being carried on by you, the test period ends at the time of the CGT event. The asset was not active for at least 7.5 years in the test period. Therefore, 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, therefore allowing the test period to end at the time the business ceased. 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. While we understand that your illness and the unfavourable market conditions may have impacted the transfer of the property somewhat, you have requested an extension of approximately 11 years. An extension of such a period of time is well in excess of usual practice for taxpayers in similar circumstances. The property was not placed on the market for two years after the sale of your business, and it was on and off the market after this time. Additionally, you were receiving rental income from the new franchisee for the 12 years that you continued to hold the property as a passive investment. In the interest of fairness to other taxpayers, combined with the significant length of the extension sought, the Commissioner has decided not to exercise the 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) of the ITAA 1997.

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