Private ruling: CGT, small business roll over
Published: June 2012
Ruling period: Year ended 30 June 2009 | Year ended 30 June 2011
Date scheme commenced: 19 June 2009

Ruling: Q1: Can the taxpayer use the small business rollover in Subdivision 152-E of the Income Tax Assessment Act 1997 ? | A1: 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. Some years ago the taxpayer operated a business from premises that it had to leave. The land was to be sold with vacant possession. The taxpayer with the guidance of the local government authority subsequently found land which it believed would be suitable and acquired the land as a normal business transaction. The local government authority had indicated that it would support an application for rezoning of the land. The taxpayer then proceeded to go through the rezoning process as the land was not eligible to be used for its business. This process took some time. The land was rezoned and the taxpayer immediately commenced to use it actively in its business. A government department confirmed they would resume the land. Negotiations with the government department commenced a short time prior to the land being rezoned. It was never the intention of the taxpayer to dispose of the land and it was only as a result of the government department's decision to acquire, that the land was subsequently valued and acquired by the government department. After negotiation the land was acquired by the government department. The land was not actively used by the taxpayer for 50% of the time that it was owned. The reason the land could not be actively used was the rezoning took so long and it was not possible for the client to use the land actively until the rezoning had been finalised. Despite serious efforts by the taxpayer to find a replacement property on which to construct its business, the search was unsuccessful and the taxpayer realised that given the capital gains tax implications of the sale, there was a two year window that would expire. The taxpayer requested an extension of time because of the difficulty in locating land and getting council approval. During the negotiations with the ATO, the two year time period was coming close to an end and therefore the taxpayer made the decision to acquire a hire business as a rollover asset.

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 and | Income Tax Assessment Act 1997 Section 152-400.

Reasons for decision: Summary: While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision. The taxpayer cannot use the small business rollover in Subdivision 152-E of the Income Tax Assessment Act 1997 (ITAA 1997). | Detailed Reasoning - Detailed reasoning: In order to obtain the small business rollover in Subdivision 152-E of the ITAA 1997 the basic conditions in Subdivision 152-B of the ITAA must be met. Those conditions include, at paragraph 52-10(1)(d) of the ITAA 1997, meeting the CGT active asset test. Under subsection 152-35(1) of the ITAA 1997, a CGT asset satisfies the active asset test if: · you have owned the asset for 15 years or less and the asset was an active asset of yours for at least half of the period specified in subsection (2); or · you have owned the asset for more than 15 years and the asset was an active asset of yours for at least 7½ years during the period specified in subsection (2). In subsection 152-35(2) of the ITAA 1997, the period: · begins 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 or any longer period that the Commissioner allows - the cessation of the business. The meaning of an active asset is found in section 152-40 of the ITAA 1997. Subsection (1) it states that: A CGT asset is an active asset at a time if, at that time: you own the asset (whether the asset is tangible or intangible) and it is used, or held ready for use, in the course of carrying on a business that is carried on (whether alone or in partnership) by: (i) you; or (ii) your affiliate; or another entity that is connected with you; or (b) if the asset is an intangible asset - you own it and it is inherently connected with a business that is carried on (whether alone or in partnership) by you, your affiliate, or another entity that is connected with you. The taxpayer acquired the land for the purpose of continuing its business. Prior to being able to do this the taxpayer was waiting for the rezoning of the land. An asset that is held ready for use in the course of carrying on a business may be an active asset. However, the fact that the land could not be used for the business until it was rezoned means that it could not be considered as being ready for use. This is supported by ATO ID 2002/354 in which land where minor earthworks have been carried out in preparation for the construction of a shed was considered as not being 'held ready for use'. The taxpayer did use the land eventually in carrying on its business from the time it was rezoned by the local government authority. Whilst this may be a short period of time, it means that the asset was an active asset. The taxpayer has stated that the land was not used for at least 50% of the time that it held the land. The circumstances that led to this situation were to an extent out the control of the taxpayer. However, there is no discretion available to the Commissioner in relation to the requirement in paragraph 152-35(1)(a) of the ITAA 1997. Consequently, the taxpayer does not meet the basic conditions in Subdivision 152-A of the ITAA and cannot use the small business rollover in Subdivision 152-E of the ITAA 1997.

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.