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Is the 'relevant business', for the purposes of subparagraph 152-35(a)(ii) of the Income Tax Assessment Act 1997 (ITAA 1997) where the taxpayer's active asset is a share in a company, the business that was carried on by the company?

Yes. The 'relevant business', for the purposes of subparagraph 152-35(a)(ii) of the ITAA 1997 where the taxpayer's active asset is a share in a company, is the business that was carried on by the company.

The taxpayer and the taxpayer's spouse owned all the shares in an Australian resident company which carried on a business.

The company sold its business and made a capital gain from the disposal of goodwill. Just before the cessation of the business, the market value of the company's active assets was greater than 80% of all of the company's assets.

The company was wound-up during the year ended 30 June 2003 and CGT event C2 happened when the taxpayer's shares were cancelled.

The net assets of the company and its associates were at all times less than $5,000,000.

A share in a company can be an active asset if the company satisfies the controlling individual test and the individual shareholder (the taxpayer) is a CGT concession stakeholder in the company - subsection 152-10(2) of the ITAA 1997. The company has to be an Australian resident company and it has to satisfy the 80% test - subsection 152-40(3) of the ITAA 1997.

For the taxpayer's shares to satisfy the active asset test under section 152-35 of the ITAA 1997, they have to be active assets at a particular point in time (the earlier of the CGT event in relation to the shares and, if the 'relevant business' ceased to be carried on in the last 12 months, or any longer period that the Commissioner allows, the cessation of the business) and for half of a particular period (in this case, from when the CGT asset (the shares) were acquired to the cessation of the business).

Subparagraph 152-35(a)(ii) applies in relation to the relevant test time, as the cessation of the business predated the CGT event happening to the shares. As the company always had at least 80% of its assets as active assets up until the cessation of the business, and assuming the 12-month (or such longer period as is allowed) requirement is satisfied, then just before the cessation of the business, the shares would be active assets because paragraph 152-40(3)(b) would be satisfied.

In our view, the 'relevant business' referred to in subparagraph 152-35(a)(ii) of the ITAA 1997 is the business that was carried on by the company in which the taxpayer held the shares.

This is evident from a reading of the explanatory memorandum accompanying amendments to extend the capital gains tax rollover relief for small business in Division 17A of the Income Tax Assessment Act 1936 (one of the predecessors of the small business CGT concessions in Division 152 of the ITAA 1997). The amendments allowed small business owners to dispose of the underlying assets of their business, or alternatively, where the business is carried on through a company or unit trust, to dispose of their shares or units and reinvest in new active assets or other shares or units.

The stated purpose, as per the explanatory memorandum, was to enable individual taxpayers actively involved in managing their businesses through certain companies or unit trusts to obtain roll-over relief without separately selling active assets of the company or trust. The amendments will allow the sale of a business and roll-over where this is done through the sale of shares in a company.

Therefore, the relevant business for purposes of subparagraph 152-35(a)(ii) of the ITAA 1997 where the taxpayer's active asset is a share in a company, is the business that was carried on by the company.