CGT small business concessions: active asset test - sale of part of a business - not a cessation

Where part of the operations of a business is disposed of, has the relevant business ceased to be carried on for the purposes of subparagraph 152-35(a)(ii) of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. In the circumstances described the relevant business has not ceased to be carried on for the purposes of subparagraph 152-35(a)(ii) of the ITAA 1997.

The taxpayer's spouse conducted a business from various locations from 1978. Over the years clients were drawn from a wide area. In 1983, the spouse purchased additional business operations and moved to where those operations were located.

The additional business operations acquired were not kept separate from the existing business. All the activities of the business were subject to the same integrated control and management. Only one set of books was maintained and one set of accounts prepared. The entire business was conducted under the one trading name.

From 1989 the business was conducted from a property owned by the taxpayer. On 30 June 1999 the taxpayer's spouse relocated the business from the taxpayer's property and from 1 July 1999 operated from premises in another location. The operations continued under the same trading name.

Prior to relocating, the taxpayer's spouse sold part of the business. From 1 July 1999 the taxpayer's property previously used in the spouse's business was used by the taxpayer to derive rent from the purchaser.

The taxpayer intends to sell the property with the proceeds from the sale to be used to acquire the premises in which the taxpayer's spouse is now carrying on the business. The taxpayer wishes to access the small business roll-over under Subdivision 152-E of the ITAA 1997.

For the small business capital gains tax (CGT) concessions to apply, the active asset test in section 152-35 of the ITAA 1997 must be satisfied (paragraph 152-10(1)(d) of the ITAA 1997).

A requirement of the active asset test in paragraph 152-35(a) of the ITAA 1997 is that the CGT asset must be an active asset just before the earlier of the CGT event giving rise to the capital gain and, in certain circumstances, the cessation of the relevant business in which you used the asset.

A CGT asset is an active asset at a given time if, among other things, you own it and it is used or held ready for use, in the course of carrying on a business by your small business CGT affiliate or another entity connected with you (paragraph 152-40(1)(c) of the ITAA 1997).

Under paragraph 152-25(1)(a) of the ITAA 1997 a spouse is a small business CGT affiliate. In this case the taxpayer's spouse conducted a business from the property owned by the taxpayer. Therefore, while the spouse was conducting the business from the property, the property was an active asset of the taxpayer under subparagraph 152-40(1)(c)(i) of the ITAA 1997.

However, when the taxpayer's spouse moved the business to another location from 1 July 1999 the property was no longer used or held ready for use in the course of carrying on a business by the taxpayer's spouse. The property was therefore no longer an active asset of the taxpayer from that time. If the property was sold in this situation, subparagraph 152-35(a)(i) of the ITAA 1997 would not be satisfied as the property would not be an active asset just before the CGT event.

To satisfy subparagraph 152-35(a)(ii) of the ITAA 1997 the relevant business must have ceased to have been carried on (within a certain period before a CGT event happens to the property) and the property must have been an active asset just before the business ceased to be carried on.

In the circumstances of this case, the taxpayer's spouse sold part of the business operations prior to moving the business to another location. Whether the taxpayer's spouse had been conducting 2 businesses from the property and then later disposed of one of those businesses such that the relevant business might have ceased to have been carried on under subparagraph 152-35(a)(ii) of the ITAA 1997, will depend on all the circumstances.

Taxation Ruling TR 1999/16 (capital gains: goodwill of a business) provides guidance in determining whether more than one business is being carried on in certain situations.

A business may expand or contract without ceasing to be the same business provided the business retains its essential nature and character. Organic growth or expansion by adopting new compatible operations or servicing different clients does not of itself lead to a new business being carried on (TR 1999/16 paragraph 21).

Whether an increase in the business operations constitutes an expansion of an existing business or a new separate business is a question of fact dependent on the circumstances of each particular case. Paragraph 62 of Taxation Ruling TR 1999/16 lists some relevant factors to consider in determining the question.

The following specific circumstances were taken into account in this case: • prior to and at the time of disposal of part of the business carried on by the taxpayer's spouse the business was operated as one business; the part that was sold was not separate or distinct from the other parts of the business, • the type of customers that the business attracted differed by their location and their relationship to the taxpayer's spouse, • the part of the business that was sold was not managed or controlled separately from the remainder of the business, • separate banking and financial records were not maintained, • separate trading names were not used, • the part that was sold did not rely on the other parts of the business; it was separated upon sale and now operates as a single self-sufficient business.

All the activities were subject to the same integrated control and management. Only one set of books was maintained and one set of financial accounts prepared. The entire business was conducted under the one trading name which is how the business continues to be conducted at another location. It was concluded that the business operated as one business.

The expansion of the business upon the acquisition of the additional business operations amounted to organic growth of the business that had been conducted at other locations. The advent of new clients as a result of operating at a new location did not cause the creation of a separate business but rather an expansion of the same business. Likewise, the discarding in an ordinary commercial way of part of the business did not indicate that there had been a change in nature or character of the business carried on. The business had retained its essential nature or character. The unsold part of the business was regarded as the same business as that previously conducted by the taxpayer's spouse (TR 1999/16 paragraph 77).

Accordingly, it was considered that the taxpayer's spouse had not been conducting 2 separate businesses from the property but rather one business which continued to be carried on in another location. The relevant business therefore had not ceased to be carried on and subparagraph 152-35(a)(ii) of the ITAA 1997 cannot apply. The active asset test in section 152-35 of the ITAA 1997 will not be satisfied upon a later sale of the property and therefore the small business CGT concessions will not be available.