Issue
Will the Commissioner allow a longer period than 12 months under subparagraph 152-35(a)(ii) of the Income Tax Assessment Act 1997 (ITAA 1997) between the cessation of a business operated by a company in which the taxpayer owned shares, and the cancellation of the taxpayer's shares?
Decision
Yes. In the particular circumstances described, the Commissioner will allow a longer period than 12 months under subparagraph 152-35(a)(ii) of the ITAA 1997 between the cessation of the business operated by a company in which the taxpayer owned shares, and the cancellation of the taxpayer's shares in the company.
Facts
In November 1999 the taxpayer acquired 50% of the shares in an Australian resident company that operated a business. The taxpayer and the taxpayer's spouse owned all the shares in the company at all times.
In March 2000 the company sold its business and made a capital gain.
Under the terms of the sale, the company received a deposit when the sale contract was signed, and the balance was received 15 months later.
In January 2003 the company was wound up and the taxpayer's shares were cancelled.
During the period from November 1999 to March 2000, the company's active assets comprised 80% or more of the market value of all the assets of the company.
The net assets of the company and its associates were at all times less than $5,000,000.
Reasons for Decision
Shares in a company can be an active asset at a given time if the company is an Australian resident and the company passes the 80% test - subsection 152-40(3) of the ITAA 1997. In addition, the company has to satisfy the controlling individual test and the shareholder has to be a CGT concession stakeholder - subsection 152-10(2) of the ITAA 1997.
The active asset test in section 152-35 of the ITAA 1997 will be satisfied if, in this particular case, the shares of the company are active assets: (a) just before the earlier of: (i) the CGT event in relation to the shares (January 2003), and (ii) (the cessation of the company's business (providing that business ceased to be carried on in the last 12 months, or any longer that the period that the Commissioner allows); and (b) during at least half the period from when they were acquired (November 1999) to the time applicable under paragraph (a).
As the company's business ceased more than 12 months before the CGT event that happened to the shares, the active asset test will only be met for this taxpayer if the Commissioner allows additional time as described in subparagraph 152-35(a)(ii) of the ITAA 1997.
The additional time required is that between March 2001 and January 2003 - a period of 22 months.
In determining if a discretion to allow further time should be exercised, the Commissioner considers the following factors: (1) evidence of an acceptable explanation for the period of extension requested and that it would be fair and equitable in the circumstances to provide such an extension; (2) prejudice to the Commissioner which may result from the additional time being allowed, however the mere absence of prejudice is not enough to justify the granting of an extension; (3) unsettling of people, other than the Commissioner, or of established practices; (4) fairness to people in like positions and the wider public interest; and (5) the consequences to the taxpayer in granting an extension.
In the taxpayer's circumstances, the explanation for the extension of time includes the length of time taken to complete the sale of the business, the time required to wind up the company, the pressure the tax agents were under at that time to handle the extra work created by the new tax system and the Business Tax Reform measures, and the taxpayer's advanced age.
As the taxpayer has provided an adequate explanation for the delay, and the decision will not prejudice or unsettle the Commissioner, other persons or practices, it is appropriate to apply the Commissioner's discretion to extend the period of time beyond the 12 month period allowed for in subparagraph 152-35(a)(ii) of the ITAA 1997.