Issue
Will the taxpayer's original business premises satisfy the active asset test in section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997) if the taxpayer vacated those premises in favour of larger premises shortly before selling the original premises?
Decision
No. The original business premises will not satisfy the active asset test in section 152-35 of the ITAA 1997 because they were not an active asset 'just before' the CGT event.
Facts
The taxpayer, a sole trader, carried on business from premises they owned. The premises had only been used for business purposes. Due to expansion of the business, the taxpayer vacated the premises and moved into larger premises. Shortly after moving, the taxpayer entered into a contract to sell the original premises.
Reasons for Decision
A basic condition for small business relief in Division 152 of the ITAA 1997 is that the active asset test in section 152-35 of the ITAA 1997 is satisfied. The active asset test requires, among other things, the CGT asset to be an active asset 'just before' the relevant CGT event (if the taxpayer's business has not ceased).
The reference to 'just before (the earlier of) the CGT event' in paragraph 152-35(a) of the ITAA 1997 refers to just before the time of the CGT event, that is, in the case of a sale of land under contract, just before the time of entering into the contract for the disposal of the land.
Furthermore, the words 'just before' in paragraph 152-35(a) of the ITAA 1997 effectively mean 'immediately before'.
In this case, the relevant CGT event is the sale of the original business premises (CGT event A1). Immediately before their sale, the premises were not used, or held ready for use, in the course of carrying on the taxpayer's business because the taxpayer had moved to other premises.
Accordingly, the original business premises were not an active asset just before the CGT event and therefore cannot satisfy the active asset test in section 152-35 of the ITAA 1997.