Issue
For the purpose of determining whether a share in a company that has ceased to carry on its business satisfies the active asset test is 'the relevant business' referred to in subparagraph 152-35(a)(ii) of the Income Tax Assessment Act 1997 (ITAA 1997) the business previously carried on by the company?
Decision
Yes. For the purpose of determining whether a share in a company that has ceased to carry on its business satisfies the active asset test, 'the relevant business' referred to in subparagraph 152-35(a)(ii) of the ITAA 1997 is the business previously carried on by the company.
Facts
The taxpayer is the controlling individual of an Australian resident company and acquired shares in the company after 19 September 1985. The company's business is sold in winding-up the company. Six months later the shares in the company are cancelled and the taxpayer makes a capital gain on the cancellation. Just before the sale of the company's business, the market value of the active assets of the company was at least 80% of the market value of all the assets of the company.
Reasons for Decision
For the small business CGT concessions in Division 152 of the ITAA 1997 to apply, the CGT asset must satisfy the active asset test in section 152-35 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, if the relevant business had ceased to be carried on in the 12 months before the CGT event, the cessation of that business. The Commissioner can allow a longer period than 12 months.
The reference to 'the relevant business ceased to be carried on' in subparagraph 152-35(a)(ii) of the ITAA 1997 is not limited to a business that ends, in the sense that no one continues to carry it on, and includes a reference to a business that has ceased to be carried on by a taxpayer because the taxpayer has sold that business (ATO Interpretative Decision ATO ID 2003/504).
For the purpose of determining whether a share in a company that has ceased to carry on a business satisfies the active asset test, the 'relevant business' referred to in subparagraph 152-35(a)(ii) of the ITAA 1997 is the business previously carried on by the company.
Therefore, if a CGT event happens to a share in a company in the 12 month period (or such longer period as the Commissioner allows) after the company has ceased to carry on its business, the relevant test time for paragraph 152-35(a) of the ITAA 1997 purposes is just before the cessation of the business because that pre-dates the CGT event. That is, the share must be an active asset just before the cessation of the business.
Under subsection 152-40(3) of the ITAA 1997 a share in a company is an active asset at a given time if: • it is a share in an Australian resident company; and • the total of the market values of active assets and certain capital proceeds of the company is 80% or more of the market value of all the assets of the company.
In this case, the company's business ceased six months prior to the CGT event happening to the shares. As well, the market value of the active assets of the company was at least 80% of the market value of all the assets of the company just before cessation of the company's business (paragraph 152-40(3)(b) of the ITAA 1997). Accordingly, the shares held by the taxpayer were active assets just before the cessation of the business.
To satisfy the active asset test, the shares must also be active assets for at least half of a certain period (paragraph 152-35(b) of the ITAA 1997). In this case, the shares must be active assets for at least half of the period from when they were acquired (assuming they have been owned for 15 years or less) to when the business ceased. This means that the total of the market values of active assets and certain capital proceeds of the company must be 80% or more of the market value of all the assets of the company for this same period.