Issue
In determining if the Australian financial services licence (AFS licence) acquired by the taxpayer under one of the same owner rollovers in Subdivision 124-O of the Income Tax Assessment Act 1997 (ITAA 1997) satisfies the active asset test in section 152-35 of the ITAA 1997, is the active asset status of the taxpayer's old licence taken into account?
Decision
Yes. The active asset status of the taxpayer's old licence is taken into account in determining if the AFS licence acquired by the taxpayer satisfies the active asset test in section 152-35 of the ITAA 1997.
Facts
The taxpayer, a financial services provider, owned an old licence acquired under the relevant law in force before the commencement of the Financial Services Reform Act 2001 . Subsequently, the taxpayer became a regulated principal under section 1430 of the Corporations Act 2001 . The old licence was used by the taxpayer in the course of carrying on a financial services business.
The taxpayer applied to the Australian Securities & Investments Commission (ASIC) for the AFS licence during the two year transition period ending on 10 March 2004. ASIC granted the AFS licence to the taxpayer during this period.
The old licence ceased to have effect when the AFS licence was granted. The AFS licence covered all of the activities that were authorised by the old licence. The taxpayer was entitled to the financial services reform (FSR) old licence rollover (same owner) under section 124-880 of the ITAA 1997.
Reasons for Decision
To qualify for the small business CGT concessions in Division 152 of the ITAA 1997 the AFS licence must satisfy the active asset test in section 152-35. This requires the licence to be an active asset at certain times. These times are generally just before the CGT event that happens to the licence and at least half the period of ownership of the licence.
If a taxpayer's business ceases before the CGT event happens to the CGT asset or alternatively, if a taxpayer owns the CGT asset for more than 15 years, the active asset test requires the asset to be an active asset at different times.
Under subsection 152-40(1) of the ITAA 1997 a CGT asset is an active asset if a taxpayer owns it and: (a) uses it, or holds it ready for use, in the course of carrying on a business; or (b) it is an intangible asset that is inherently connected with a business the taxpayer carries on; or (c) it is used, or held ready for use, in the course of carrying on a business by: (i) a small business CGT affiliate of the taxpayer; or (ii) an entity connected with the taxpayer.
As the old licence owned by the taxpayer was used by the taxpayer in the course of carrying on the financial services business and was also an intangible asset inherently connected with the taxpayer's business, the old licence was an active asset of the taxpayer (under both paragraphs 152-40(1)(a) and 152-40(1)(b) of the ITAA 1997).
Subsection 152-45(1A) of the ITAA 1997 modifies the time periods for the active asset test for an AFS licence acquired as a result of a FSR rollover to ensure that the replacement asset, the AFS licence, is taken to be acquired at the time that the original asset, the old licence, was acquired.
The active asset test in section 152-35 of the ITAA 1997 applies as if: • the taxpayer had acquired the AFS licence at the same time that the old licence was acquired • the AFS licence had been the taxpayer's active asset at all times when the old licence was the taxpayer's active asset, and • the AFS licence had not been the taxpayer's active asset at all times when the old licence was not the taxpayer's active asset.
Accordingly, the active asset status of the taxpayer's old licence is taken into account in determining if the AFS licence acquired by the taxpayer satisfies the active asset test in section 152-35 of the ITAA 1997.
Note 1: Subsection 152-45(1A) of the ITAA 1997 modifies the time periods for the active asset test where an AFS licence is acquired under any of the same owner rollover relief provisions in the following sections of the ITAA 1997: • section 124-880, old licence rollover • section 124-885, qualified licence rollover, or • section 124-890, rights rollover.
Note 2: Subsection 152-45(1B) of the ITAA 1997 modifies the time periods for the active asset test where an AFS licence is acquired under any of the new owner rollover relief provisions in the following sections of the ITAA 1997: • section 124-900, old licence rollover • section 124-905, qualified licence rollover, or • section 124-910, rights rollover.