Issue
Is a sale of shares in a company that carries on 'the relevant business' a cessation of the relevant business under subparagraph 152-35(a)(ii) of the Income Tax Assessment Act 1997 (ITAA 1997) for the purpose of determining whether the active asset test is satisfied?
Decision
No. A sale of shares in a company that carries on 'the relevant business' is not a cessation of the relevant business under subparagraph 152-35(a)(ii) of the ITAA 1997 for the purpose of determining whether the active asset test is satisfied.
Facts
Company A carried on business from premises it acquired in 1987. On 1 July 2000, Company A sold the business to a partnership comprising Company B and Company C and also leased the premises to that partnership for use in the business. Company A and Company B had a common 'controller' such that they were both connected entities under paragraph 152-30(1)(b) of the ITAA 1997. Company C was not connected with either Company A or Company B.
On 1 July 2002, the common controller sold their shares in Company B to the individuals that controlled Company C. As a result, Company A and Company B were no longer connected with each other as there was no common controller. Company B continued to carry on its business and use the premises in partnership with Company C.
On 1 June 2003, Company A sold the premises and made a capital gain. It is considering whether it qualifies for small business capital gains tax (CGT) concessions in Division 152 of the ITAA 1997.
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 has ceased in the last 12 months before the CGT event (or any longer period the Commissioner allows), the cessation of that business.
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).
In this case, the premises were an active asset of Company A between 1987 and 1 July 2000 as they were used by Company A in the course of carrying on a business (paragraph 152-40(1)(a) of the ITAA 1997). The premises continued to be an active asset of Company A between 1 July 2000 and 1 July 2002 as they were used in the business of a connected entity (subparagraph 152-40(1)(c)(ii) of the ITAA 1997).
However, the premises ceased to be an active asset from 1 July 2002 until their sale on 1 June 2003 because, although the business carried on by Company B and Company C continued, Company B stopped being connected with Company A as a result of the common controller selling their shares in Company B.
In considering whether that part of the active asset test referred to in the second paragraph of these reasons is satisfied, the question arises as to whether there has been any cessation of the relevant business. Where an asset is an active asset because it is used in the business of a connected entity, the relevant business, as referred to in subparagraph 152-35(a)(ii) of the ITAA 1997, is the business carried on by the connected entity. The question is therefore whether Company B's business (the relevant business) has ceased or been sold.
Company B ceased being a connected entity of Company A on 1 July 2002 which resulted in the premises no longer being an active asset of Company A. However, Company B continued to carry on its business in partnership with Company C after that time. There was no sale or cessation of Company B's business (the relevant business). A sale of shares in a company that carries on the relevant business does not amount to a cessation of the relevant business under subparagraph 152-35(a)(ii) of the ITAA 1997.
Accordingly, consideration must be given to whether subparagraph 152-35(a)(i) of the ITAA 1997 is satisfied. As the premises were not an active asset just before their sale on 1 June 2003, subparagraph 152-35(a)(i) of the ITAA 1997 is not satisfied and therefore the active asset test is not satisfied. The small business CGT concessions are therefore not available in this situation.