When does a business cease?

The question of whether a business is being carried on is often important in income tax, as it can determine questions such as whether a transaction is on income or capital account, whether one rollover or another is available or whether an asset is trading stock or not.

Equally important is trying to determine when a business ceases. In the context of the small business CGT concessions, the turnover test is only available for a CGT small business entity, which requires that there is a business that is carried on in the CGT event year. So when does a business cease?

It is easy, but perhaps too simplistic to argue that this occurs when the last sale occurs – part of running a business surely has to include collecting debtors after that last sale, or using those sale proceeds to pay out creditors. For a business with physical premises, it may include selling any fitout or equipment and doing a make-good before exiting the premises. It would also include paying staff, but given that their entitlements must be paid by their last day of employment and their super must also be paid right away, the only actions which could take much longer would be the relevant WorkCover and payroll tax recons (if any). So it is not too hard to see a reasonable argument that if one accepts that even an informal winding up a business is part of being in business the date at which the business ends is later than when actual trading ceases.

In the small business CGT concession rules, there is a section which specifically includes these ‘after trading’ activities in certain situations. Section 152-49 states that, for the purposes of applying the active asset test where those active assets are held by an affiliate or a connected entity, or where a partner in a partnership owns an asset used by that partnership, if the former business ‘… is being wound up in that year…’ then the asset remains an active asset in the later year.

As an example, if I control two discretionary trusts (so they are connected with each other) and one trust ran a business until closing the doors in May last year and the other owns the premises the first trust operated from, then if the time taken to wind up the business owned by the first trust continues into this income year then the premises continue to pass the active asset test this year whilst those winding up activities are being undertaken.

Clearly, the winding up itself should occur in an active and timely manner, as artificially extending it may result in gaps in the winding up process long enough to constitute a break in the running of the business. In such a case, this concession may cease to be available. However, where the timing of the winding-up process may affect situations where one is close to passing the active asset test, or being in business for at least 15 years, one should consider where the end date of that business genuinely falls. In this regard, the decision in Eichmann v Comm’r of Taxation [2020] FCAFC 155 is relevant. The Court unanimously took the view that the law in relation to tax concessions should be read in a way beneficial to taxpayers.

As always, the burden of proof is on the taxpayer, so keeping records of what actions were taken to wind up the business, reasons for any delays etc. should be retained to substantiate the position in the event of an ATO review or enquiry. The statutory concession provided by section 152-49 only applies solely for the purposes of subsections 152-10(1A) and (1B), which require a connected entity, or affiliate relationship with the taxpayer selling the asset – for taxpayers in other situations they will have to argue that the business hasn’t ceased as a matter of fact and ordinary meaning.

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