ATO Interpretative Decision

ATO ID 2003/687

Income Tax

• This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Will the general interest charge (GIC) imposed under section 170AA of the Income Tax Assessment Act 1936 (ITAA 1936) be remitted where a replacement asset is not acquired by a taxpayer who has chosen a small business roll-over?

Decision

Yes. The GIC imposed under section 170AA of the ITAA 1936 will be remitted for the 2 year period after the CGT event.

Facts

The taxpayer sold a business in the year ended 30 June 1999 and made a capital gain in respect of goodwill.

The taxpayer chose the small business roll-over in former Division 123 of the Income Tax Assessment Act 1997 (ITAA 1997) to disregard the capital gain for the year ended 30 June 1999.

However, due to poor health, the taxpayer did not buy a replacement asset.

As a result of the taxpayer's amendment request, the capital gain was included in the taxpayer's assessable income and GIC was imposed on this additional income.

Reasons for Decision

Where an assessment is amended to increase the amount of tax payable, a taxpayer is liable to pay the GIC under section 170AA of the ITAA 1936. However, section 8AAG of the Taxation Administration Act 1953 (TAA 1953) allows the Commissioner to remit all or part of the GIC payable in appropriate circumstances.

Taxation Ruling IT 2444 and the ATO Receivables Policy provide guidelines for determining when the Commissioner will remit the GIC. It is clear from these guidelines that the GIC will be payable in most situations and remission will only be granted in limited circumstances. Paragraph 13 of Taxation Ruling IT 2444 states that the interest charge on underpayments of tax is designed to compensate the revenue for the full amount of tax not having been paid by the due date.

Paragraph 15 of IT 2444 broadly describes three kinds of situations in which remission in whole or in part may be warranted, namely:

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where a taxpayer voluntarily advises of an underpayment;

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where an understatement of taxable income resulted from an interpretation of the law adopted by a taxpayer for which there was judicial or quasi-judicial authority at the time of lodgement of the taxpayer's return; and

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where, by reason of the particular circumstances, it is considered fair and reasonable to remit the interest.

When the taxpayer chose the small business roll-over, there was no requirement to include the capital gain in their income tax return for the income year the capital gain was made.

Under Division 123 of the ITAA 1997, a capital gain is disregarded where a replacement asset is acquired during the period starting one year before and ending 2 years after the happening of the last CGT event in the income year for which the taxpayer obtained the small business roll-over. Where a replacement asset is not acquired within this time frame, the taxpayer is required to include the capital gain in their income tax return for the income year in which the CGT event happened.

When the taxpayer did not acquire a replacement asset, the taxpayer requested an amendment to their income tax return that resulted in their assessable income being amended to include the disregarded capital gain for the year ended 30 June 1999, and GIC was imposed.

Given that the taxpayer voluntarily advised of the understated income, and it was due to the taxpayer's poor health that a replacement asset was not acquired, it is appropriate for the Commissioner to exercise the discretion in subsection 8AAG(1) of the TAA 1953. The GIC will be remitted for the 2 year period after the CGT event. However, the GIC will still apply from the day after the end of the relevant 2 year period to the date of the taxpayer's amendment request.

Year of income:  Year ended 30 June 1999

Legislative References:
Income Tax Assessment Act 1936
   section 170AA

Related Public Rulings (including Determinations)
Taxation Ruling IT 2444

Related ATO Interpretative Decisions
ATO ID 2001/244
ATO ID 2003/686

Other References:
ATO Receivables Policy

Keywords
Income tax penalties
Remission of Section 170AA interest
Section 170AA interest

Business Line:  Losses and CGT Centre of Expertise

Date of publication:  8 August 2003

ISSN: 1445-2782