Edited version of private ruling

Authorisation Number: 1011550636395

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Ruling

Subject: Small business CGT concessions - extension of time to acquire a replacement asset

Will the Commissioner, pursuant to subsection 104-190(2) of the Income Tax Assessment Act 1997 (ITAA 1997), extend the time limit set out in paragraph 104-185(1)(a) of the ITAA 1997 for you to acquire a replacement asset?

Yes.

This ruling applies for the following periods:

1 July 2008 to 30 June 2009.

1 July 2009 to 30 June 2010.

1 July 2010 to 30 June 2011.

The scheme commences on:

1 July 2008.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The trust sold an asset which resulted in a capital gain.

The trust would like to apply the small business roll-over.

The trust looked for a replacement asset but was unable to find a suitable building. Instead, the trust decided to purchase land and construct a suitable building.

The trust signed a contract to purchase a block of land but settlement did not occur until some time later.

It took some time to have the land rezoned so that the trust could construct the type of building it needed.

The trust then had plans drawn up to complete construction of a commercial building. There were delays with having the plans passed through council.

To construct the building the trust needed to borrow funds from a financial institution. The trust had difficulty in borrowing the funds as the financial institutions were reluctant to loan money due to the economic downturn.

Due to the inability to purchase a suitable building and then delays with purchase of the land, rezoning of the land, having the plans approved at council and borrowing funds, the building will not be completed until later in 2010 and therefore the trust will not have acquired a replacement asset within two years of disposing of the original asset.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10.

Income Tax Assessment Act 1997 Section 104-185.

Income Tax Assessment Act 1997 Paragraph 104-185(1)(a).

Income Tax Assessment Act 1997 Subsection 104-185(1).

Income Tax Assessment Act 1997 Section 104-190.

Income Tax Assessment Act 1997 Subsection 104-190(2).

Income Tax Assessment Act 1997 Section 152-415.

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA of the ITAA 1936, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Small business rollover

The conditions that must be met in order to obtain relief under the small business rollover provisions are set out in Subdivision 152-E of the ITAA 1997. The rollover allows a small business entity to defer the making of a capital gain from a capital gains tax (CGT) event happening in relation to a small business asset, if it acquires one or more replacement assets and certain conditions are satisfied.

One of the requirements to be satisfied for the small business rollover is that the replacement asset the taxpayer obtains satisfies the conditions set out in section 104-185 of the ITAA 1997.

Subsection 104-185(1) of the ITAA 1997 requires the taxpayer to acquire a replacement asset within the period starting one year before, and ending two years after the last CGT event happens in the income year for which the taxpayer obtains the small business rollover.

The most common CGT event is CGT event A1. Under subsection 104-10(1) of the ITAA 1997, CGT event A1 occurs when the taxpayer disposes of an active asset. According to subsection 104-10(3) of the ITAA 1997, CGT event A1 arises at the time the taxpayer enters into the contract for the disposal of the asset.

The Commissioner may exercise his discretion and extend the time limit for the taxpayer to acquire a replacement asset under subsection 104-190(2) of the ITAA 1997.

In Hunter Valley Developments Pty Ltd and Ors v. Cohen (1984) 58 ALR 305; (1984) 3 FCR 344; (1984) 7 ALD 315, Wilcox J summarised principles to guide the exercise of the courts discretion. These principles are of a general nature applicable where there is a discretionary power to extend a procedural time limit and have been applied to the exercise of the power of the Commissioner to extend time.

In determining whether the discretion should be exercised, the Commissioner considers the following factors:

· There should be evidence of an acceptable explanation for the period of extension requested and that it would be fair and equitable in the circumstances to provide such an extension.

· Account must be had to any prejudice to the Commissioner which may result from the additional time being allowed, however the mere absence of prejudice is not enough to justify the granting of an extension.

· Account must be had of any unsettling of people, other than the Commissioner, or of established practices.

· There must be a consideration of fairness to people in like positions and the wider public interest.

· Whether there is any mischief involved.

· A consideration of the consequences.

Application to the case

The trust contracted for the sale of the asset. In order to satisfy subsection 104-185(1) of the ITAA 1997, the trust needs to acquire a replacement asset within the period starting one year before the CGT event and ending two years after the CGT event.

The trust did not acquire a replacement asset within two years. The Commissioner may exercise his discretion to extend the time limit, as provided in subsection 104-190(2) of the ITAA 1997.

The factors relevant to the Commissioner exercising his discretion in this case are as follows:

· The trust looked for a replacement asset but had difficulty finding a suitable property. The trust purchased land to construct a suitable building but this took some time to settle. The trust had to have the land re-zoned and the plans to construct the building were delayed in council The trust also had trouble obtaining finance.

· The granting of an extension in the circumstances would not give rise to any prejudice towards the Commissioner. The request for an extension of time to acquire a replacement asset is not due to any intent to avoid any form of taxation.

· The granting of an extension in these circumstances, would not cause any unsettling of persons other than the Commissioner, nor would it unsettle any established practices as the granting of any extension of time to taxpayers, dependent upon their facts, is itself an established practice.

· The granting of an extension of time in these circumstances would not result in any amount of unfairness to people in similar circumstances or like positions. The availability to apply for an extension of time, in the same manner as the trust has, is available to all people with similar circumstances as well as to the wider taxpaying public.

· There is no mischief involved in the circumstances which have resulted in the trust requesting an extension of time.

· The consequences of granting the extension to the trust is that the trust may be eligible for the small business rollover concession, and thus the capital gain that would have arisen on the disposal of the asset will be disregarded to the extent set out in section 152-415 of the ITAA 1997. If the extension is not granted to the trust, then the trust will not be eligible for the small business rollover concession and therefore a capital gain liability will arise on the sale of the shares.

Having considered the relevant factors, the Commissioner is able to apply his discretion and allow a reasonable extension to the time limit. Allowing an extension is not prejudicial to the Commissioner in this case nor is it unfair to other people in similar positions.

The two year time limit is extended. The extension will allow a new asset to be considered a replacement asset for the purposes of section 104-185 of the ITAA 1997.

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