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Edited version of your written advice
Authorisation Number: 1012827084753
Date of advice: 19 June 2015
Ruling
Subject: Capital gains tax small business concessions
Question
Will the Commissioner exercise his discretion under subsection 152-125(4) of the Income Tax Assessment Act 1997 (ITAA 1997) to extend the time limit to allow the small business capital gains tax (CGT) concessions to be applied?
Answer
Yes.
This ruling applies for the following periods:
Year ending 30 June 2015.
Year ending 30 June 2016.
The scheme commences on:
1 July 2014.
Relevant facts and circumstances
You sold a post CGT asset (contract dated in the 20XX-XX financial year) with a settlement date in the relevant financial year.
50% of the sale price was payable in the relevant financial year with the balance due to be paid in the subsequent financial year.
The funds were received as follows:
• $X in the relevant financial year
• $x in the subsequent financial year
You submit that all conditions have been met to be eligible for the 15 year exemption.
With the settlement date being post the two year time frame the company did not have the cash available to make any payments to the CGT concession stakeholder.
Payments have been made to the CGT concession stakeholder in the relevant and subsequent financial years.
Relevant legislative provisions
Income Tax Assessment Act 1997 Subsection 152-125(4).
Reasons for decision
Section 152-125 of the ITAA 1997 explains that if a capital gain made by a company is disregarded under the small business 15 year exemption, any distributions made by the company of that exempt amount to a CGT concession stakeholder is:
• not included in the assessable income of the CGT concession stakeholder, and
• not deductible to the company
provided certain conditions are satisfied.
The conditions are:
• the company or trust must make a payment within two years after the CGT event that resulted in the capital gain
• the payment must be made to an individual who was a CGT concession stakeholder of the company or trust just before the CGT event, and
• the total payments made to each CGT concession stakeholder must not exceed an amount determined by multiplying the CGT concession stakeholder's control percentage by the exempt amount.
It has been recognised that the requirement to distribute the exempt amount within two years may cause problems where the capital proceeds are to be received by instalments (which is commercial practice). Subsection 152-125(4) of the ITAA 1997 allows the Commissioner to extend the two year time limit to make a payment to a CGT concession stakeholder.
In determining if discretion should be exercised, the Commissioner will consider the following factors:
• whether there is 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
• whether there is any prejudice to the Commissioner if the additional time is allowed, however the mere absence of prejudice is not enough to justify the granting of an extension
• whether there is any unsettling of people, other than the Commissioner, or of established practices
• fairness to people in like positions and the wider public interest
• whether there is any mischief involved, and
• a consideration of the consequences.
The Explanatory Memorandum to the Tax Laws Amendment (2006 Measures No 7) Act 2001 states
There is a requirement that the company or trust make the payments relating to the exempt amount within two years of the CGT event. To take into account actual taxpayer circumstances and commercial practices, the Commissioner has a discretion to extend this time limit.
Application to your circumstances
You signed a contract for the sale of your asset in the 20XX-XX financial year. Settlement was not due to occur until the relevant financial year. You also provided vendor financing to the purchasers and the payments were paid in instalments on and after settlement.
Due to the purchasing arrangement in place, you received the total of the payments more than two years after the CGT event. You were therefore unable to meet the requirements of subsection 152-125(1) of the ITAA 1997 unless the Commissioner extends the time limit.
Having considered the particular circumstances of this case, the Commissioner will apply his discretion under subsection 152-125(4) of the ITAA 1997 and allow an extension to the two year time limit.
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