Edited version of your written advice

Authorisation Number: 1051226854956

Date of Advice: 19 May 2017

Ruling

Subject: Capital Gains Tax Relief

Question

Will the Commissioner extend the time period under subsection 152-125(4) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow further time to make the payment required by paragraph 152-125(1)(b) of the ITAA 1997?

Answer

No.

This ruling applies for the following periods

Year ended 30 June 2015

Year ended 30 June 2016

Year ended 30 June 2017

Year ended 30 June 2018

The scheme commenced on

1 July 2014

Relevant facts

Entity A operated a business for over 15 years. Entity A is now winding down the business.

The business was a small business and had a turnover of less than $2,000,000 per annum.

The land used to operate the business is being sold as part of the winding down.

The land was acquired after 1985. The land has since been subdivided.

The land in question is held in separate lots and these lots have been offered for sale as individual lots. To date, some of these lots have been sold and it is intended to sell the remaining lots.

The land is being sold on capital account.

The first CGT event occurred a few years ago.

Entity A has applied the Small Business Entity CGT 15-year exemption to the sales already made to disregard any capital gains. Entity A will apply the concession to the sales of the remaining lots.

Entity A had a significant individual for at least 15 years.

The business had substantial debts/liabilities owing to others after finishing its operations. It also incurred significant debts in preparing the lots for sale. Due to unfortunate circumstances, many of these debts were with mezzanine finance companies with extremely high interest rates. Further, a condition of the financing arrangements dictates that Entity A is required to abstain from distributing cash until the debt is repaid. Entity A still has significant liabilities.

Entity A submits that the inability to make the payment to the significant individual within the required timeframe under section 152-125 of the ITAA 1997 is outside their control as it is a condition of the financiers that their debt be settled first. Entity A considers that it would be unfair for the significant individual to forgo access to the concession provided under section 152-125 merely due to the conditions imposed by the third party financiers.

Entity A requests an extension for the CGT events for the land in question occurring that satisfy the retirement exemption.

Entity A request an extension of time until entity A is able to sell enough of the land to clear the liabilities with the third party financiers. Following that, entity A is expected to be able to make payments to the relevant stakeholders, including the significant individual. Unfortunately, due to the current economic climate you are unable to provide a specific date.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-110

Income Tax Assessment Act 1997 section 152-125

Income Tax Assessment Act 1997 paragraph 152-125(1)(b)

Income Tax Assessment Act 1997 subsection 152-125(4)

Reasons for decision

Division 152 of the ITAA 1997 allows CGT concessions to small businesses where certain conditions are met. A capital gain that results from a CGT event may be reduced or disregarded if the relevant conditions are satisfied.

Subdivision 152-B of the ITAA 1997 outlines the requirements for the small business 15-year exemption.

Section 152-110 of the ITAA 1997 provides a small business 15-year exemption for trusts. Under this section, a company or trust can disregard the capital gain from the disposal of a CGT asset if: 

(a) the company or trust satisfies the basic conditions in Subdivision 152-A of the ITAA 1997 for the small business CGT concessions;

(b) the company or trust continuously owned the CGT asset for the 15-year period ending just before the CGT event happened;

(c) the company or trust had a significant individual for a total of at least 15 years during which time the company or trust owned the CGT asset; and

(d) an individual who was a significant individual of the company or trust just before the CGT event was either:

- at least 55 years old at that time and the event happened in connection with their retirement or

- permanently incapacitated at that time.

Entity A has applied the small business 15-year exemption to the sale of lots already made.

Under section 152-125 of the ITAA 1997, payments to a CGT concession stakeholder are exempt provided that:

● the distribution of the exempt amount was made by the company or trust to the CGT concession stakeholder within two years of the CGT event; and

● the payment made to the CGT concession stakeholder does not exceed their participation percentage.

Under subsection 152-125(4) of the ITAA 1997 the Commissioner may extend the two year time limit.

The Commissioner may exercise his discretion under subsection 152-125(4) of the ITAA 1997 and allow further time to make payments to the concessional stakeholder. Factors considered to determine if the discretion is given include:

● there should be evidence of an acceptable explanation for the period of time requested and 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;

● account must be had of any unsettling of people, other than the Commissioner, or of established practices;

● there must be consideration of fairness between you and other people in like positions and the wider public interest;

● whether there was any mischief involved; and

● consideration of the consequences.

The Commissioner generally extends the time limit where a sale of business agreement provides for the proceeds to be received in instalments over a longer than two year period. An extension may also be given if there has been an unexpected delay in receiving the capital proceeds.

In this case, entity A subdivided the land that was used to operate the business. The business had substantial debts after finishing its operations. Entity A also incurred significant debts in preparing the lots for sale. Many of the debts were with mezzanine finance companies with extremely high interest rates. Such events and circumstances existed prior to the sale of the lots.

The financial position of entity A is not generally a situation where the Commissioner would exercise a discretion and extend the two year time limit under subsection 152-125(4) of the ITAA 1997. The business debts and the terms and conditions of the mezzanine finance including the requirements to abstain from distributing cash until the debt is repaid existed at the time the debt was taken out. Such circumstances are not directly related to the CGT events. The delay in making payments in relation to the exempt amount within two years is not due to unexpected or unforeseen circumstances for entity A.

While we acknowledge the circumstances, the debt position of entity A is of a different nature to the situations in which the Commissioner exercises a discretion under subsection 152-125(4) of the ITAA 1997. The conditions of the financing arrangement are acknowledged. However, after considering the above factors against the circumstances, it is not considered that the choice to subdivide the land and the financial position of entity A are acceptable explanations for an extension of time. While there is no suggestion of mischief in this case, it could not be considered fair to people in like positions to allow you an extension of time.

Having considered the relevant circumstances, the Commissioner will not exercise his discretion and extend the two year time limit under subsection 152-125(4) of the ITAA 1997.

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