Edited version of your written advice

Authorisation Number: 1051354899845

Date of advice: 5 April 2018

Ruling

Subject: Capital gains tax (CGT) – small business concessions - extension of replacement asset period (RAP)

Question

Will the Commissioner exercise his discretion to extend the RAP pursuant to subsection 104-190(2) of the Income Tax Assessment Act 1997¹ in respect of the small business CGT replacement asset roll-over relief?

Answer

Yes

This ruling applies for the following periods:

Income year ended 30 June 2016

Income year ended 30 June 2017

Income year ending 30 June 2018

1 July 2018 to 31 March 2019

The scheme commenced on:

21 September 2015

Relevant facts and circumstances

1. You sold a business, an active asset and satisfied all the conditions to qualify for the small business CGT concessions as set out in Subdivision 152-A. You chose to apply the small business roll-over relief in Subdivision 152-E in the income year ending XX June XXXX, which requires that a replacement active asset be acquired within a two year period. You have not been in business throughout the RAP.

2. The sole director/owner/operator of the business (the director) intended to acquire a replacement asset during the RAP

3. During the RAP, a building belonging to the director was destroyed. Consequently, the director has since been dealing with the relevant agencies in regards to this matter.

4. Further, the director's parent was diagnosed with a serious health condition and this required the director to be heavily involved with the day to day operation of the parents businesses preparing those businesses for sale. These businesses are located interstate. The director needed to travel frequently to assist with the management of each of the businesses. The intention was to sell them, however they were not in a saleable condition. The director has been working to improve the condition of the businesses. Operational performance has been restored and onsite managers have now been appointed.

5. There are no other people involved in the business that could have acquired a replacement asset in the director’s absence.

6. Due to the abovementioned unforeseen circumstances, you were unable to acquire a replacement asset before the end of the RAP; therefore, you are seeking an extension of time of eighteen months to allow for the construction and building of the new premises required for the replacement asset.

7. The director is currently negotiating on the replacement asset acquisition with a view to finalising this during the current calendar year. Negotiations began in January XXXX and contracts are expected to be signed in March XXXX, with construction commencing within the next 6 months.

8. For the purposes of paragraph 104-197(1)(a), you confirmed that you have not incurred any ‘fourth element expenditure’ in relation to a CGT asset.

9. For the purposes of establishing the relevant RAP under section 104-190, you confirmed that the capital proceeds for the CGT event have not been increased under either subsection 116-45(2) or subsection 116-60(3).

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 Subdivision 152-E

Income Tax Assessment Act 1997 section 104-190

Income Tax Assessment Act 1997 subsection 104-190(2)

Income Tax Assessment Act 1997 section 104-197

Income Tax Assessment Act 1997 section 104-197(1)

Income Tax Assessment Act 1997 paragraph 104-197(1)(a)

Income Tax Assessment Act 1997 subsection116-45(2)

Income Tax Assessment Act 1997 subsection 116-60(3)

Reasons for decision

Detailed reasoning

The rules covering the small business roll-over are contained in Subdivision 152-E. The small business roll-over allows you to defer all or part of a capital gain from a CGT event happening to an active asset.

CGT event J5 happens if you choose a small business roll-over under Subdivision 152-E and you have not acquired a replacement asset by the end of the RAP.

Under section 104-190, the RAP is the period starting one year before and ending two years after the last CGT event in the income year for which you obtain the roll-over. The RAP may be extended or modified by the Commissioner under subsection 104-190(2).

In determining whether to allow an extended asset replacement period the Commissioner considers the following factors:

● whether there is evidence of an acceptable explanation for the period of extension requested and whether 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

● the need to ensure fairness to people in like positions and the wider public interest

● whether there is mischief involved, and

● the consequences of the decision.

Application to your circumstances

You sold your business (the active asset) on XX September XXXX. The sole director had full intention to acquire a replacement asset within the two year roll-over period. However due to unforeseen circumstances the director’s ability to acquire a replacement asset within two years was delayed.

The unforeseen circumstances included a building owned by the director being destroyed during the RAP and his/her parents heath issue which required him/her to be heavily involved in his/her parents business located interstate. This resulted in a time consuming and significant restrictions on the director’s ability to acquire the replacement asset within the two year period.

Now, the building has been rebuilt. The director has also been working to improve the condition of his/her parents businesses. As a result, operational performance has been restored and onsite managers have now been appointed.

Further, in January XXXX the director had begun negotiations on the replacement asset acquisition with a view to finalising this during the current calendar year. Contracts are expected to be signed in March XXXX, with construction commencing within the next 6 months.

As established above, you have been unable to acquire a replacement asset due to unforeseen circumstances that has impacted the director’s ability to search and acquire a replacement asset. Allowing an extension is not prejudicial to the Commissioner in this case nor is it unfair to other people in similar positions. There is also no evidence of any mischief involved.

Having considered the relevant factors above, and the particular circumstances of your case, the Commissioner will exercise his discretion to extend the RAP to XX March XXXX under subsection 104-190(2).

Further issue for you to consider

This ruling has not considered your eligibility for the small business roll-over concession. You should ensure that you satisfy the basic conditions and the other conditions relevant for the concession. More information can be found at CGT concessions for small business, which is available on our website www.ato.gov.au.

¹ All legislative references are to the Income Tax Assessment Act 1997, unless otherwise stated.

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