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Edited version of your written advice

Authorisation Number: 1051362250983

Date of advice: 19 April 2018

Ruling

Subject: Small business capital gains tax concessions – replacement asset – Commissioner’s discretion to extend the replacement asset period

Question

Will the Commissioner exercise his discretion under subsection 104-190(2) of the Income Tax Assessment Act 1997 (ITAA 1997) to extend the replacement asset period?

Answer

Yes.

This ruling applies for the following periods:

Income year ending 30 June 2018

Income year ending 30 June 2019

The scheme commences on:

November 20XX.

Relevant facts and circumstances

Company A (the Trustee) is the trustee for the Trust.

The Trust is a discretionary trust that operated a business (the Business).

Person A is the sole director and shareholder of the Trustee and is also the appointer of the Trust.

Person A and their spouse (Person B) separated.

A number of months after the separation, an agreement (the Agreement) to sell the Business as a going concern was entered into between Company XYZ, the Buyer, and Company A as the trustee for the Trust, as the Seller. The Agreement includes the following information:

During the following month an Initiating Application was filed with the Family Court due to Person B seeking a court order in relation to finalising financial arrangements between them and Person A which included the following information:

After a number of months, settlement on the sale of the Business occurred.

After a period of time, Person A and Person B were divorced.

Orders by Consent were issued by the Family Court which included the following information:

The Trust indicated that it had made the choice to apply numerous small business capital gains tax concessions in the 2015-16 income year.

Person A commenced searching for a replacement business following the sale of the Business and has registered with various professionals, such as business brokers, to assist in finding a replacement business.

Over a number of months Person A has looked at numerous potential businesses.

When undertaking due diligence in relation to considering the potential businesses, Person A requests documentation such as financial accounts, balance sheets, depreciation schedules, asset list, copies of warranties and leases, bank statements, tax lodgements, customer lists, information relating to suppliers, workplace agreements and staff entitlements.

A replacement asset has not been acquired within the replacement asset period.

A request has been lodged for an extension of time for an additional period for the Trust to purchase a replacement business.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

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

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

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 Subdivision 152-C

Income Tax Assessment Act 1997 Section 152-410

Reasons for decision

Summary

The Commissioner will exercise his discretion under subsection 104-190(2) of the ITAA 1997 to extend the time for the Trustee for the Trust to acquire a replacement asset.

Detailed reasoning

Extension to obtain a replacement asset

You may choose to disregard all or part of a capital gain under the small business rollover exemption if you satisfy certain conditions.

The general rule is that a choice available under the CGT provisions once made cannot be changed. Generally, such a choice must be made by the time the income tax return is lodged, or within such further time as the Commissioner allows (subsection 103-25(1) of the ITAA 1997).

Under subsection 103-25(2) of the ITAA 1997, the way you prepare your income tax return is sufficient evidence of the making of the choice.

In order to apply the small business rollover, a replacement asset must be acquired within two years after the relevant CGT event. However, the Commissioner may extend the replacement asset period in certain circumstances under subsection 104-190(2) of the ITAA 1997.

The relevant factors in determining whether to extend the replacement asset period are:

Application to your situation

In this case, Person A, the director of the Trustee, experienced a marriage breakdown and went through divorce proceedings.

As part of the divorce settlement, Person A or Person B could not access the proceeds from the sale of the Business without written consent from each other, or under a Court Order.

Orders of Consent were issued which outlined the distribution of the sale proceeds from the disposal of the Business.

It is stated that for a period after the divorce settlement, Person A did not turn their mind to purchasing a new business due to:

Person A has investigated a number of businesses following the disposal of the Business for the purpose of buying a replacement business.

Having regard to the relevant factors above and the specific circumstances of this case, it is considered reasonable for the Commissioner to exercise the discretion in subsection 104-190(2) of the ITAA 1997 and extend the replacement asset period.

Further information

This ruling has not fully considered your eligibility for the small business CGT concessions. You should ensure that you satisfy the relevant conditions for the concessions. More information is available on our website www.ato.gov.au by using the search term “Capital gains tax concessions for small business”.


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