Edited version of private advice

Authorisation Number: 1051716473910

Date of advice: 15 July 2020

Ruling

Subject: Small business capital gains tax (CGT) concessions

Question

Will the Commissioner exercise his discretion under paragraph 103-25(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow an extension of time to make a choice to apply the small business retirement exemption in subdivision 152-D of the ITAA 1997?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 2019

The scheme commences on:

1 July 2018

Relevant facts and circumstances

The Trust was established by a deed between the settlor and trustees.

Company X is the current trustee of the Trust.

The Trust sold an asset.

The Trust has utilised the 50% CGT discount and small business CGT concessions in relation to the sale and applied them in the 20XX income year to reduce the gain to nil.

The Trust lodged its tax return for the year ended 30 June 20XX on this basis.

The Trust did not acquire a replacement asset so a CGT event J5 occurred for the Trust, refreshing the previously disregarded capital gain.

The Trust had instructed its tax agent that it wished to use the small business retirement exemption in relation to the refreshed capital gain.

An individual is a beneficiary of the Trust and the individual has not previously used any of the lifetime CGT retirement exemption limit.

The Trust intended to use the retirement exemption in the 20YY income year by making a payment equals to the capital gain to the individual's superannuation.

The individual's self-managed super fund will be used to receive the retirement exemption payment.

The Trust's 20YY income tax return was lodged makes no reference to the refreshed capital gain.

The tax agent only identified the lodgement error later, and with all staff of the tax agent's office commencing to work from home, lodging the private ruling application has been delayed.

The individual works remotely so that there is often delay in communications with him.

The Trust requests the Commissioner allows an extension to extend the period within which the Trust can choose to apply Subdivision 152-D in order to make payments to the nominated superannuation funds in accordance with section 152-325 of the ITAA 1997.

The Trust requests that the extension of time be granted on the basis:

• the tax return was lodged early due to inadvertent tax agent error;
• the Trust was aware that if a replacement active asset was not acquired it would be open to it to utilise the retirement exemption, and it would not be fair and reasonable to deny the Trust the ability to make this choice merely due to its tax agent's mistake.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 103-25(1)

Reasons for decision

An entity may choose to disregard all or part of a capital gain under the small business retirement exemption if it satisfies 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).

A taxpayer who has considered the application of the CGT concessions and chosen a particular concession has made a choice which cannot later be changed. However, a taxpayer who did not consider the CGT concessions and accordingly included a capital gain in their income tax return has not made a choice and can, if the Commissioner allows further time, later make a choice for a CGT concession to apply and amend their return to reduce or disregard the capital gain.

In determining whether the Commissioner should allow an extension of time the following factors will be considered (QC 18383):

• you have an acceptable explanation for not making the choice by the time it should have been made
• it would be fair and equitable in the circumstances to allow you more time to make a choice
• prejudice to the ATO that might result from additional time being allowed to you (the absence of prejudice by itself is not enough to justify granting an extension)
• it would be fair and equitable to people in similar positions and the wider public interest
• any mischief is involved.

Application to your circumstances

The Trust was aware that if a replacement active asset was not acquired it would be open it to utilise the retirement exemption. However, its tax agent incorrectly lodged 20YY Trust tax return with no reference to the refreshed capital gain. Moreover, the tax agent only identified the lodgement error and with all staff of the tax agent's office commencing to work from home, lodging the private ruling application has been delayed.

This is an acceptable explanation for the period of extension required. There would be no prejudice to the ATO by allowing the extension. There is no mischief involved. The Commissioner considers it fair and equitable in these circumstances for an extension to be allowed.

An extension of time is allowed for the Trust to make the choice to apply the retirement exemption.

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