Edited version of private advice

Authorisation Number: 1052011612449

Date of advice: 22 July 2022

Ruling

Subject: CGT - replacement asset roll-over relief

Question

Will the Commissioner use the discretional power under subsection 104-190(2) of the Income Tax Assessment Act 1997 ('ITAA 1997') to extend the replacement asset period in respect of the small business capital gains tax ('CGT') replacement asset roll-over relief to y YY 20YY?

Answer

Yes.

This ruling applies for the following periods

x XX 20XX to y YY 20YY

The Scheme commences on

x XX 20XX

RELEVANT FACTS AND CIRCUMSTANCES

1.      Company A is an Australian proprietary company incorporated in XYZ on x YY 20XY.

2.      Company A's directors are Taxpayer A and Taxpayer B.

3.      Company A's current registered office and principal place of business is situated at XYZ.

4.      In FY 20YZ, Company A sold its business and made a capital gain on the sale of the business of $xyz. The contract for sale was dated x YY 20YZ and settlement occurred on y XX 20YZ.

5.      Company A was contacted by the ATO in early 20YZ in relation to the transaction and invited to participate in a pre-lodgement review process to receive assurance on the treatment of the capital gains tax ('CGT') event prior to lodging its tax return.

6.      On z ZZ 20ZZ, Company A applied for a private ruling from the Commissioner to exercise the discretion to extend the replacement asset period to y YY 20XX. The purpose of this application was to have sufficient time to locate and assess (including undertaking due diligence) potential, qualifying replacement assets after finalising the position.

7.      On z ZZ 20XX, Company A received notice that the Commissioner had exercised the discretion to allow an extension of the replacement asset period to y YY 20XX.

8.      While Company A had initially located a potential business acquisition and undertook an extensive period of due diligence, this fell through in late 20XY due to a legal issue that could not be resolved with the vendor.

9.      The market for business acquisitions has been extremely difficult through 20XY and 20XX with the global economy dealing with the impacts of COVID-19. As such, on x YY 20XX, Company A applied for a further extension of time to find a suitable replacement asset due to the persisting economic circumstances and the impact of lockdowns which inhibited the ability to locate and evaluate potential options.

10.   On y ZZ 20XX, Company A received notice that the Commissioner had exercised the discretion to allow an additional extension of time to x XX 20XX for the company to acquire a replacement asset.

11.   Throughout the extended replacement asset period, Company A has continued its review of the market and opportunities for a suitable acquisition of an eligible business and subscribes to a number of websites and business broker agents which list businesses for sale.

12.   Company A undertook an extensive due diligence and feasibility analysis for the building and operating of a new facility on a parcel of land at XYZ in 20XX, including plans drawn up and indicative pricing and construction timeframes obtained. The constraints in the current market due to resource and supply chain issues mean there is no certainty that the facility could be constructed and operational by the end of the extended replacement period and with construction prices escalating, construction may not be viable in the current market.

13.   Company A has been issued with previous decisions made by the Commissioner in relation to this matter.

Information provided

14.   You have provided a number of documents containing detailed information in relation to Company A, including:

•           Private Binding Ruling ('PBR') Application, dated z ZZ 20YY

•           Document with Background Facts

15.   We have referred to the relevant information within these documents in applying the relevant tests to your circumstances.

Assumption(s)

Not applicable.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 Subdivision 152E

Further issues for you to consider

Not applicable.

REASONS FOR DECISION

All legislative references are to the Income Tax Assessment Act 1997 ('ITAA 1997') unless otherwise stated.

SUMMARY

The Commissioner will apply the discretion available under subsection 104-190(2) of the ITAA 1997 and allow an extension of the time to y YY 20YY for Company A.

DETAILED REASONING

16.   The rules covering the small business roll-over are contained in Subdivision 152-E of the Income Tax Assessment Act 1997 (ITAA 1997). The small business roll-over allows you to defer all or part of a capital gain from a capital gains tax ('CGT') event happening to an active asset.

17.   CGT event J5 happens if you choose a small business roll-over under Subdivision 152E of the ITAA 1997 and you have not acquired a replacement asset by the end of the replacement asset period.

18.   As outlined in subsection 104-190(1A), the replacement asset period is the period starting one year before the last CGT event in the income year for which you obtain the roll-over and ending two years after the last CGT event in the income year for which you obtain the roll-over.

19.   As outlined in subsection 104-190(2), the replacement asset period may be extended by the Commissioner.

20.   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

21.   Company A's directors have continued to actively search for a replacement asset since they obtained confirmation that they had access to the small business CGT concessions and were granted additional time for the rollover concession.

22.   Throughout the extended replacement asset period, Company A have continued its review of the market and opportunities for a suitable acquisition of an eligible business and subscribes to a number of websites and business broker agents which list businesses for sale, however, to date this has not produced any potential businesses that would be suitable for the company's needs and match to their available resources and skillset.

23.   The difficulty in identifying established business targets has been exacerbated during the unprecedented economic conditions impacting numerous industry sectors. Due to this difficulty, Company A expanded their scope for suitable replacement assets and looked into the acquisition of XXX, located in XYZ.

24.   To assess the longer term suitability of these businesses, due diligence and feasibility analysis have been conducted on a number of these assets over a period of time. Company A concluded that the assets which produced a reasonable commercial return were based in sub optimum locations which carried many risks.

25.   The assets that were available in the better locations were all priced at a point which did not allow a commercial return to be made on the capital required to be invested. Therefore, the investigation did not result in an acquisition and subsequent weather events in the 20XX year have proven this to be the appropriate course of action.

26.   Company A have also undertaken an extensive due diligence and feasibility analysis for the building and operating of a new facility on a parcel of land at XYZ. The process included having plans created and tenders for indicative pricing and construction timeframes were obtained.

27.   Unfortunately, the current market is significantly constrained due to resource and supply chain issues being experienced globally by the construction industry. When looking at construction options presented, there was no certainty that the facility could be constructed and operational by the end of the extended replacement period and construction prices have been escalating. As a result, the proposal has not proceeded at this time given the impact of the feasibility.

28.   As such, Company A have needed to consider whether it is feasible in the current market, to continue the search for a facility asset and has needed to reconsider what might present an ongoing viable business opportunity for the family to operate.

29.   In the interim, Company A have been investigating other operations, however, has not been able to secure a property given the current competition in the market.

30.   For the reasons discussed above, Company A have been unable to locate a suitable replacement asset at this time and given lead times involved to finalise either an acquisition or constructed asset, this is not expected to be in place by the end of the extended replacement period.

31.   Currently, Company A are hoping that with the federal election now completed and in the hope that economic conditions and business certainty will begin to normalise, and viable business opportunities will begin to present themselves in the second half of 20XX.

32.   Company A have made attempts to acquire a replacement asset. Evidence of an acceptable explanation for the period of extension requested has been provided. 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. It would be fair and equitable in the circumstances to allow a further extension.

33.   Having considered the relevant factors above, and the particular circumstances of the case, the Commissioner will exercise the discretion to extend the replacement asset period to y YY 20YY.

CONCLUSION

The Commissioner will exercise the discretion undersubsection 104-190(2) of the ITAA 1997 and extend the replacement asset period to y YY 20YY for Company A.

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