Edited version of private advice

Authorisation Number: 1052109940634

Date of advice: 28 April 2023

Ruling

Subject: CGT - small business concessions

Question

Will the Commissioner allow further time under paragraph 103-25(1)(b) of the Income Tax Assessment Act 1997 ('ITAA 1997') for Company A to make a choice under section 152-315 in respect of a capital gain made in the income year ended xx XX 20XX?

Answer

Yes.

This ruling applies for the following periods:

y YY 20YY to xx XX 20XX

The Scheme commences on:

y YY 20YY

RELEVANT FACTS AND CIRCUMSTANCES

Background Facts - Company

1.      Company A is an Australian proprietary company incorporated in XYZ on xx YY 200X.

2.      Company A's directors are Taxpayer A (date of birth xx YY 19XX) and Taxpayer B (date of birth yy YY 19YY).

3.      Company A's registered office is situated at XYZ.

4.      Company A's principal place of business is situated at ZYX.

Background Facts - Trusts

5.      Taxpayer A and Taxpayer B are the controllers of the XXX Family Trust (a discretionary trust).

6.      The XXX Family Trust owns all of the units in the YYY Trust (a unit trust) and all of the shares in Company A.

7.      The YYY Trust previously owned the property on which the XYZ business was conducted.

8.      The YYY Trust entered into a contract to sell this property on xx YY 20XX and the contract was completed on x YY 20XX.

9.      Company A previously leased the property from the YYY Trust and carried on the XYZ business on the property.

10.   Company A entered into a contract to sell the business on xx YY 20XX and the contract was completed on x YY 20XX.

CGT Concessions

11.   The small business CGT concessions are not being claimed by the YYY Trust in relation to the sale of the property by the YYY Trust.

12.   Company A lodged its income tax return for the income year ended xx XX 20XX on yy YY 20XX on the basis that the small business 50% reduction (Subdivision 152-C of the ITAA 1997) and the small business retirement exemption (Subdivision 152-D of the ITAA 1997) applied to reduce the capital gain.

13.   Company B is the registered tax agent for the entities controlled by Taxpayer A and Taxpayer B. As the small business CGT concessions are complex, Company B sought formal advice from Company C, which has a specialist tax consulting practice.

14.   The advice from Company C stated that a choice to apply the small business retirement exemption needed to be made in writing by the time of lodgement of Company A's return for the income year ended xx XX 20XX.

15.   However, Company A inadvertently did not, as required by subsections 152-315(4) and (5) make a choice in writing that the small business retirement exemption applied to reduce the capital gain.

Reasons for oversight to make choice

16.   Taxpayer B contracted a medical condition in XX 20XX and was ill from the condition during XY 20XX and is still on medication. During XY 20XX they were unable to make many meetings or read documents due to the medical condition.

17.   Taxpayer A has a medical condition and required several doctor's appointments around the time that the Company A income tax return for the income year ended xx XX 20XX was prepared and lodged.

18.   Both of these significant medical conditions caused a great deal of stress and disruption for both Taxpayer A and Taxpayer B.

19.   Tax Agent A is the Relationship Partner for Taxpayer A and Taxpayer B. Tax Agent A contracted COVID in late XY 20XX.

20.   Tax Agent A's practice was extraordinarily busy during XY 20XX in the lead-up to the close of the calendar year and was closed over the Christmas/New Year period.

21.   Other key team members at the practice were on leave during the Christmas/New Year period.

22.   Upon Tax Agent A's recent discovery that a written choice had not been made in time, the practice have immediately prepared this Private Ruling request for the Commissioner to allow further time under paragraph 103-25(1)(b) of the ITAA 1997 for the choice to be made.

23.   Company A has not yet made the payment required under section 152-325 of the ITAA 1997 for the small business retirement exemption (subdivision 152-D) to apply.

24.   Company A has until 7 days after Company A makes the choice in writing under section 152-315 of the ITAA 1997 to make the payment under section 152-325 of the ITAA 1997.

25.   If the Commissioner grants Company A additional time to make the choice under section 152-315 of the ITAA 1997, Company A will promptly make this choice in writing and will then make the section 152-325 payment within 7 days of making the choice.

26.   Neither the XXX Family Trust nor Taxpayer A have lodged their income tax returns for the income year ended xx YY 20XX.

Further relevant facts

27.   Both Taxpayer A and Taxpayer B are over 55 years of age.

28.   A capital gain was made in the income year ended xx XX 20XX as a result of the sale of active assets.

29.   At the time of the capital gains tax (CGT) event (x YY 20XX), they satisfied the conditions to access the small business concessions in Division 152 of the ITAA 1997.

30.   On xy XY 20XX, Company A lodged its income tax return for the income year ended xx XX 20XX on the basis that the small business 50% reduction (Subdivision 152-C of the ITAA 1997) and the small business retirement exemption (Subdivision 152-D of the ITAA 1997) applied to reduce the capital gain.

31.   However, Company A inadvertently did not, as required by subsections 152-315(4) and (5) make a choice in writing on lodgement of their tax return, that the small business retirement exemption applied to reduce the capital gain.

Information provided

32.   You have provided a number of documents containing detailed information in relation to Company A's ruling application, including:

•           Private Binding Ruling ('PBR') Application, dated yy YY 20YX

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

Relevant legislative provisions

Income Tax Assessment Act 1997 Paragraph 103-25(1)(b)

Income Tax Assessment Act 1997 Section 152-315

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 allow further time until 28 days from the date of issue of this ruling, under paragraph 103-25(1)(b) of the Income Tax Assessment Act 1997 for Company A to make a choice under section 152-315 in respect of a capital gain made in the income year ended xx XX 20XX.

DETAILED REASONING

Small Business Retirement Exemption - Subdivision 152-D

34.   A company may choose to disregard all or part of a capital gain (from a CGT event happening to a CGT asset of a small business) if the capital proceeds from the event are used in connection with retirement and if the company satisfies certain conditions.

Choosing the Retirement Exemption - Section 152-305 ITAA 1997

35.   The general rule is that a choice available under the CGT provisions once made cannot be changed.

36.   Subsection 152-305(2) states that a company or a trust can also choose to disregard such an amount if:

(a)    the basic conditions in Subdivision 152-A are satisfied for the capital gain; and

(b)    the entity satisfies the significant individual test (see section 152-50); and

(c)    the company or trust conditions in section 152- 325 are satisfied.

Note: Section 103- 25 tells you when the choice must be made.

Timing of Choice - Section 103-205 ITAA

37.   Paragraph 103-25(1)(a) of the ITAA 1997 states that, such a choice must be made by the time the income tax return is lodged (for the income year in which the relevant CGT event happened), or within such further time as the Commissioner allows under Paragraph 103-25(1)(b) of the ITAA 1997.

38.   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.

39.   Paragraph 103-25(3)(b) of the ITAA 1997 however, contains an exception in relation to the small business retirement exemption, and subsection 152-315(4) of the ITAA 1997 requires the choice for this exemption to be made in writing.

Factors considered by Commissioner in allowing extension of time

40.   On ato.gov.au at QC 66018, it states that the Commissioner may give you more time to make a choice if you lodged your tax return without being aware that:

•           events had happened that required you to make a choice

•           a choice was available

•           a choice you made was not valid

41.   Other considerations may be whether:

•           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 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 to people in similar positions and the wider public interest

•           any mischief is involved.

APPLICATION TO YOUR CIRCUMSTANCES

General matters

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

43.   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 under subsection 103-25(1) of the ITAA 1997.

44.   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. Paragraph 103-25(3)(b) of the ITAA 1997, however, contains an exception in relation to the small business retirement exemption, as subsection 152-315(4) of the ITAA 1997 requires the choice for this exemption to be made in writing.

Your specific details

45.   As discussed in detail in the Relevant Facts and Circumstances section, the controllers of Company A, Taxpayer A and Taxpayer B, both suffered from serious health issues and associated disruption and stress. These are significant extenuating circumstances and explain why the choice was not made.

46.   The choice was required to be made at the time of lodgement of the tax return for the income year ended xx XX 20XX on yy XY 20XY. Company A have applied for a ruling to grant additional time to make a choice approximately x months after this date.

47.   Company A has an acceptable explanation for the period of extension required. The Commissioner considers that it would be appropriate to exercise the discretion in this case. There would be no prejudice to the Commissioner, unsettling of people or disadvantage to other taxpayers by allowing the extension.

48.   Further, no government revenue is at risk by correctly allowing the concessional Division 152 provisions to apply.

49.   The Commissioner considers it fair and equitable in these circumstances to exercise his discretion.

50.   An extension of time until 28 days from the date of issue of this ruling, is allowed for Company A to make the choice in writing to apply the retirement exemption.

CONCLUSION

The Commissioner will allow further time under paragraph 103-25(1)(b) of the Income Tax Assessment Act 1997 for Company A to make a choice under section 152-315 in respect of a capital gain made in the income year ended xx XX 20XX.

Additional information

The Commissioner has not considered your eligibility for the small business retirement exemption in this ruling. You should ensure that you satisfy the basic conditions and any other relevant conditions. More information is available in the publication Advanced guide to capital gains tax concessions for small business 2011-12 (NAT 3359), which is available on our website www.ato.gov.au.

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