Edited version of private ruling

Authorisation Number: 1011709867035

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Ruling

Subject: Capital Gains Tax - Extension of time to acquire a replacement asset

Question

Will the Commissioner exercise his discretion under subsection 152-420(3) of the Income Tax Assessment Act 1997 (ITAA 1997) and allow you to choose as a replacement asset for Capital Gains Tax (CGT) purposes, an asset acquired more than one year before the disposal of the asset being replaced?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 2010

Year ending 30 June 2011

Year ending 30 June 2012

The scheme commences on:

1 July 2008

Relevant facts

A property was purchased with the intention of renovating it then using the property as a replacement for an existing business property. Renovations to the new property commenced immediately upon settlement and were completed some months later. The business then moved into the new property.

The original property was listed for sale the month after the move was completed. To ensure a speedy sale, it was listed at the price recommended by the real estate agent as being reasonable. A prospective purchaser was found several months later however the sale fell through as a result of the global financial crisis.

A second potential purchaser was found the following year. That party is currently leasing the building and renovating it to their needs. They have an option to purchase the property at an agreed price within eighteen months of beginning their lease. It is expected that a sale will take place within that eighteen month time frame as the lessee has done extensive renovations.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 104-185

Income Tax Assessment Act 1997 Section 104-190

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

Unless otherwise stated, all references in the following Reasons for Decision are to the Income Tax Assessment Act 1997 (ITAA 1997).

Summary

Having considered the relevant facts, the Commissioner is unable to apply his discretion under subsection 104-190(2) and, consequently, will not allow an extension to the time limit.

Detailed reasoning

The small business roll-over allows you to defer the capital gain made from a CGT event if you acquire one or more replacement assets and satisfy certain conditions. The conditions which must be met to obtain relief are set out in Subdivision 152-A.

For you to obtain a roll-over, subsection 104-185(1) requires you to acquire a replacement asset within a period starting one year before and ending two years after the date of disposal of the original asset. Subsection 104-190(2) states that the Commissioner may exercise his discretion to extend those time limits.

You acquired the asset which you would like to treat as a replacement asset. As at the date of the ruling application, the original asset had not been sold though a lessee has been found who holds an option to purchase the property within a certain period of time.

The disposal of the original property falls into the category of CGT event A1, as described in section 104-10. Paragraph 104-10(3)(a) states that where the disposal of the asset occurs as the result of entering into a contract the time of the event is when you enter into that contract. n the present case, that would place the event outside the twelve month limit specified in subsection 104-185(1).

Principles of exercising discretion

Judicial decisions which have dealt with extension of time issues and the exercise of the Commissioner's discretionary powers generally, have offered guidance regarding the factors to which the Commissioner should have regard in considering the exercise of his discretion.

In determining if the discretion should be exercised, the Commissioner considers the following factors:

(1) There should be evidence of an acceptable explanation for the period of extension requested and that it would be fair and equitable in the circumstances to provide such an extension. However, there is no rule that an explanation is an essential pre-condition ;

(2) Account must be had of any prejudice to the Commissioner which may result from the additional time being allowed, however the mere absence of prejudice is not enough to justify the granting of an extension

(3) Account must be had of any unsettling of people, other than the Commissioner, or of established practices;

(4) There must be a consideration of fairness to people in like positions and the wider public interest;

(5) There must be a consideration of whether there is any mischief involved ; and

(6) There must be consideration of the consequences.

In the present case, an explanation for the delay in disposing of the original asset has been provided. That explanation refers to the difficulties of finding a buyer for the property in the wake of the global financial crisis and is understandable and reasonable.

Furthermore, there is no suggestion of any mischief being involved in the arrangement. Letting the property, particularly to a prospective buyer, rather than having it lie idle until a buyer could be found was a reasonable decision and made sound commercial sense.

However, in addition to providing for replacement asset rollover, the legislation specifies a set period in which the relevant transactions should occur. The intention is that in the general run of cases that time limit will be adhered to. Nevertheless, the latitude to extend the time limit is provided for those exceptional cases where it is fair and reasonable to do so. Generally, extensions will be granted for short periods where the time limit has been exceeded at the margin.

In the present case, the replacement asset was acquired at a certain time. Section 104-185 allows one year from that date to dispose of the original asset. Even if it is assumed that the original asset will be disposed of at the end of the lease period, three and a half years will have elapsed from the acquisition of the replacement.

Consequently, the extension which is being sought is not an increase at the margin but is significantly beyond the intended period as set out in the legislation.

While the explanation for and basis of the delay in disposing of the original asset are reasonable, allowing an extension of such magnitude would significantly undermine the intention of the legislation and would be unfair to other taxpayers in similar circumstances. If, alternatively, extensions of the magnitude sought were made generally available to taxpayers the consequence would be to render the time limitation in the legislation effectively meaningless.

Having regard to all of the facts, there is no question that the second property was acquired in order to replace the original property as your business premises. The further requirement to qualify for the rollover is that the original asset be disposed of within one year of acquisition of the replacement. The passage of time in this case is likely to be nearly three and a half years and that is assuming that the current lessee proceeds to purchase.

Having considered the relevant facts and the principles upon which the discretion should be exercised under subsection 104-190(2), it would not seem reasonable for the Commissioner to extend the statutory period to the extent requested. Consequently, he is unable to apply his discretion and will not allow an extension to the time limit.