Edited version of private ruling

Authorisation Number: 1011728851644

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Ruling

Subject: Capital Gains Tax

Question

Will the Commissioner exercise his discretion under subsection 104-190(2) 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

Yes.

This ruling applies for the following period:

Year ending 30 June 2010

The scheme commences on:

1 July 2008

Relevant facts and circumstances

The taxpayer owned property. A decision was made to sell the property and purchase a replacement property in another area.

The taxpayer contracted to purchase a property. The farm land which needed to be sold was comprised of a number of separate titles which were sold in several different parcels over a period of time. The contract for the final block was dated more than twelve months after the replacement was acquired.

Difficult economic conditions caused the delay in the sale of the various property titles to be more protracted than was first planned. The negotiation process included being required to reduce the sale price on the properties offered for sale.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10 ,

Income Tax Assessment Act 1997 Section 104-185 and

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 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

Question

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 able to apply his discretion under subsection 104-190(2) and, consequently, will 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 last CGT event during the year for which you obtain the roll-over. 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. The original asset, held under several titles, was disposed of over a period ending more than twelve months after the replacement was acquired.

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. In 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 prevailing economic conditions and is understandable and reasonable. Furthermore, there is no suggestion of any mischief being involved in the arrangement.

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. Section 104-185 allows twelve months from that date to dispose of the original asset. However, somewhat more time 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. As a result, the issue of fairness to people in like positions comes into question.

However, the mitigating circumstance in this case is that the fact that the original asset was held under a number of separate titles made its disposal relatively complex. Furthermore, the parcels of land were being sold progressively during the period in question and it was only the last parcel which was disposed of at the end of the period. Those facts serve to differentiate the present case from others in which such a delay has occurred in disposing of the original asset.

Having considered all of the relevant factors, the Commissioner is able to apply his discretion and allow a reasonable extension to the time limit. Given all of the circumstances, allowing an extension is not prejudicial to the Commissioner in this case nor is it unfair to other people in similar positions.

The one year time limit is extended. That will allow the second property to be considered a replacement asset for the purposes of section 104-185.