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Ruling

Subject: Capital Gains Tax small business replacement asset exemption (rollover) SD 152-E of ITAA 1997

Question 1

Will the Commissioner extend the replacement asset period under subsection 104-190(2) of the Income Tax Assessment Act 1997 (ITAA 1997) to enable the taxpayer to disregard the capital gain made, on the future sale of sheds, under subdivision 152-E of the ITAA 1997?

Answer

No

This ruling applies for the following periods:

1 July 2011 to 30 June 2012

1^t July 2012 to 30 June 2013

The scheme commences on:

During 2009

Relevant facts and circumstances

A number of the Companies rent sheds from the related rulee company (rulee).

The rulee purchased a new block of land during 2009 and plans to build a new shed to lease to the other two companies and relocate both businesses to the new premises once the construction is completed, expected to be during 2012.

It is then proposed to sell at least two of the sheds and then seek to use the small business concessions on asset for asset rollover as provided by Section 104-185 Subdivision 152-E of the Income Tax Assessment Act 1997.

The rulee should be eligible for the 50% active asset reduction in relation to the capital gain that will arise from the sale of the sheds.

The net value of the assets of the rulee and its affiliates and connected entities at the time of the disposal of the sheds will be less than $6,000,000.

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 104-185(1)(a)

Income Tax Assessment Act 1997 Section.104-190(2)

Income Tax Assessment Act 1997 Section 152-A

Income Tax Assessment Act 1997 Section 152-B

Income Tax Assessment Act 1997 Section 152-10.

Income Tax Assessment Act 1997 Section 152E

Income Tax Assessment Act 1997 Section 152-15.

Income Tax Assessment Act 1997 Section 152-35.

Income Tax Assessment Act 1997 Sub section 152-40

Reasons for decision

Summary

Although you the rulee, satisfy the basic conditions in subdivision 152-A of the ITAA 1997 and the first two specific provisions of subdivision 152-B of the ITAA 1997, the Commissioner will not extend the replacement asset period under subsection 104-190(2) of the ITAA 1997.

Detailed reasoning

Before deciding whether the Commissioner will extend the replacement asset period under Subsection 104-190(2) of the ITAA 1997, it is first necessary to determine if the basic conditions for the capital gains small business concession in Subdivision 152-A of the ITAA 1997 have been satisfied.

Basic Conditions subdivision 152-A of the ITAA 1997

Subsection 152-10 set out the basic conditions that must be satisfied for any of the small business capital gains tax concessions to be available. These conditions are:

(a) a CGT event happens in relation to a CGT asset

(b) the event (apart from this Division) would have resulted in a gain.

(c) at least one of the following applies:

(1) you are a small business entity for the income year

(2) you satisfy the maximum net value test (section 152-15)

(3) you are a partner in a partnership that is a small business entity and the CGT asset has an interest in an asset of the partnership

(4) the conditions in subsection (1A) or (1B) are satisfied in relation to the CGT Asset.

(d) The asset satisfies the active asset test (section 152-35)

Taking each of the basic conditions in turn

(a) The disposal of two or more of the sheds will constitute a CGT event A1. CGT event A1, subsection 104 -10 of the ITAA 1997, occurs when a CGT asset is disposed off. Division 108 of the ITAA 1997 defines a CGT asset. Paragraph 108(1)(a) of the ITAA 1997 states a CGT asset is any kind of property. The sheds to be disposed of are property and therefore a CGT asset. Hence basic condition (a) is satisfied.

(b) This condition requires the disposal of the sheds to result in a gain. As the sheds are yet to be disposed off, an assumption will be made that the disposal of the sheds will result in a capital gain being made.

(c) The maximum net asset test in subsection 152-15 of the ITAA 1997 required the net assets, at the time of disposal of the sheds, of the taxpayer and its affiliates and connected entities to total $6,000,000 or less. The taxpayer has confirmed that this will be the situation. Therefore, basic condition (c) has been satisfied.

(d) The final basic condition requires the sheds to satisfy the active asset test. To satisfy the active asset test, subsection 152-35 of the ITAA 1997 requires the asset to have been an active asset for at least half the period being when the asset was acquired, if the asset had been owned for 15 years or less, and had been an active asset for at least 7 ½ years if the asset had been owned for more than 15 years.

In accordance with subsection 152-40 of the ITAA 1997, an asset is an active asset if it is used or held ready for use in the course of carrying on a business by

(a) you or

(b) your affiliate or

(c) an entity connected to you.

As the sheds to be disposed of are used in the business of entities connected to you they are active assets.

The sheds have been owned by you and used in the business of your affiliates for more than 15 years .Therefore, basic condition (d) has been satisfied.

Therefore all the basic conditions in subdivision 152-A, have been satisfied.

Secondly it is necessary to determine if the specific conditions for the small business rollover under subdivision 152-E of the ITAA 1997 have been satisfied.

These conditions are:

(a) A replacement asset is acquired;

(b) The replacement asset is an active asset

(c) The replacement asset was acquired during the replacement asset period.

Taking each of these conditions in turn:

(a) A replacement asset, a block of land, was acquired during 2009. Hence condition (a) is satisfied.

(b) The replacement asset will be an active asset when the construction of the new shed is completed because the new shed is to be used in carrying on a business of entities connected to you the rule. Hence condition (b) is satisfied.

(c) In accordance with paragraph 104-185(1)(a) of the ITAA 1997, the replacement asset period starts one year before and sends two years after the CGT event for which the Company received roll over relief. In this case the replacement asset period starts in a specific month in 2011, as the asset (the Sheds) is expected to be sold in a specific month in 2012, and ends in a specific month in 2014.The replacement asset was acquired in during 2009 which is outside the replacement asset period. Hence condition (c) is not satisfied.

Therefore for the small business roll-over to be available the Commissioner will need to extend the replacement asset period under paragraph 104-190(2) of the ITAA 1997.

In determining if the discretion to extend the replacement asset period should be exercised, the Commissioner has considered 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.

2. account must be had to any prejudice to the Commissioner which may result from the additional time being allowed, however the mere absence of prejudice is not by itself 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. if there is any mischief involved, and

6. consider the consequences.

The rulee did not attempt to sell the sheds after the land was purchased in 2009. The sale of the sheds is dependent on the completion of the new shed, which should be completed during 2011. The property has not yet been put on the market. It is expected the sheds will be disposed of between sometime in 2012.

We have decided not to grant an extension of time in this case as:

(a) There is not an acceptable explanation as to why it will take approximately 3 years after the purchase of the replacement asset, for the asset being replaced to be sold.

(b) It would not be fair and equitable to people in similar circumstances or like position to the rulee.

(c) The rulee had control over the time and manner in which the property was disposed of

(d) There would appear to have been no great urgency to dispose of the property

(e) It is considered that the granting of an extension of time in this instance would cause an unsettling of the Commissioner's established practices and result in unfairness to people in similar circumstances or like position to the rulee.  

Conclusion

After considering the relevant factors against the rulee's circumstances, in particular, the lack of attempts to construct the new shed and to sell the sheds within a reasonable period of time, in fact well outside the 12 months in the replacement asset period, it has been decided that the Commissioner will not exercise the discretion under subparagraph 152-35(a)(ii) of the ITAA 1997 to extend the period within which the rulee can dispose of the two sheds and still satisfy the active asset test in section 152-35 of the ITAA 1997. 

As per information provided, the rulee's are not eligible for the small business active asset reduction or retirement exemption.