Edited version of your private ruling

Authorisation Number: 1012011919790

This edited version of your ruling will be published in the public register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.

Ruling

Subject: Capital Gains - Small Business Concessions - Extension Of Time

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, an asset acquired more than one year before the asset being replaced?

Answer

No.

This ruling applies for the following period

1 July 2010 - 30 June 2011.

The scheme commenced on

1 July 2008 - 30 June 2010.

Relevant facts

You and your spouse carried on a business from your property.

You sold your business and as part of the sale, you entered into a restrictive covenant preventing you from operating a business for three years.

You began a business in commercial premises, which you later sold.

When the opportunity arose you decided to purchase a commercial piece of land, which you state was 'held ready for use' for the re-commencement of your business.

A large container was placed on the block of land for storage of parts and tools for the running of your business.

As the business only uses a portion of the land, you constructed a building on the remaining land, which is now used for commercial rent, which is one year after the business commenced trading.

Currently you have leased this to a company.

You re-commenced trade 1 year and 1 month prior to the CGT event occurring on the sale of your commercial premises.

You purchased land, which was vacant and used for parking vehicles on, you state this land was held ready for use until the restrictive covenant of three years was lifted and you could re-commence your business.

Although a proportion of the land is currently used to derive a rental income, you ask for the land to be considered as an active asset for rollover purposes.

The asset that you wish to be your replacement asset was acquired four years prior to the disposal of the asset giving rise to the capital gain.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 Paragraph 104-185(1)(a)

Reasons for decision

Commissioner's discretion - extension of time to acquire a replacement asset

Under paragraph 104-185(1)(a) of the ITAA 1997, the replacement asset period starts one year before, and ends two years after the last CGT event in the income year for which you obtain the small business roll-over. The Commissioner has a discretion to extend the replacement asset period (subsection 104-190(2) of the ITAA 1997).

In your case, you obtained the small business roll-over in the 2008 income year. As you did not expect to acquire the replacement asset within the relevant replacement asset period, the Commissioner may exercise his discretion under subsection 104-190(2) of the ITAA 1997 to extend the time period.

In determining if the discretion to extend the replacement asset period should be exercised, 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

· fairness to people in like positions and the wider public interest

· whether there is any mischief involved and

· the consequences of the decision.

In your case, we consider that you have not provided an acceptable explanation for acquiring a replacement asset within the replacement asset period, which has now ended. You advise that you purchased land four years prior to the capital gain for the purposes of a rollover in relation the sale of the commercial premises, which requires an extension of four times the normal period.

When you sold the business, you signed a contract that specified restrictions on your business or any related entity not to trade again within a described radius for a period of three years. Therefore, whilst the restrictive covenant was necessary in order to secure the sale of your business, you were fully aware of the three-year restriction when you purchased the land.

When you purchased the land, although earlier than required, you could not overlook the purchase of a flood free industrial property for re-commencement of your business.

You only use a portion of the land for your business and currently you lease it to a company to cover the costs for improvements you have made to the land.

After considering the above factors against your circumstances, it is considered that you have not provided a reasonable and acceptable explanation for an extension of the replacement asset period. We consider that an extension of four times the normal period is excessive under these circumstances, and this would not be fair to others in like positions.

In making this ruling, we have not considered whether the main use of the land is to derive rent.

Conclusion

For the reasons discussed above the Commissioner will not exercise the discretion under subsection 104-190(2) ITAA 1997 to extend the replacement asset period in your case.

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 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 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'.