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Ruling

Subject: CGT small business concessions - extension of time to acquire a replacement asset

Question:

Will the Commissioner, pursuant to subsection 104-190(2) of the Income Tax Assessment Act 1997 (ITAA 1997), extend the time limit set out in paragraph 104-185(1)(a) of the ITAA 1997 for your replacement asset to be acquired?

Answer: Yes.

This ruling applies for the following periods:

1 July 2009 to 30 June 2010.

1 July 2010 to 30 June 2011.

1 July 2011 to 30 June 2012.

1 July 2012 to 30 June 2013.

The scheme commences on:

1 July 2009.

Relevant facts and circumstances

In the 2009-10 financial year you sold a business and made a capital gain on the sale and chose to apply the replacement asset roll-over relief. Within two years you commenced another business but the start up costs of that business were not sufficient to utilise the entire gain that had been rolled over.

You were aware that you needed to acquire a replacement asset within the replacement asset period and started evaluating your options shortly after settling the sale of the original property. Even though you had a restriction of trade condition in the original sale contract, you considered a number other businesses in the area.

You are now in the process of making a decision and are considering purchasing a property that is currently leased.

It has been difficult to find a suitable business in the area as the poor economic environment has been affecting businesses in the last couple of years.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 152E.

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

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

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'.

Reasons for decision

Subdivision 152-E of the ITAA 1997 provides small business roll-over as part of the small business capital gains tax (CGT) relief provisions. The roll-over allows you to defer the capital gain made from a CGT event happening in relation to a business asset, if you acquire a replacement asset within the replacement asset period, and other specific conditions are satisfied.

Paragraph 104-185(1)(a) of the ITAA 1997 states that you must acquire the replacement asset within the period starting one year before and ending two years after the last CGT event that happens in the income year for which you obtain the roll-over.

Paragraph 104-185(1)(b) of the ITAA 1997 states that the replacement asset must be an active asset at the at the end of the replacement asset period.

In your case, you applied the roll-over concessions in respect of the sale of a business asset. You have incurred some expenditure on a new business but you advised you will not be able to acquire a suitable replacement asset and roll-over the full amount of the gain within the replacement asset period.

Where a taxpayer is unable to acquire a suitable replacement asset within the replacement asset period the Commissioner may exercise his discretion to further extend the time limit as provided by subsection 104-190(2) of the ITAA 1997.

Commissioner's Discretion

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

§ 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

§ 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 enough to justify the granting of an extension

§ account must be had of any unsettling of people, other than the Commissioner, or of established practices

§ there must be a consideration of fairness to people in like positions and the wider public interest

§ whether there is any mischief involved, and

§ a consideration of the consequences.

After considering the relevant factors against your circumstances, it is considered that there is an acceptable explanation for the extension requested.

In your circumstances you acquired some replacement assets within two years of the sale of the original asset. You continued to search for an additional replacement asset but due to the economic downturn and the restriction of trade condition you found it difficult to find another replacement asset. You have found one very suitable property however it is currently leased.

Allowing an extension of time would not prejudice the Commissioner, and there would appear to be no unsettling of other people or established practices in this case.

There is no evidence of a lack of fairness between you and other people in like positions and the wider public interest. Other persons are within their rights to have a request for an extension of time considered, based on the individual facts of each case.

Based on the facts of this case there appears to be no mischief involved.

The consequences to you of not granting the extension of time would be to deny you the small business roll-over under the CGT small business relief provisions. The purpose of Subdivision 152-E of the ITAA 1997 is to allow small business taxpayers to use the relevant portion of the capital gain to acquire new CGT assets.

Conclusion

The Commissioner is able to apply his discretion under subsection 104-190(2) of the ITAA 1997, to extend the time period for you to acquire a replacement asset.