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Ruling

Subject: Extension of time to acquire assets beyond replacement asset period section 104-190(2) Income Tax Assessment Act 1997, as elected under sub-division 152-E 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, under subdivision 152-E of the ITAA 1997?

Answer

Yes

This ruling applies for the following periods:

1^st July 2008 to 30 June 2009

The scheme commences on:

1^st July 2008

Relevant facts and circumstances

The taxpayer elected under sub-division 152-E ITAA 1997 to apply the small business roll over in respect to the disposal of their business on 1 July 2008 and defer part of the capital gain made on the disposal of their business.

The taxpayer had committed to purchasing eligible rollover assets in the form of equipment and fit out in a new place of business before the rollover period expired on 1 July 2010. However, due to circumstances beyond their control during the construction period of their new premises, not all of the replacement assets were installed and ready for use by the end of the rollover period.

Of the total rollover amount only some money was spent in replacement assets and was ready for use prior to 1 July 2010. The total actual expenditure on replacement assets was ultimately in excess of the rollover amount.

An extension of time is being sought to acquire assets beyond the replacement asset period section104-190(2) ITAA 1997.

The delays to the construction process led to the business equipment not being installed and ready for use within the rollover period.

The original date for the construction process to be completed was January 2010. Due to inadequate soil conditions the base building construction work was not completed until later in 2010. The soil condition was only known once the construction process commenced. As a result, the design by the structural engineer was required to be substantially altered. This prolonged the construction time as well as requiring a redesign to numerous aspects of the building. This redesign process also involved additional submissions for certification of varying aspects of the building which also prolonged construction time.

Inclement weather further delayed the construction time of the footings and bored piers.

The Building Code required an alternative fire engineered solution to the fire systems due to the above changes. Further to this, there were delays in connecting to gas for the premises, hence the work was further delayed.

The Specialist medical fit-out was accordingly also delayed and the start date to supply and fit the equipment was in March 2910.

In summary, it was always the taxpayer's intentions to acquire the replacement assets under the asset replacement provisions. In some instances these were committed to over 18 months before the end of the asset replacement period. Expenditure incurred is in excess of the rollover amount and all assets were in place and ready to use by 31 December 2010, which was 6 months after the expiry of the asset replacement period.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 152-10

Income Tax Assessment Act 1997 Section 152E

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 152-15

Income Tax Assessment Act 1997 Section 152-35

Income Tax Assessment Act 1997 Sub section 152-40

Reasons for decision

The taxpayer elected under sub-division 152-E ITAA 1997 to apply the small business roll over in respect to the disposal of their business on 1 July 2008 and defer part of the capital gain made on the disposal of their business.

The taxpayer had committed to purchasing eligible rollover assets in the form of equipment and fit out in a new place of business before the rollover period expired on 1 July 2010. However, due to circumstances beyond their control during the construction period of their new premises, not all of the replacement assets were installed and ready for use by the end of the rollover period.

Of the total rollover amount only some equipment was purchased for use prior to 1 July 2010. The total actual expenditure on replacement assets was ultimately in excess of the rollover amount.

An extension of time is being sought to acquire assets beyond replacement asset period s104-190(2) ITAA 1997, as elected under sub-division 152-E ITAA 1997. 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 the skin therapy business 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 business to be disposed of is property and therefore a CGT asset. Hence basic condition (a) is satisfied.

(b)   This condition requires the disposal of the business to result in a gain. As the business is now disposed of, and a capital gain was made, this condition is satisfied.

(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 business, of the taxpayer and its affiliates and connected entities to total $6,000,000 or less. The taxpayer has confirmed that this is the situation. Therefore, basic condition (c) has been satisfied.

(d)   The final basic condition requires the business 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

(i)      you or

(ii)    your affiliate or

(iii)    an entity connected to you.

As the business disposed is in the business of entities connected to you they are active assets.

If the asset is disposed of in an intangible asset (such as goodwill) the nit must have been inherently connected with a business carried on by you, your affiliate or another entity connected with you.

As all the assets disposed of were either used in or inherently connected with a business carried on by you, your affiliate or another entity connected with you, 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, the new premises being built for day surgery. Hence condition (a) is satisfied.

(b)   The construction and fit out of the day surgery was completed by 31 December 2010. Hence from that date the replacement asset was held ready for use for the day surgery business. Thus from that date the replacement asset is considered an active asset. Therefore 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 ends two years after the CGT event for which the Company received roll over relief. In this case the replacement asset period starts about 1 July 2008, and ends in April 2010.The replacement asset was acquired 30 July 2010 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 had committed to purchasing eligible rollover assets in the form of a newly constructed building, equipment and fit out in the new premises before the rollover period expired 1 July 2010. However, it is noted that due to circumstances beyond their control, severe flooding caused delays in all stages of the project and fit out could not be completed by the due date.

By the end of the replacement asset period only part assets were purchased, out of the total replacement asset value, and were installed ready for use.

We have decided to grant an extension of time in this case as:

a.      There is an acceptable explanation as to why the delay occurred

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

c.      The rulee had no control over the time and manner in which the construction delay occurred

d       It is considered that the granting of an extension of time in this instance would be appropriate as per the Commissioner's established.  

Conclusion

As the taxpayer has provided an adequate explanation for the delay, and the decision will not prejudice or unsettle the Commissioner, other persons or practices, it is appropriate to apply the Commissioner's discretion to extend the period of time beyond the 12 month period allowed for in subparagraph 104-185(1)(a).