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Ruling

Subject: Small business CGT concessions - extension of time

Small business CGT 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 the Taxpayer's replacement asset to be acquired?

Answer:

Yes.

Relevant facts

The Taxpayer sold all of its units in a unit trust that carried on an active business.

The Units were active assets of the Taxpayer with the Trust satisfying the provisions of section 152-40 and in particular sub-section 152-40(3) ITAA 1997.

The sole director and shareholder of the Taxpayer was employed in the business and was also a CGT concession stakeholder /significant individual of the business as per sub-section 152-10(2) of the ITAA 1997.

The Taxpayer satisfied the maximum net assets test as per section 152-15 of the ITAA. The Taxpayer applied the small business concessions including the replacement asset rollover to reduce a capital gain.

The Taxpayer intended to find a replacement asset in the form of an interest in another business as soon as he could establish a suitable relationship with such a prospective business.

The contract of sale of the units contained a restrictive covenant clause that effectively prevented the Taxpayer from having an interest in a similar business in the state and dealing with any suppliers or customers of the original business for at least six months after the contract date.

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

The Taxpayer is requesting that the Commissioner grant an extension of time of six months to find a replacement asset in respect of the small business replacement asset roll-over under subdivision 152-E of the ITAA 1997 that was claimed by the Taxpayer.

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 this case, the Taxpayer applied the roll-over concessions in respect of the sale of all of their units in a unit trust that carried on a business as a real estate agency. These units were active assets of the Taxpayer. The Taxpayer has advised that they will not be able to acquire a suitable replacement asset 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.

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

o 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

o 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

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

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

o whether there is any mischief involved, and

o a consideration of the consequences.

Application to your situation

The Taxpayer has worked to obtain a replacement asset. However this was hindered by the restrictive covenant clause in the sale of business contract and the relationship breakdown with a prospective new business.

The sole director and shareholder of the Taxpayer attempted to build up a relationship with an appropriate business however this relationship did not work out. This shows that the taxpayer is making a continued effort to replace the asset. It is evident that the taxpayer has made an effort to find a replacement asset however this has not yet come to fruition. The Taxpayer contends that if the Commissioner allows an extension of time of six months the Taxpayer will be able to acquire a replacement asset. From the facts supplied by the Taxpayer it is evident that there is an acceptable explanation as to why a replacement asset has not already been obtained.

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 the Taxpayer 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 the taxpayer 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 the Taxpayer to acquire a replacement asset.