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Ruling

Subject: CGT Small business concessions

Question 1

Will the Commissioner exercise his discretion under subsection 104-190(2) of the Income Tax Assessment Act 1997 (ITAA 1997) to extend the replacement asset period following the sale of the original business?

Answer

Yes.

Question 2

Will the Commissioner exercise his discretion under subsection 104-190(2) of the ITAA 1997 to extend the replacement asset period following a J2 event?

Answer

Yes.

Question 3

Will the Commissioner exercise his discretion in relation to the active asset test in relation to the sale of the property used in the second business?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

The company sold the original business in the 2001-02 income year and elected to take advantage of the small business rollover.

Due to the ill health of one of the directors of the company, the company received a ruling stating that the Commissioner would extend the period in which the company was required to acquire a replacement asset for the rollover.

The company purchased a property in the 2004-05 income year and constructed a building to commence the second business. The construction was completed during the 2006-07 income year and the property was held ready for use in the business on this date.

The second business operated as a small business until a date during the 2008-09 income year. The business ceased following one of the directors of the company falling ill again. The directors of the company were unsure if they would re-activate the business.

One of the directors of the company passed away and the second business remained inactive.

It became clear that the business would be unable to be re-established and the property was sold in the 2011-12 income year.

The company wishes to roll over the capital gain made on the sale of the property used in the second business.

The company established a new business during the 2011-12 income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-185

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

Income Tax Assessment Act 1997 Section 152-10

Income Tax Assessment Act 1997 Section 152-35

Income Tax Assessment Act 1997 Subparagraph 152-35(2)(b)(ii)

Reasons for decision

Where a taxpayer elects to take advantage of the small business rollover, there are rollover conditions that must be satisfied by the end of the replacement asset period. This period starts one year before and ends two years after the last CGT event that occurs in the income year for which you choose the roll over, or a longer period that the Commissioner allows.

If the rollover conditions are not met within the replacement asset period the gain will become assessable.

You satisfy the rollover conditions where you meet all the following conditions:

· you acquire one or more CGT assets as replacement assets or make a capital improvement to one or more existing assets, or both, within the replacement asset period

· the replacement asset, or the asset to which the capital improvement was made is an active asset at the end of the replacement asset period (a depreciating asset such as plant can be a replacement asset)

· if the replacement asset is a share in a company or an interest in a trust, at the end of the replacement asset period:

· you, or an entity connected with you, are a CGT concession stakeholder in the company or trust, or

· CGT concession stakeholders in the company or trust have a small business participation percentage in the interposed entity of at least 90%

· the capital gain that is being rolled over is not more than the sum of the following

· the amount paid to acquire the replacement asset (that is, the first element of the cost base of the replacement asset)

· any incidental costs incurred in acquiring that asset, which can include giving property (that is, the second element of the cost base of the replacement asset), and

· the amount expended on capital improvements to one or more assets that were acquired or already owned (that is, fourth element expenditure).

If you choose the rollover, all or part of the capital gain will not be included in your assessable income until a change in circumstances happens, for example you don't meet the rollover conditions within the specified time period.

Sale of the original business

In this case, the company sold a business in the 2001-02 income year and elected to take advantage of the small business rollover. The company received an extension of time to acquire a replacement asset. Although the company purchased a property prior to the end of the replacement asset period, the asset was not active at the end of the asset replacement period.

A CGT asset is an active asset if it is owned by you and is used or held ready for use in a business carried on (whether alone or in partnership) by you, your affiliate, your spouse or child, or an entity connected with you. At the end of the extended asset replacement period the property was under construction and not held ready for use until the 2006-07 income year. The company would therefore not meet the rollover conditions in regards to the replacement asset.

However the Commissioner may extend the replacement asset period in certain circumstances (subsection 104-190(2) of the ITAA 1997).

The relevant factors in determining whether to extend the replacement asset period are:

· 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

· a consideration of the consequences.

In this case, the company had already obtained an extension of time from the Commissioner to acquire a replacement asset due to the ill health of one of the directors of the company.

The company purchased the property during the extended asset replacement period; however it was not active until a number of months after the extended asset replacement period. We consider that the previous illness of the director and the time taken to construct the property is an acceptable explanation for the further delay. We do not consider that allowing an additional period of time would unsettle others or that there is any mischief involved.

Accordingly, in these circumstances, the Commissioner will exercise his discretion to allow a further extension to the asset replacement period. This would enable the company to meet the rollover conditions with the property used in the second business.

CGT event J2

CGT event J2 happens if, after the end of the replacement asset period, there is a change in the status of a replacement or capital improved asset you chose for the small business rollover. An example of CGT event J2 is where the replacement asset stops being your active asset, for example, you dispose of the asset or you stop using it or holding it ready for use in your business.

When CGT event J2 happens to your replacement or capital improved asset, you make a capital gain equal to the gain previously disregarded under the small business rollover. A capital gain from CGT event J2 may qualify for further rollover provided you meet all the relevant conditions.

When the second business ceased CGT event J2 occurred. The company then made a capital gain equal to the gain previously disregarded following the sale of the original business. The company wishes to once again roll over this gain. In order to qualify to rollover the capital gain arising from the J2 event, the company would need to meet the basic conditions and the rollover conditions.

As previously discussed, the rollover conditions require you to acquire a replacement asset within two years following the CGT event. In this case the company would need to have acquired a replacement asset by the 2010-11 income year. You have requested that the Commissioner exercise his discretion to allow a longer period to acquire a replacement asset.

Following the cessation of the business, it was uncertain if the business would be able to be re-established due to the illness of one of the directors. Once it was determined that it would not be possible to re-establish the business, the property was sold. A new business has been established in the 2011-12 income year.

After taking the relevant factors discussed above into account, we consider the delay is reasonable in the circumstances. Accordingly, the Commissioner will exercise his discretion to allow an extension to the asset replacement period for the J2 event.

Sale of the property used in the second business

In the 2011-12 income year the company sold the property used in the second business. At this point a separate capital gain occurred, following the disposal of the asset. The company is seeking to apply the small business rollover to the capital gain. In order to access the small business rollover, the company must first meet the basic conditions contained in subsection 152-10(1) of the ITAA 1997. One of the basic conditions is the active asset test.

The active asset test is contained in section 152-35 of the (ITAA 1997). The active asset test is satisfied if:

· you have owned the asset for 15 years or less and the asset was an active asset of yours for a total of at least half of the test period detailed below, or

· you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of least 7.5 years during the test period.

The test period:

· begins when you acquired the asset, and

· ends at the earlier of

· the CGT event, and

· when the business ceased, if the business in question ceased in the 12 months before the CGT event (under subparagraph 152-35(2)(b)(ii) of the ITAA 1997 the Commissioner can allow a longer period than 12 months).

In this case, the property was an active asset of the company's for less than two years. The company did not sell the property immediately as it was unsure if the business would be re-established due to the ill health and subsequent passing of one of the directors. However it became clear that the business would not be able to be re-activated. The property was subsequently sold in the 2011-12 income year.

As the disposal of the property did not occur within 12 months of the cessation of the business being carried on, the test period ends at the time of the CGT event. The asset was not active for at least half of the test period.

Therefore, the active asset test will only be satisfied if the Commissioner allows a longer period under subparagraph 152-35(2)(b)(ii) of the ITAA 1997, therefore allowing the test period to end at the time the business ceased. 

In determining if the discretion to allow a period longer than 12 months 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.

After considering the relevant factors against the circumstances in this case, it is considered that there is a reasonable and acceptable explanation for the delay in the disposal of the property following the cessation of the business.

Accordingly, the Commissioner will exercise his discretion to allow a longer time and treat the date the business ceased as the end date of the test period for the active asset.

The company will therefore pass the active asset test and will be entitled to the small business rollover in relation to the sale of the property used in the second business subject to the other basic and rollover conditions.