Edited version of your written advice

Authorisation Number: 1013109809046

Date of advice: 28 October 2016

Ruling

Subject: 2 year replacement asset roll-over

Question

Will the Commissioner exercise his discretion under section 104-190(2) of the Income Tax Assessment Act (ITAA) 1997 to extend the replacement asset period from two years after the contract date to two years after the settlement date?

Answer

No

This ruling applies for the following period:

Year ending 30 June 20AA

The scheme commences on:

1 July 20ZZ

Relevant facts and circumstances

You (The Vendors) acquired the Property (The Property) after September 1985.

The Property has been used since purchase, and is currently used, as an operating farm by the Vendors.

The Vendors operate the farm via a partnership.

In 20XX, the Vendors entered into a contract with the Purchaser (The Purchaser) to sell the Property (Contract Date).

The particulars of the contract provide that the price for the sale of the Property is $X,000,000.

The price for the sale of the Property is payable in instalments.

There are X instalments to be paid, each of which becomes payable only once specific conditions are satisfied.

Settlement of the contract is due when the first instalment is paid (First Payment Date).

The First Payment Date is the date which is 14 days after Rezoning occurs (Rezoning).

Rezoning refers to an amendment of the Council Planning Scheme to rezone the land on which the Property is situated to a residential zone, enabling residential subdivision of the land.

The Vendors are required to manage the Property until settlement using prudent farm management practises.

The contract stipulates that the Purchaser is bound to use its best endeavours to achieve Rezoning and obtain an approved planning permit which permits residential subdivision of the land.

The Vendors are obligated to do all things reasonable to allow the Purchaser to apply for and obtain the permits and approvals required under the contract.

Under the terms of the contract, the Vendors are required to do the following;

● Maintain in the name of itself and the Purchaser public liability insurance of $X,000,000;

● Permit the Purchaser access to the Property for the purposes of development or use of the Property;

● Be the proprietors of a Mortgage over the Property equal to payments to be made under the contract. In this capacity the Vendors must consent to the development and subdivision of the Property;

● At the purchaser's cost, agree to do all things reasonable, consent to or agree to be named in any documents as may be necessary to allow the Purchaser to obtain all relevant permits and approvals required by the Purchaser to complete the development;

● Not object, or be involved in any objection, to the rezoning or any application for approval by the Purchaser.

However, the contract stipulates that the Purchaser acknowledges that the vendor will not be arranging for any construction on or development of the Property.

The contract of sale is further subject to specific timing conditions, including the requirement that rezoning occur within 36 months after the date of sale (Timing Conditions).

Failure to satisfy the Timing Condition permits both the Vendors and the Purchaser to terminate the contract.

The Purchaser is also entitled to terminate the contract by giving no less than 30 days' notice in writing to the Vendors at any time prior to Rezoning occurring.

The Vendors do not intend to undertake any development activities in the future

The Vendors have not yet acquired a replacement asset.

The following supporting documentation has been provided;

Contract of Sale for the Property, including

● Vendor Statement

● Title Plan

● Planning Certificate

● Land Tax Clearance Certificate

● 20XX Partnership Tax Return for the Vendors

● Financial Statements for the Vendors for the year ended 30 June 20YY.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 Subsection 104-190(1)

Reasons for decision

Summary

The Commissioner will not exercise his discretion under subsection 104-190(2) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow an extension to the time limit to acquire a replacement asset.

Commissioners Discretion

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.

Application to your circumstances

You have entered into a contract to sell your property. You entered into the contract on DD MM 20XX. For the purposes of the small business concessions (roll-over relief), you are required to acquire a replacement asset within two years of the contract date. You do not intend to purchase a new property until settlement occurs. You have advised that you will be unable to purchase another farm within the two year time frame as settlement has not occurred as at the end of MM 20ZZ.

In considering whether the Commissioner will exercise his discretion, the Commissioner needs to be satisfied that there were circumstances beyond your control that prevented you from finding a replacement asset within two years.

In prior cases, the Commissioner has granted an extension of time where there have been special circumstances and an acceptable explanation for the period of extension requested. These can include, but are not limited to medical or financial issues, personal issues or natural disasters.

In your case, the contract you have entered into clearly sets out the conditions of the contract. The contract specifically outlines that you will be paid the purchase price in six payment instalments and is subject to specific milestones being met. The Commissioner's view regarding your circumstances is that you have agreed to the conditions of the contract and you have made a commercial decision to accept them. In particular, the contract of sale stipulates that there are specific timing conditions, including the requirement that rezoning occur within 36 months after the date of sale (outside the two year replacement asset period).The commercial decision was inside your control, with no evidence to suggest that you had to accept this offer. The commissioner does not accept that you have special circumstances to allow further time to purchase a replacement asset.

After considering both the relevant factors for determining whether to exercise the Commissioner's discretion and the specific circumstances of your case, we consider that your circumstances do not warrant an extension of time. This is for the following reasons:

● In your case it is difficult to say there is evidence of an acceptable explanation for the extension requested. The reasoning for the delay is a personal and financial decision you have made. You have not acquired a replacement asset (farmland) since the contract was entered into as you are waiting for settlement to occur and the first payment instalment to be received. Although we understand the financial and contractual reasons why you have not purchased subsequent farmland, the Commissioner is of the view that you were aware at the time you signed the contract of the payment and contractual conditions. These factors along with the taxation implications need to be considered before the contract is entered into.

● To allow an extension of time in your case is likely to unsettle people for the reasons discussed above, that is, you understood the contract conditions and made a commercial decision to accept them.

● While there is no suggestion of mischief in this case, it could not be considered fair to people in like positions to allow you an extension of time. Another application with similar circumstances would be denied.

● There is no evidence you have identified the replacement asset or what portion of the proceeds would be necessary to be applied to its purchase. Indeed if you require access to multiple instalment payments to fund the replacement asset, in all probability the Commissioner would be asked to consider further extensions. In the absence of this decision and information, it is inappropriate for the Commissioner to provide what would in effect be an open-ended extension to the normal two year period.

Having considered all the relevant factors, the Commissioner is of the opinion that you have not provided an acceptable explanation for the period of extension to be granted until two years from settlement date.

Therefore, in your case, the Commissioner will not exercise the discretion under subsection 104-190(2) of the ITAA 1997 to extend the replacement asset period

Further issues for you to consider

This ruling has not considered your eligibility for the small business rollover. You should ensure that you satisfied the basic conditions and the other conditions for the rollover. More information is available in the guide Capital gains tax concessions for small business which available on our website www.ato.gov.au. The guide can be located by entering the code 'QC44192' in the search box located in the upper right hand corner of the website's page.