Edited version of private advice

Authorisation Number: 1051611011103

Date of advice: 26 November 2019

Ruling

Subject: Capital gains tax

Question 1

Does the full share sale amount represent capital proceeds for CGT events that occurred in the 20XX-XX financial year?

Answer

Yes

Question 2

Will the Commissioner exercise the discretion in paragraph 103-25(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow an extension of time to make a choice to apply the small business rollover?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Trust owns X shares (X% percent of the shares) in ABC Pty Ltd (ABC) and X shares (X% percent of the shares) in XYZ Pty Ltd (XYZ).

The Trust entered into a share sale agreement on X January 20XX with an overseas company (the Purchaser).

The agreement provided for the Trust to sell their X shares in ABC and their X shares in XYZ

The Trust is required to transfer the shares in four tranches.

Relevant terms from the definitions in the share sale agreement are:

1.2.6. Completion means completion of the initial share sale and purchase of fifty five (55%) percent of the Shares under clause 5.

1.2.7. Completion Date means X January 20XX or such other date agreed in writing between the parties

Clause 2.2.2 of the share sale agreement provides that title to, property in and risk of the shares will pass to the Purchaser on and from Completion.

The Trust has transferred shares and received the proceeds for the first 3 tranches, being X January 20XX, X July 20XX and X July 20XX. The Trust expects that the final proceeds due X July 20XX will be paid by the purchaser and that the remaining shares will be transferred in accordance with the agreement.

The Trust included the amount of $X as the sale proceeds under CGT event A1 in the 20XX-XX financial year tax return. The capital gain was reduced by the 50% general discount, the 50% small business reduction and the small business retirement exemption, leaving a net capital gain of $X.

The sale proceeds to be received X July 20XX, X July 20XX and X July 20XX were not declared on the 20XX-XX financial year tax return, as it was expected that these would be reported on subsequent tax returns once the proceeds were received.

As the second tranche was received X July 20XX, it was expected that this amount would be declared on the 20XX-XX financial year tax return. When preparing taxation estimates for the 20XX-XX financial year in June 20XX, the tax agent advised that in their opinion the full sale proceeds should have been included on the 20XX-XX financial year tax return, and that they should seek a ruling from the Commissioner to confirm the same.

Had the Trust been aware that the full sale proceeds of $X should be declared on the 20XX-XX financial year tax return, the Trust would have claimed an amount of $X under the retirement exemption, leaving the same net capital gain of $X as originally reported on the 20XX-XX financial year tax return.

On the basis that the full sale proceeds of $X should be declared on the 20XX-XX financial year tax return, and that the extension of time to make the rollover choice is granted, the Trust will request an amendment of the 20XX-XX financial year tax return to apply the small business rollover to the additional capital gain that will be made on the shares transferred on X July 20XX.

You have provided supporting information which confirms that the Trust meets the basic conditions for the small business CGT concessions and the additional basic conditions for a share in a company or interest in a trust.

Relevant legislative provisions

Income Tax Assessment Act 1997 Paragraph 103-25(1)(b)

Income Tax Assessment Act 1997 Subsection 104-10(1)

Income Tax Assessment Act 1997 Subsection 104-10(2)

Income Tax Assessment Act 1997 Paragraph 104-10(3)(a)

Reasons for Decision

Question 1

CGT event A1 happens under section 104-10 of the ITAA 1997 if you dispose of an asset. You are taken to have disposed of an asset if a change of ownership occurs from you to another entity, whether because of some act or event; or because of an operation of law.

The time of CGT event A1 is when you enter into the contract to dispose of the CGT asset, or, where there is no contract, when the change of ownership occurs.

In these circumstances, the Trust entered into a contract to dispose of the shares on 16 January 2017. Clause 2.2.2 of the share sale agreement provides that title to, property in and risk of the shares will pass to the Purchaser on and from Completion.

Even though the proceeds for the shares are paid in instalments over a number of financial years, the disposal of the shares has occurred in the 20XX-XXfinancial year and as a result the full sale proceeds represent capital proceeds for CGT events that occurred in the 20XX-XX financial year.

Question 2

You may choose to disregard or defer all or part of a capital gain under the small business CGT concessions if you satisfy certain conditions.

The general rule is that a choice available under the CGT provisions once made cannot be changed. Generally, such a choice must be made by the time the income tax return is lodged, or within such further time as the Commissioner allows (subsection 103-25(1) of the ITAA 1997).

Under subsection 103-25(2) of the ITAA 1997, the way you prepare your income tax return is sufficient evidence of the making of the choice. Paragraph 103-25(3)(b) of the ITAA 1997, however, contains an exception in relation to the small business retirement exemption, as subsection 152-315(4) of the ITAA 1997 requires the choice for this exemption to be made in writing.

In determining if the Commissioner should use his discretion to allow an extension of time the following will be considered:

·         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.

Application to your circumstances

We consider the reasons you have supplied to be an acceptable explanation for the extension required. There would be no prejudice to the Commissioner or unsettling of people by allowing the extension. There is no mischief involved. The Commissioner considers it fair and equitable in these circumstances to exercise his discretion to allow you to access the active asset concession and replacement asset rollover relief. An extension of time is allowed for you to make the choice to apply the small business concessions.