Edited version of private advice

Authorisation Number: 1051648971349

Date of advice: 02 April 2020

Ruling

Subject: Small business concessions

Question

Will the Commissioner exercise the discretion under subsection 104-190(2) of the Income Tax Assessment Act 1997 (ITAA 1997) to extend the two year time limit under subsection 104-197(1) of the ITAA 1997 to acquire the replacement asset?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2019

Year ended 30 June 2020

The scheme commences on:

1 July 2018

Relevant facts and circumstances

In August 20XX the Trust disposed of an active asset and generated a capital gain.

The active asset was a company.

The Trust satisfied the $6,000,000 maximum net asset test, the Trustee is a capital gains tax (CGT) concession stakeholder and had a small business participation percentage in the company of at least 90%.

The trust was eligible for, and applied the small business concessions, applying the following to reduce the capital gain:

- 50% General CGT discount.

- 50% Active Asset CGT concession.

After applying the small business concessions, there was a residual capital gain.

The Trust applied the replacement asset CGT concession to defer the assessing of the residual capital gain for two years.

The tax agent understood, at the time of lodgement of the 2017 Income Tax Return, the Trustee's intention was to utilise the CGT concession, Retirement Exemption at the expiry of the replacement asset period and contribute the crystallised residual capital gain into a complying superannuation fund account.

A new Company was established with shares held by the Trust.

The Company operates a business and the shares in the Company are active assets.

The director was doing all things necessary to commence operating the new business.

There were delays on council approval and design issues relating to accommodating the needs of the business' patients.

By August 20XX the company was incurring initial start-up costs and overheads, funded by the Trust.

In August 20XX, the Trustee did not have sufficient funds to contribute the deferred capital gain into a complying superannuation fund account.

During the new business start up the director was occupied in working to launch the small business and did not consider the timing of the previous CGT event some two years earlier.

The funds invested in the Company had previously been disclosed as a loan from the Trust to the Company.

The Company has since issued additional shares as consideration for the payment of the loan and the value of the shares is at least the value of the residual capital gain.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 Subdivision 152-E

Income Tax Assessment Act 1997 Subsection 104-185(1)

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

Income Tax Assessment Act 1997 Section 104-197

Income Tax Assessment Act 1997 Section 104-198

Reasons for decision

The small business roll-over allows you to defer the capital gain made from a capital gains tax (CGT) event if the Trust acquires' one or more replacement asset and satisfies certain conditions. The conditions which must be met to obtain relief are set out in Subdivision 152-A of the ITAA 1997.

The Trust can choose the roll-over even if it has not yet acquired a replacement asset. However CGT event J5 happens if, by the end of the replacement asset period, the Trust does not acquire a suitable replacement asset which is an active asset. CGT event J6 happens if, by the end of the replacement asset period, the cost base (first, second and fourth elements only) of the replacement asset(s) the Trust acquired is less than the capital gains disregarded under the roll-over provisions.

The replacement asset period starts one year before, and ends two years after the date of disposal of the original asset. Subsection 104-190(2) of the ITAA 1997 states that the Commissioner may exercise his discretion to extend those time limits.

In determining if the discretion would be exercised, the Commissioner must have considered the following factors:

·   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 any mischief is involved, and

·   consideration of the consequences.

The Commissioner will generally only exercise his discretion where a taxpayer can demonstrate that they have actively sought to comply with their tax obligations, but were not able to comply through no fault of their own.

Having considered the relevant factors against the specific circumstances of your case, the Commissioner will not exercise the discretion under subsection 104-190(2) of the ITAA 1997 to allow an extension to the replacement asset period.