Edited version of private advice

Authorisation Number: 1051851826671

Date of advice: 12 June 2021

Ruling

Subject: CGT - small business concessions - EOT to make a choice

Question 1

Will the Commissioner allow an extension of time under paragraph 103-25(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) to make an election under section 152-220 of the ITAA 1997 to choose not to apply the small business 50% active asset reduction under section 152-205 of the ITAA 1997?

Answer

Yes

Question 2

Will the Commissioner allow an extension of time under paragraph 103-25(1)(b) of the ITAA 1997 to make a choice to apply the small business retirement exemption to that half of the capital gain to which the 50% active asset reduction previously applied?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You made a capital gain in the 20XX income year.

You received taxation advice in relation to applying the small business CGT concessions to reduce that capital gain.

The advice noted that applying the active asset reduction would result in a reduction of the cost base of the units when this component was paid/distributed to the unit holders, potentially triggering CGT event E4.

Following the advice received, you decided not to apply the 50% active asset reduction and to apply the small business retirement exemption to reduce the capital gain to NIL as the CGT concession stakeholders were all aged 55 or over and wished to maximise contributions to superannuation.

On XX Month 20XX you lodged the CGT schedule with your income tax return showing the capital gain reduced as follows:

Gross Gain $X

Less General CGT discount ($X)

Less active asset reduction ($X)

Less small business retirement exemption ($X)

Upon realising that the 50% active asset reduction had been automatically applied in the return, you lodged an amended return on XX Month 20XX to change the CGT schedule as follows:

Gross Gain $X

Less General CGT discount ($X)

Less small business retirement exemption ($X)

Relevant legislative provisions

Income Tax Assessment Act 1997 section 103-25

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

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 Subdivision 152-C

Income Tax Assessment Act 1997 section 152-205

Income Tax Assessment Act 1997 section 152-220

Income Tax Assessment Act 1997 subsection 152-305(2)

Reasons for decision

Subdivision 152-C of the Income Tax Assessment Act 1997 (ITAA 1997) sets out the order in which the CGT small business concessions are to be applied to a capital gain, if the basic conditions for relief outlined in Subdivision 152-A of the ITAA 1997 are satisfied.

The 50% active asset reduction in section 152-205 of the ITAA 1997 applies automatically if the basic conditions are satisfied and a choice is not made otherwise. With the enactment of section 152-220 of the ITAA 1997 a taxpayer can choose not to apply the 50% active asset reduction.

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

However, as section 152-205 of the ITAA 1997 had automatic application it is considered that no choice was made in relation to that part of the capital gain to which the 50% active asset reduction applied. Accordingly, in view of the enactment section 152-220 of the ITAA 1997, a choice may be made to apply the retirement exemption to the whole of the gain if the Commissioner grants further time in which to make that choice.

In determining if the discretion to allow further time would be exercised the Commissioner has 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 there is any mischief involved; and

•         a consideration of the consequences.

The 50% active asset reduction automatically applied to the capital gain and therefore it is considered that no choice has been made. Once identified you lodged an amendment to make the choice to not apply the 50% active asset reduction and instead applied the retirement exemption to that portion of the capital gain. The amendment was lodged XX days after the original return was lodged.

Having considered the relevant factors, the Commissioner will exercise the discretion under paragraph 103-258(1)(b) of the ITAA 1997 to allow an extension of time for you to choose the retirement exemption for that half of the capital gain to which the 50% active asset reduction previously applied.