Edited version of private advice

Authorisation Number: 1051949666538

Date of advice: 16 February 2022

Ruling

Subject: Small business CGT replacement asset - extension of time

Question 1

Will the Commissioner exercise discretion pursuant to subsection 104-190(2) of the Income Tax Assessment Act 1997 (ITAA 1997) to extend the small business capital gains tax (CGT) replacement asset period to XX XXX 20XX?

Answer

Yes.

Question 2

Will the Commissioner exercise discretion pursuant to section 103-25(1)(b) of the ITAA 1997 to extend the timeframe to make a choice to apply the small business CGT rollover relief under section 152-410 of the ITAA 1997 to XX XXX 20XX?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 XXX 20XX

Relevant facts and circumstances

The Trust for CD Trust (the Trust) is a discretionary investment trust.

Axxx Bxxx (AB) is trustee and sole beneficiary of you.

Together the Trust and AB owned shares in a trading company.

On 1 XXX 20XX, the Trust and AB entered a sale contract to sell your shares.

The purchase price compromised an upfront payment plus earn-out payments to be paid over a period of X years from the completion date.

Settlement was to be on XX XXX 20XX.

Settlement was delayed xxx until XX XXX 20XX due to COVID-19 and funding issues.

On XX XXX 20XX, the Trust lodged the 20XX-XX financial year income tax return. You disclosed an incorrect capital gain amount of $XXX,XXX.

On XX XXX 20xx, the tax agent notified the Trust of the incorrect capital gain amount. The Trust intends to amend the capital gain amount when lodging the 20XX-XX financial year income tax return.

AB's partner currently resides in xxxx. AB intends to commence a new business venture in xxxx, spending at least XX% of time there.

AB sought incorrect taxation advice that he had until XXX 20XX to find a suitable replacement asset.

The Trust and AB have since been advised that the correct date to find a suitable replacement asset is prior to 1 XXX 20XX.

AB has made numerous genuine enquiries on multiple properties to use for business locations.

AB has been limited due to COVID-19 border restrictions and unable to view the properties in person.

AB intends to find a suitable replacement asset within 24 months.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 103-25

Income Tax Assessment Act 1997 Section 104-90

Income Tax Assessment Act 1997 Section 104-185

Income Tax Assessment Act 1997 Section 104-190

Income Tax Assessment Act 1997 Section 116-120

Income Tax Assessment Act 1997 Section 118-565

Income Tax Assessment Act 1997 Section 152-10

Income Tax Assessment Act 1997 Section 152-315

Income Tax Assessment Act 1997 Section 152-410

Reasons for decision

Question 1

Replacement Asset Rollover Relief

Subsection 104-190(2) of the ITAA 1997 sets out the conditions for the small business rollover concession. It allows you to defer the capital gain made from a capital gains tax (CGT) event if you acquire one or more replacement assets and satisfy certain conditions. The basic conditions which must be met to obtain relief are set out in section 152-10 of the ITAA 1997.

For you to obtain a rollover, subsection 104-185(1) of the ITAA 1997 requires you to acquire a replacement asset within a period starting one year before and ending two years after the date of disposal of the asset for which you are claiming the rollover. Subsection 104-190(2) of the ITAA 1997 states that the Commissioner may extend those time periods.

Application to your circumstances

After considering your circumstances including the incorrect advice provided by a tax professional and the COVID-19 border restrictions limiting your opportunities to travel interstate, the Commissioner considers it would be fair and reasonable for the purposes of section 104-190(2) of the ITAA 1997 to extend the replacement asset period.

Question 2

Decision to make a choice

Section 103-25(1)(b) of the ITAA 1997 allows you 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.

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 reasonable 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.

Capital Proceeds

Section 116-120 of the ITAA 1997 outlines the special rules in relation to the disposals of assets involving look-through earnout rights. Despite section 103-25 of the ITAA 1997, you may remake any choice you made in relation to CGT event if:

a) you provide or receive a financial benefit under such a look-through earnout right; and

b) you remake the choice at or before the time you are required to lodge your income tax return for the income year in which the financial benefit is provided or received.

Alternatively, the Commissioner may amend an assessment of a tax-related liability before the end of the 4 year period starting at the end of the income year in which the last possible financial benefit becomes or could become due under the look-through earnout right.

Section 118-565(3) of the ITAA 1997 states in working out the period over which the financial benefits under a right can be provided, disregard any part of an arrangement that allows for an entity to defer providing such a financial benefit where, the deferral is contingent on an event happening that is beyond the control of the parties to the arrangement, the deferral cannot change the amount of any financial benefit provided, or to be provided, under the right and when the arrangement is entered into, the contingent event is not reasonably expected to happen.

Application to your circumstances

After considering the facts and circumstances of your application, including the incorrect advice provided by a tax professional which mislead you into believing that there was additional time to obtain a suitable replacement asset. As well as the vendor delaying completion of settlement, resulting in bringing the replacement asset period forward. The Commissioner considers there is an acceptable explanation for the period of extension requested and that it is fair and reasonable in the circumstances to grant an extension. Therefore, the Commissioner grants an extension of time to make a choice in applying the small business roll-over under section 152-410 of the ITAA 1997.