Edited version of private advice

Authorisation Number: 1052070651555

Date of advice: 6 February 2023

Ruling

Subject: CGT - replacement asset period

Question

Will the Commissioner use his discretion to extend the replacement asset period pursuant to subsection 104-190(2) of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of the Small Business CGT replacement asset rollover relief?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 October 20XX

Relevant facts and circumstances

You made a capital gain from the settlement of a legal matter relating to your business in 20XX.

You rolled over the capital gain amount of $X under Subdivision 152-E of the ITAA 1997.

Based on subsection 104-190(1A) of the ITAA 1997, the end date for acquiring replacement assets would have been a date in 20XX.

You have received previous private rulings, in which the Commissioner extended the replacement asset period in accordance with subsection 104-190(2):

You have acquired additional active assets in the period to 30 June 20XX.

Additional capital improvements are underway on the active assets, which will be purchased after the end of the replacement asset period on 30 June 20XX.

You continue to have a dispute in relation to access which has significantly impacted your ability to make improvements to the property.

The amount of capital gain that remained as of 30 June 20XX is $X.

Relevant legislative provisions

Income Tax Assessment Act 1997, Subdivision 152-E

Income Tax Assessment Act 1997, subsection 104-190(1A)

Income Tax Assessment Act 1997, subsection 104-190(2)

Income Tax Assessment Act 1997, subsection 104-198

Reasons for decision

All references made in these reasons for decision are to the Income Tax Assessment Act 1997 unless otherwise stated.

Summary

The Commissioner will use his discretion to extend the replacement asset period pursuant to subsection 104-190(2) of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of the Small Business CGT replacement asset rollover relief until 30 June 20XX.

At the end of the 30 June 20XX extended replacement asset period, CGT event J6 in s104-198 happens automatically to any of the disregarded capital gain not yet expended by this time. You make a capital gain equal to the difference between the amount of the capital gain disregarded under the small business rollover, and the amount incurred on the replacement assets or capital improvements.

Detailed reasoning

If a taxpayer makes a capital gain from a CGT asset and satisfies all the basic conditions in Subdivision 152-A, the taxpayer may choose small business roll-over in Subdivision 152-E.

There are roll-over conditions that must be satisfied by the end of the replacement period, if the roll-over conditions are not met within the replacement asset period, the gain will become assessable.

One such condition, specified in subsection 104-190(1A), requires a taxpayer to acquire a replacement asset within a period starting one year before, and ending two years after the date of disposal of the original asset.

However, subsection 104-190(2) states that the Commissioner may exercise his discretion to extend this time limit.

An extension of time may be granted 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.

The relevant factors in determining whether to extend the replacement asset period are:

•         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.

CGT consequences for insufficient expenditure incurred on replacement asset

Section 104-198 of the ITAA 1997 provides that CGT event J6 happens if you choose to obtain a rollover, and by the end of the replacement asset period you satisfy all of the rollover conditions except one, namely the amount you choose to rollover is equal to or greater than the sum of the following amounts

•         the amount paid to acquire the replacement asset (that is, the first element of the cost base of the replacement asset)

•         any incidental costs incurred in acquiring that asset, which can include giving property (that is, the second element of the cost base of the replacement asset), and

•         the amount expended on capital improvements to one or more assets that were acquired or already owned (that is, fourth element expenditure).

When CGT event J6 happens, you make a capital gain equal to the difference between:

•         the amount of the capital gain disregarded under the small business rollover, and

•         the amount incurred on the replacement asset or capital improvements.

The time of the event is at the end of the replacement asset period.

When CGT event J6 occurs, you may be eligible for the retirement exemption, provided you meet the relevant conditions for that exemption. You don't need to meet the basic conditions again. However, you cannot apply the 50% discount, small business 50% active asset reduction or the 15 year exemption to reduce this gain.

Application to your circumstances

You made a capital gain in 20XX.

The end date for acquiring replacement assets was a date in 20XX.

You asked the Commissioner to extend the replacement asset period on more than one occasion, all of which were granted.

In the period up to 30 June 20XX you purchased some replacement assets, but you have not yet expended all the capital gain.

A requirement of the small business rollover concession is that you must acquire a replacement asset and it is expected that you would take action to find a suitable replacement asset in anticipation of the receipt of the proceeds from the sale of the CGT asset.

Where that cannot be achieved within the replacement asset period, there is an expectation that you can demonstrate that you have been actively looking to acquire a replacement asset but were not able to do so, through no fault of your own.

The reason for your current request is that there are additional capital improvements underway which will be purchased after the end of the replacement asset period on 30 June 2022. These capital improvements are taking place after the end of the extended replacement asset period due to a dispute causing access issues to your property.

In the circumstances the Commissioner is willing to grant an extension to 30 June 20XX.

At the end of the 30 June 20XX extended replacement asset period, CGT event J6 in s104-198, will automatically apply to any of the disregarded capital gain not expended by this time on replacement assets and improvements. You make a capital gain equal to the difference between the amount of the capital gain disregarded under the small business rollover, and the amount incurred on the replacement asset or capital improvements.