Edited version of private advice

Authorisation Number: 1052086935997

Date of advice: 13 February 2023

Ruling

Subject: CGT - replacement asset period

Question

Will the Commissioner exercise his discretion under subsection 104-190(2) of the Income Tax Assessment Act 1997 (ITAA 1997) to extend the 'replacement asset period' to the period between DD MM 20YY and DD MM 20YY?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 20YY

Year ending 30 June 20YY

Year ending 30 June 20YY

The scheme commenced on:

DD MM YYYY

Relevant facts and circumstances

'Property B'

X and Y owned property located in a state as joint tenants. X and Y are partners.

Business activities were carried out at Property B, being that of primary production, specifically beef cattle breeding and finishing with some cropping. The business did not generate any profits.

The business at Property B was carried on by X and Y as partners in a partnership. X and Y operated the business together, with both partners contributing to the running of the business.

X and Y planned to sell Property B at the time they purchased Property I. However, due to severe drought conditions, the marketing and sale of Property B were delayed. The market conditions for the sale of Property B were adversely impacted by the drought.

Property B was placed on the market around the end of 20YY.

Property B was drought-declared for 4 years or more up until end of 20YY.

The contract to dispose of Property B was entered into in MM 20YY.

The settlement for the sale of Property B occurred in MM 20YY.

'Property I'

In MM 20YY, X and Y tendered for the purchase of property located in a state ('Property I'). The contract to purchase Property I was entered into in MM 20YY.

X and Y are carrying on business in operating the Property I farm.

The business carried out on Property I is that of primary production: beef cattle breeding and fattening.

Property B and Property I transactions

In relation to Property B and Property I transactions, X and Y had always intended to sell Property B and purchase Property I as quickly as possible, but circumstances did not allow this to happen.

The amount incurred in relation to the purchase of Property I is less than the capital gain on the sale of the Property B property.

Assumptions

The basic conditions of the small business CGT concessions as set out in Subdivision 152-A of the ITAA 1997 are met by X.

The replacement asset, X's interest in Property I, is an active asset used in the course of the partnership business carried on by X and Y.

X will choose a small business roll-over under Subdivision 152-E in relation to the sale of X's interest in Property B.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 109-B

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 Subdivision 152-E

Income Tax Assessment Act 1997 section 104-5

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 104-190

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(1)

Income Tax Assessment Act 1997 subsection 104-198(4)

Income Tax Assessment Act 1997 section 109-5

Income Tax Assessment Act 1997 subsection 152-40(1)

Income Tax Assessment Act 1997 section 152-400

Income Tax Assessment Act 1997 section 152-410

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Subdivision 152-E

Section 152-400 of Subdivision 152-E of the ITAA 1997 sets out the following:

"A small business roll-over allows you to defer the making of a capital gain from a CGT event happening in relation to one or more small business assets if the basic conditions in Subdivision 152-A are satisfied for the gain..."

Section 152-410 of the ITAA 1997 states the following:

"You can choose to obtain a roll-over under this Subdivision for a *capital gain if the basic conditions in Subdivision 152-A are satisfied for the gain."

As set out in the Relevant Facts and Circumstances section of this ruling, the basic conditions of the small business CGT concessions as set out in Subdivision 152-A of the ITAA 1997 are satisfied by X. Therefore, the requirement of section 152-410 of the ITAA 1997, that the basic conditions of Subdivision 152-A are met, has been satisfied.

It is also noted that X's interest in Property I was acquired as an active asset. In this regard, the Commissioner notes the following:

•                     The term 'replacement asset' is not defined in Subdivision 152-E of the ITAA 1997 but takes its meaning from section 104-185, section 104-197 and section 104-198 of the ITAA 1997. For X's interest in Property I to be considered a replacement asset, it must have been 'acquired' as an 'active asset':

•                     Section 995-1 of the ITAA 1997 defines 'acquire' as follows:

"(a) a * CGT asset: you acquire a CGT asset (in its capacity as a CGT asset) in the circumstances and at the time worked out under Division 109 (including under a provision listed in Subdivision 109-B);..."

Section 109-5 of the ITAA 1997 sets out the following:

As a contract to purchase Property I was entered into by X and Y in MM 20YY, X's interest in Property I meets the definition of having been 'acquired' in MM 20YY.

Subsection 152-40(1) of the ITAA 1997 sets out the meaning of an 'active asset' as follows:

" A * CGT asset is an active asset at a time if, at that time:

(a) you own the asset (whether the asset is tangible or intangible) and it is used, or held ready for use, in the course of carrying on a * business that is carried on (whether alone or in partnership) by:

(i) you; ..."

X's interest in Property I is an 'active asset' as X and Y are carrying on business in partnership, and Property I is being used in the course carrying on that business since Property I's acquisition.

However, X's acquisition of his interest in Property I did not occur during the replacement asset period. Under section 995-1 of the ITAA 1997, replacement asset period is defined as having the meaning given by section 104-190.

Under subsection 104-190(1A) of the ITAA 1997, the replacement asset period starts one year before, and ends two years after, the happening of the last CGT event in the income year for which the small business roll-over is obtained. Subsection 104-190(1A) of the ITAA 1997 states the following:

"Replacement asset period

(1A) If you choose a small business roll-over under Subdivision 152-E for a * CGT event that happens in relation to a * CGT asset in an income year, the replacement asset period is the period:

(a) starting one year before the last CGT event in the income year for which you obtain the roll-over; and

(b) ending at the later of:

(i) 2 years after that last CGT event; and

(ii) if the first-mentioned CGT event happened because you * disposed of the CGT asset--6 months after the latest time a possible * financial benefit becomes or could become due under a * look-through earnout right relating to the CGT asset and the disposal."

Section 104-5 of the ITAA 1997 sets out the following:

Section 104-10 of ITAA 1997 states the following:

"(1) CGT event A1 happens if you * dispose of a • CGT asset.

(2) You dispose of a * CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law...

(3) The time of the event is:

(a) when you enter into the contract for the * disposal..."

In this case, CGT event A1 occurred in MM 20YY, being the same date on which the contract was entered into to dispose of Property B.

Therefore, the replacement asset period for the purposes of subsection 104-190(1A) of the ITAA 1997 starts in MM 20YY and ends in MM 20YY; ie the replacement asset period in this case is one year before and two years after CGT event A1 occurring in MM 20YY.

However, the Commissioner has the discretion to extend or modify the replacement asset period under subsection 104-190(2) of the ITAA 1997.

Commissioner's discretion under subsection 104-190(2) of the ITAA 1997

Subsection 104-190(2) of the ITAA 1997 states the following:

"(2) The Commissioner may extend the replacement asset period, or that period as modified by subsection (1)."

In determining whether the Commissioner should exercise his discretion in relation to the replacement asset period, the following factors are set out in ATO Interpretive Decision 2001/619 (withdrawn):

•                     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.

Having considered the relevant factors set out in ATO Interpretive Decision 2001/619 (withdrawn) and facts and circumstances as set out in this ruling, the Commissioner considers:

•                     the applicant has provided an acceptable explanation for the period of extension requested and it would be fair and reasonable in the circumstances to provide such an extension. Specifically, the delay in the sale of Property B was caused by circumstances that were beyond the control of the applicant, being the severe drought conditions and associated circumstances impacting the sale of Property B;

•                     the facts and circumstances do not indicate an unsettling of people or of established practices if the discretion were to be exercised;

•                     there is no mischief involved; and

•                     the primary consequence of the Commissioner exercising his discretion and extending the period for acquiring the replacement asset is that X will be able to choose to obtain a roll-over under Subdivision 152-E of the ITAA 1997 for the capital gain from the sale of Property B.

It is noted that the discretion under subsection 104-190(2) is broad and allows for the 'extension' and 'modification' of the replacement asset period. This allows for the replacement asset period to be extended prospectively as well as retrospectively (that is, the Commissioner may allow the replacement asset period to commence at an earlier starting date): refer to ATO Interpretive Decision 2001/619 in this regard.

Accordingly, the Commissioner will exercise his discretion under subsection 104-190(2) of the ITAA 1997 to extend the period for acquiring the replacement asset from MM 20YY to MM 20YY.