Edited version of private advice

Authorisation Number: 1052090179723

Date of advice: 28 February 2023

Ruling

Subject: CGT - replacement asset period

Question

Will the Commissioner extend the 'replacement asset period' under subsection 104-190(2) of the ITAA 1997 with respect to the disposal of shares?

Answer

Yes, to XXXX

This ruling applies for the following periods:

1 July XXXX to 30 June XXXX

Relevant facts and circumstances

AA and Trust, a discretionary trust which AA controls, (Taxpayers) together owned all the issued shares in a Company.

Company operates a business.

Both Taxpayers entered a sale contract, dated XX XX XX, to sell their shares in Company to the same purchaser. The purchase price comprised an upfront cash payment plus earnout payments to be paid over a period of # years from the completion date.

Completion was to be on XX XX XX, and it was anticipated that all conditions precedent would be met by that time. However, the settlement was delayed by the purchaser until XX XX XX.

Formal tax advice from the Taxpayers' tax agent was issued on XX XX XX confirming that the capital gain on sale was eligible for the small business CGT concessions in Division 152 of the ITAA 1997 and that the right to receive the earnout payments would qualify as a look-through earnout right under subsection 118-565(1) of the ITAA 1997. This was on the assumption that payments under the right would all be received by XX XX XX. As a result, the Taxpayers lodged their tax returns for the year ended XX XX XX on XX XX XX and disclosed a capital gain on sale of the shares based on the settlement cash proceeds only.

However, the tax agent advice and tax return mistakenly overlooked the delay in settlement which means that the last earnout payment was not payable until XX XX XX. As the earnout did not qualify as a look-through earnout right the full capital gain needed to be brought to account in the tax return for the year ended XX XX XX. Further, in the absence of the Commissioner exercising the discretion, the 'replacement asset period' had ended on XX XX XX.

On XX XX XX the Commissioner exercised the discretion under subsection 104-190(2) and paragraph 103-25(1)(b) of the ITAA 1997 to allow the Taxpayers to amend their choice to apply the small business roll-over based on the full capital gain and to extend the 'replacement asset period' to XX XX XX.

The XX XX XX income tax returns of the Taxpayers were subsequently amended to reflect the revised capital gain and choice.

In addition, AA had previously applied the small business roll-over with respect to a capital gain amount of $xx and had acquired the shares in Company as a ''replacement asset'. As AA ceased to hold the replacement asset on settlement of the share sale on XX XX XX, CGT Event J2 in section 104-185 of the ITAA 1997 also occurred. AA also chose to apply the small business roll-over to this gain, requiring another replacement asset to be acquired by XX XX XX.

This roll-over relief was not included in the previous request for the 'replacement asset period' extension.

No replacement assets have yet been acquired.

A timeline setting out the events which have occurred since settlement of the shares which have made it difficult for the Taxpayers to acquire a replacement asset to date, as well as the steps the Taxpayers have taken to acquire a replacement asset have been provided.

Relevant legislative provisions

Income Tax Assessment Act 1997

Subsection 103-25 (1)

Subsection 103-25(2)

Subsection 103-25(3)

Subsection 104-190

Subsection 104-190(1)

Subsection 104-190(2)

Section 104-182

Section 104-185

Division 152

Subdivision 152-B

Subdivision 152-E

Section 152-10

Section 152-305

Section 152-410

Section 152-430

Reasons for decision

This private ruling is based on the facts and circumstances set out below. If your facts and circumstances are different from those set out below, this private ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Replacement Asset Roll-over Relief

The CGT small business asset roll-over relief allows an eligible taxpayer to choose to defer the making of a capital gain from a capital gains tax (CGT) small business asset. The rules covering the small business roll-over are contained in Subdivision 152-E of the ITAA 1997. The small business roll-over allows you to defer all or part of a capital gain from a capital gains tax CGT event happening to an active asset 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.

However, section 152-430 of the ITAA 1997 provides that Subdivision 152-E of the ITAA 1997 does not apply to a capital gain to which Subdivision 152-B of the ITAA 1997 (15-year exemption) applies.

Acquiring a replacement asset

To obtain a roll-over, subsection 104-185(1) of the ITAA 1997 requires you to acquire a replacement asset within 'replacement asset period'.

The definition of the term 'replacement asset period' is contained in CGT event J2 in paragraph 104-185(1)(a) of the ITAA 1997,

A replacement asset must be acquired, or capital improvement expenditure must be incurred, in the period commencing one year before and ending two years after the last disposal in a year of a CGT asset for which roll-over relief is claimed.

The replacement asset period can be extended in circumstances where capital proceeds from a CGT event are not received immediately (subsection 104-190(1) of the ITAA 1997), or the Commissioner may extend the period (subsection 104-190(2) of the ITAA 1997).

In determining whether to allow an extended asset replacement period, the following factors are considered:

•         whether there is evidence of an acceptable explanation for the period of extension requested and whether it would be fair and equitable in the circumstances to provide such an extension

•         whether there is any prejudice to the Commissioner if the additional time is allowed (the mere absence of prejudice is not enough to justify the granting of an extension)

•         whether there is any unsettling of people, other than the Commissioner, or of established practices

•         the need to ensure fairness to people in like positions and the wider public interest

•         whether there is mischief involved, and

•         the consequences of the decision.

CGT event J5 in section 104-197 of the ITAA 1997 happens if you choose a small business roll-over under Subdivision 152-E of the ITAA 1997 and you have not acquired a replacement asset by the end of the 'replacement asset period'.

Change in the status of a replacement asset

CGT event J2 in section 104-185 of the ITAA 1997 happens if after the end of the replacement asset period, there is a change in the status of a replacement or capital improved asset you chose for the small business roll-over. This capital gain would be in addition to any capital gain or capital loss that is actually made from the replacement asset.

Relevantly, a capital gain from CGT event J2 may qualify for a further roll-over, if the relevant conditions for the roll-over are met and another replacement asset is acquired.

Application to your circumstances

Based on the facts and events, pursuant to section 104-190 of the ITAA 1997, the time within which the Taxpayers can acquire a replacement asset, as defined in section 104-182 of the ITAA 1997, can be acquired has been extended to XXXX.

In this case the 15-year exemption in Subdivision 152-B of the ITAA 1997 does not apply.

As outlined in the facts there have been multiple issues, that were out of the control of the Taxpayers, which have prevented them from acquiring a replacement asset by the end of the relevant replacement asset periods. During this period the Taxpayer has continued to seek to acquire a replacement asset.

In particular:

•         Due to the ongoing issues, there was no certainty as to the funds available to acquire a replacement asset.

•         Due to the COVID-19 pandemic there were limited listings of commercial properties and businesses, or difficulties in travelling to inspect, and so there were few opportunities to purchase. The issue of there being limited appropriate listings has continued, given the specialised field in which AA operates and the preference to acquire a replacement asset for this purpose.

•         The Taxpayers have attempted to acquire a suitable business or property, which were not successful. The Taxpayers have looked both in State A, and in State B, as well as at businesses outside AA's immediate area of expertise. The Taxpayers are restricted under the sale contract from operating a similar business in certain areas.

•         As any replacement asset is likely to be held for a considerable period, the tax consequences should be the same as if the Taxpayers had been able to acquire an asset within the original replacement asset period. On this basis, it is also therefore unlikely to establish an unreasonable precedent or result in prejudice to the ATO. There has also been no mischief involved from the Taxpayers.

The Commissioner considers there is an acceptable explanation for the period of the extension requested and it is fair and reasonable in the circumstances for the Commissioner, pursuant subsection 104-190(2) of the ITAA 1997 to extend the 'replacement asset period' to XX XX XX.