Edited version of private advice

Authorisation Number: 1052093242396

Date of advice: 31 March 2023

Ruling

Subject: CGT - small business replacement asset roll-over relief

Question

Will the Commissioner extend the 'replacement asset period' under subsection 104-190(2) of the Income Tax Assessment Act 1997 (ITAA 1997) to include the acquisition of the property?

Answer

Yes.

This ruling applies for the following periods:

year ended 30 June XXXX

year ended 30 June XXXX

Relevant facts and circumstances

The Taxpayer conducts a cattle grazing business.

The Taxpayer conducted the cattle grazing business activities at address provided (Property).

The Property was acquired by another entity.

The sale of the Property resulted in CGT event A1 under section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) happening on XX XX 20XX and resulted in a capital gain.

The small business CGT concessions in Division 152 of the ITAA 1997 applied to the capital gain.

The small business roll-over in Subdivision 152-E of the ITAA 1997 was chosen to apply.

The Taxpayer has purchased a property as a replacement asset to continue the cattle grazing business (Replacement Asset).

The purchase date for the Replacement Asset was XX XX 20XX.

The reasons for difficulty in finding a replacement asset include:

•         the COVID pandemic made it more difficult to travel and inspect properties;

•         severe drought conditions at the Property limited the ability to get away to inspect properties;

•         several properties were on the market across Queensland and North New South Wales, however very few were of the quality required to replace the property sold;

•         during the replacement asset period twenty-eight properties were inspected;

•         of the properties inspected four auctions of suitable properties were attended and bid on;

•         the acquisition of the Replacement Asset commenced in XX 20XX but the contracts weren't entered into until XX XX 20XX. The time in between these dates was due to negotiating price and acceptable contract terms.

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

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'.

Application to your circumstances

Based on the facts and events, pursuant to section 104-190 of the ITAA 1997, the time within which to acquire a replacement asset, as defined in section 104-182 of the ITAA 1997, will be extended to the time that the Replacement Asset was acquired.

As outlined in the facts there have been multiple issues, that have prevented a replacement asset being acquired by the end of the relevant replacement asset period. Nevertheless, during this period the search for a replacement asset had continued.

The Commissioner would extend the replacement asset period because:

•         due to the COVID-19 pandemic there were difficulties in travelling to inspect properties and there were limited listing of suitable properties, and so there were few opportunities to purchase an appropriate property;

•         notwithstanding the difficulties with travel and property listings, the Taxpayer inspected XX properties and bid on X; and

•         the purchase of the Replacement Asset was delayed due to negotiations on price and acceptable contract terms.

The Commissioner considers that there is an acceptable explanation for the period of the extension requested and it would be 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 include the time within which the Replacement Asset was acquired.