Edited version of private advice

Authorisation Number: 1052096563089

Date of advice: 17 March 2023

Ruling

Subject: Replacement asset - extension of time

Question

Will the Commissioner exercise the discretion in subsection 104-190(2) of the Income Tax Assessment Act 1997 (ITAA 1997) to extend the replacement asset period to acquire a replacement asset by 12 months?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 20YY

Year ended 30 June 20YY

The scheme commenced on:

DD MM YYYY

Relevant facts and circumstances

You held 100% of the shares in the company.

The company ran a business.

You sold shares and made a capital gain of $X.

The replacement asset period under section 104-190 of the ITAA 1997 ended on DD MM YYYY.

Depreciating assets totalling $X were acquired and reduced the remaining capital gain to $X.

Further purchases of replacement assets are planned for the remaining capital gain and quotes have been obtained.

There were circumstances outside your control that led to a delay in acquiring replacement assets.

You are requesting a further 12-month extension.

Relevant legislative provisions

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 section 104-197

Income Tax Assessment Act 1997 section 104-198

Reasons for decision

Subdivision 152-E contains the provisions regarding the small business roll-over relief. Under sections 152-410 and 152-415, the small business roll-over relief allows entities that satisfy the conditions in Subdivision 152-A to defer all or part of each capital gain arising from a CGT event happening to an active asset.

Under note 1(a) of section 152-410, this roll-over is available to the entity even if they have not acquired a replacement asset at the time of claiming the roll-over provided that a replacement asset is acquired by the end of the replacement asset period. CGT event J5 happens if a replacement asset is not acquired by the end of the replacement asset period pursuant to section 104-197.

Subsection 104-190(1A) states that the replacement asset period is the period starting one year before and ending 2 years after the last CGT event in the income year for which you obtain the roll-over.

Relevantly here, the shares were sold on DD MM YYYY. Therefore, the replacement asset period commenced on DD MM YYYY and ceased on DD MM YYYY. As a result, the replacement asset period has passed, and no replacement asset has been acquired.

Section 104-190 provides that the Commissioner may extend the replacement asset period.

The Commissioner considers the following factors when determining whether to grant an extension to the asset replacement period:

•                     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

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

•                     whether the extension will unsettle people, other than the Commissioner, or established practices

•                     whether the extension will be fair to people in like positions and the wider public interest

•                     whether there is any mischief involved and

•                     the consequences of the decision.

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.

Applying the law to your circumstances

The Commissioner has decided to exercise his discretion under subsection 104-190(2) and extend the replacement asset period up to DD MM YYYY. This is because:

•                     The taxpayer provided an acceptable explanation for the period of the extension requested.

•                     It would be fair and equitable in the circumstances to provide the extension.

•                     The taxpayer committed to acquiring a replacement asset and has identified potential replacement assets.

•                     Due to circumstances outside of their control the acquisition of the replacement asset was delayed and will fall outside of the replacement asset period.

•                     Due to the taxpayer's commitment to acquiring a replacement asset and acceptable explanation for the delay in acquiring a replacement asset, the Commissioner is of the view that no mischief has occurred.

•                     There is unlikely any prejudice to the Commissioner if the additional requested time is granted.

At the end of the 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. At 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 asset or capital improvements.