Edited version of private advice

Authorisation Number: 1052129019027

Date of advice: 13 June 2023

Ruling

Subject: CGT replacement asset roll-over relief extension

Question:

Will the Commissioner use the discretion under subsection 104-190(2) of the Income Tax Assessment Act 1997 ('ITAA 1997') to extend the replacement asset period in respect of the small business capital gains tax ('CGT') replacement asset roll-over relief to DD MM YYYY?

Answer:

Yes

This ruling applies for the following periods

DD MM YYYY to DD MM YYYY

The Scheme commences on

DD MM YYYY

RELEVANT FACTS AND CIRCUMSTANCES

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect, and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Background Facts

Since YYYY, Company X has operated a business in XXX and is in the process of establishing another related business ('the Business').

On DD MM YYYY, Company X entered into an agreement to sell the Business and the assets used in the Business to an unrelated third party.

A number of assets were sold under the transaction.

Company X made a capital gain in respect of the sale of the Business, and the capital gains tax ('CGT') small business concession was available to Company X.

Further extension of time

Broadly, the flow-on effects of the COVID-19 pandemic, the ongoing skills shortages within the Australian labour market, and the rapidly increasing rates of inflation have continued to have a disproportionate effect on all industries, including the industry in which Company X operates.

Accordingly, Company X will not be able to complete acquisitions before DD MM YYYY for the following reasons:

•           The period since their last application has been subject to a continuation of the challenging post COVID-19 business environment experienced in the prior year. The Business is now faced with the very immediate effect of inflationary pressures and escalating interest rates which continue to impact all aspects of the development chain.

•           Additionally, Australia is experiencing its tightest labour market in xx years.

•           A reduction in resources, staff shortages and the transition across all industries to a workforce that primarily works remotely, has led to lack of personnel available in all industries and all levels of government to provide approval for projects.

•           The outbreak of COVID-19 and subsequent lockdowns represented an immediate and very significant commercial downturn for this particular industry.

Due to these special circumstances beyond Company X 's control, Company X will not be able to acquire an appropriate replacement asset by DD MM YYYY.

In addition to continuing its business in XXX, Company X and its affiliate, Company Y,remain in the process of establishing a new business. As at the last application for the extension of time and as a direct result of the COVID-19 restrictions, there have been additional delays in the acquisition of these sites, including Planning and Permit issues, and disruptions to negotiations with property owners and any on-site activity. Accordingly, Company X is now confident that it will be able to make the appropriate asset acquisition before DD MM YYYY.

In furtherance of acquiring a replacement asset, a number of sites are still being pursued.

Company X and Company Y have also been active in pursuing other opportunities for the Business. This aspect of the Business is continuing to suffer as a result of the continued after-effect of COVID-19.

Previous Private Rulings

The Commissioner previously accepted that the replacement asset rollover was available to Company X and has, in prior years, exercised the discretion to extend the replacement asset period.

Company X is now seeking a further extension of the replacement asset period to DD MM YYYY.

In their previous application letter of DD MM YYYY, Company X advised the ATO that they would not require any further extensions to the replacement asset period beyond DD MM YYYY. However, Company X did not foresee the ongoing flow-on effects of COVID-19 (including the skills shortage) and the rapidly increasing rates of inflation at that time, which caused significant disruptions to the industries that they operate in.

Information provided

You have provided a number of documents containing detailed information in relation to Company X, including:

•         Private Binding Ruling ('PBR') Application, dated DD MM YYYY

•         Document with Background Facts

We have referred to the relevant information within these documents in applying the relevant tests to your circumstances.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 104-190(2)

Income Tax Assessment Act 1997 Subdivision 152E

REASONS FOR DECISION

All legislative references are to the Income Tax Assessment Act 1997 ('ITAA 1997') unless otherwise stated.

SUMMARY

The Commissioner will apply the discretion available under subsection 104-190(2) of the ITAA 1997 and allow an extension of the time to DD MM YYYY for Company X.

DETAILED REASONING

The rules covering the small business roll-over are contained in Subdivision 152-E of the Income Tax Assessment Act 1997 (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.

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

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

As outlined in subsection 104-190(2), the replacement asset period may be extended by the Commissioner.

In determining whether to allow an extended asset replacement period, the Commissioner considers the following factors:

•         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 (however, 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.

APPLICATION TO YOUR CIRCUMSTANCES

Company X and its affiliate, Company Y, have been actively seeking replacement assets in efforts to diversify their businesses.

As evidenced in the Background Facts in the original application, the Trustee has been actively engaged in the extensive process of identifying and acquiring a site in their search for the appropriate asset for their continuation of their Business.

However, due to the standard lengthy planning processes and strict building requirements having been exacerbated by a number of blockers, and they have been unable to meaningfully progress with any acquisitions until YYYY.

Consideration of whether there is any prejudice to the Commissioner if the additional time is allowed needs to be determined. On the facts, there would likely be no prejudice to the Commissioner that would result from a further extension of the replacement asset period. Company X satisfies all other conditions to qualify for the CGT small business concessions as acquiesced by the Commissioner in the previously issued private rulings.

Under subsection 104-190(2) of the ITAA 1997, the Commissioner has an established practice of granting an extension of time therefore, there would likely not be any unsettling of people.

The business and the particular industry are both highly regulated due to the planning process and Company X is beholden to numerous stakeholders at every stage of the acquisition process who can cause unjust and lengthy delays.

Additionally, the legislative discretion granted to the Commissioner under subsection 104- 190(2) does not provide a limit to the extent the Commissioner can grant an extension. Undoubtedly, the lack of limit imposed by legislation is to grant the Commissioner flexibility in exercising the discretion where the replacement asset rollover should not be denied due to commercial circumstances unforeseen by the legislation.

Given the unprecedented economic circumstances as well as the significant disruptions to the operation of all aspects of business, the Commissioner is sympathetic and sensitive to the challenges faced by Company X.

Further, there is no mischief in these circumstances. As demonstrated in the Background Facts of the original application, Company X has been actively seeking a replacement asset since YYYY but has not yet acquired a replacement asset because of circumstances outside of its control. The unprecedented economic conditions caused by the COVID-19 pandemic have impacted the ability of Company X to seek replacement assets before DD MM YYYY.

In conclusion, Company X has made attempts to acquire a replacement asset. Evidence of an acceptable explanation for the period of extension requested has been provided. Allowing an extension is not prejudicial to the Commissioner in this case nor is it unfair to other people in similar positions. There is also no evidence of any mischief involved. It would be fair and equitable in the circumstances to allow a further extension.

Having considered the relevant factors above, and the particular circumstances of the case, the Commissioner will exercise the discretion to extend the replacement asset period for Company X to DD MM YYYY.

CONCLUSION

The Commissioner will exercise the discretion undersubsection 104-190(2) of the ITAA 1997 and extend the replacement asset period to DD MM YYYY for Company X.