Edited version of private advice

Authorisation Number: 1052187743237

Date of advice: 2 November 2023

Ruling

Subject: CGT - small business concessions

Question

Will the Commissioner exercise the discretion under paragraph 103-25(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997)

to grant an extension of time to make a choice to apply the small business retirement exemption under Subdivision 152-D of the ITAA 1997 to a capital gain that arose to the Taxpayer in the income year ended 30 June 20XX?

Answer

Yes.

This ruling applies for the following period:

Income year ended 30 June 20XX

Relevant facts and circumstances

1.    In April 2022, the Taxpayer sold a farm which resulted in a gross capital gain.

2.    The Taxpayer used a registered tax agent to prepare their income tax return for the income year ended 30 June 20XX which was lodged in September 20XX.

3.    The capital gains tax (CGT) schedule which was lodged with the Taxpayer's income tax return for the income year ended 30 June 20XX showed the following information in relation to the capital gain:

Table 1 CGT Schedule

4.    At the time of lodgment of the 20XX income tax return, the Taxpayer was unaware of the availability of the small business retirement exemption under Subdivision 152-D of the ITAA 1997 and its tax agent failed to advise that this exemption may be available. The Taxpayer did not make a choice to disregard all, or any part, of the remaining capital gain pursuant to section 152-305 of the ITAA 1997.

5.    The Taxpayer is seeking the Commissioner's discretion under paragraph 103-25(1)(b) of the ITAA 1997 to allow an extension of time to make a valid choice to apply the small business retirement exemption in respect of the remaining capital gain.

6.    The Taxpayer intends to lodge an amendment to its 20XX income tax return to include the small business retirement exemption.

Relevant legislative provisions

Income Tax Assessment Act 1997 part 3-1

Income Tax Assessment Act 1997 subsection 103-25(1)

Income Tax Assessment Act 1997 paragraph 103-25(1)(b)

Income Tax Assessment Act 1997 subsection 103-25(2)

Income Tax Assessment Act 1997 part 3-3

Income Tax Assessment Act 1997 subdivision 152-A

Income Tax Assessment Act 1997 section 152-205

Income Tax Assessment Act 1997 section 152-220

Income Tax Assessment Act 1997 subdivision 152-D

Income Tax Assessment Act 1997 section 152-305

Income Tax Assessment Act 1997 subsection 152-315(4)

Income Tax Assessment Act 1997 subsection 152-315 (5)

Reasons for decision

All subsequent legislative references are to the ITAA 1997.

Summary

The Commissioner will grant an extension of time under paragraph 103-25(1)(b) by which the Taxpayer can make a choice to apply the small business retirement exemption under Subdivision 152-D in the income year ended 30 June 20XX.

Detailed reasoning

Subsection 103-25(1) prescribes the time and manner in which a choice made by a taxpayer under Part 3-1 or 3-3 (the CGT provisions) must be made. That is:

•         the lodgment day of the income tax return for the income year in which the relevant CGT event happened, or

•         within any further time allowed by the Commissioner.

Generally, the way in which the taxpayer prepares their income tax return is sufficient evidence of the making of the choice (subsection 103-25(2)). However, subsections 152-315(4) and (5) (relating to the small business retirement exemption) requires a choice to disregard all or part of a capital gain to which Subdivision 152-D applies to be made in writing.

Under section 152-205, the 50% active asset reduction automatically applies if the 'basic conditions' in Subdivision 152-A are met and a choice is not made otherwise. The automatic application of the 50% active asset reduction does not constitute the making of a choice.[1]

Application to the Taxpayer's circumstances

Upon application of the 50% CGT general discount and 50% active asset reduction, the Taxpayer's total capital gain from the sale of the farm was reduced to $X.

Where a taxpayer chose a particular concession under the CGT provisions, that choice cannot later be changed. However, a taxpayer who did not consider the CGT concessions and accordingly included a capital gain in their income tax return has not made a choice and can, if the Commissioner allows further time, later make a choice for a CGT concession and amend their return to reduce or disregard the capital gain.

As noted, the mere application of the 50% active asset reduction is not regarded as akin to making a choice.

In determining whether the discretion to allow further time would be considered pursuant to paragraph 103-25(1)(b), the Commissioner has considered the following factors[2]:

•         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);

•         prejudice to the Commissioner which may result from the additional time being allowed (but the mere absence of prejudice is not enough to justify the granting of an extension);

•         unsettling of people, other than the Commissioner, or of established practices;

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

•         whether any mischief is involved; and

•         consequences of the decision.

Subject to the satisfaction of all relevant basic conditions in Subdivision 152-A and all relevant additional conditions in Subdivision 152-D, it is reasonable to expect, had the Taxpayer been adequately informed of the availability of the small business retirement exemption, that the Taxpayer would have made a choice to apply the small business retirement exemption in its 20XX income tax return, resulting in further reduction of the capital gain realised from the sale of the farm.

There is no evidence of mischief and it is accepted that if the extension of time is granted, the exercise of the discretion will not prejudice the Commissioner, nor cause any unsettling of people or of established practices.

Having regard to these circumstances, it is considered appropriate for the Commissioner to grant the Taxpayer an extension of time pursuant to paragraph 103-25(1)(b) to make a choice to apply the small business retirement exemption under Subdivision 152-D in respect of the remaining capital gain realised in the income year ended 30 June 20XX.

[1] The enactment of section 152-220, conferring the taxpayer the choice not to apply the active asset reduction, underpins the intent that the automatic application of the concession is not akin to a choice. As extrapolated in the Note under section 152-220, there are circumstances under which a company or trust may make larger tax-free payments by applying the small business retirement exemption instead of the active asset reduction.

[2] ATO ID 2003/102: Capital gains tax: Extension of time to choose the small business roll-over.