Edited version of private advice

Authorisation Number: 1052214410170

Date of advice: 22 January 2024

Ruling

Subject: CGT - small business relief

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 any available small business capital gains tax (CGT) concessions to a capital gain that arose to the Taxpayers in the income year ended June 2022?

Answer

Yes.

This ruling applies for the following period:

Income year ending June 2022

Relevant facts and circumstances

1.    The Taxpayers are partners of the Partnership and acquired the Property during the income year ended June 20XX.

2.    The Property was leased by the Partnership (for a fee) to an associated company of the Taxpayers (the Company), to be used in a sheep farming business undertaken by the Company.

3.    The lease income earnt by the Partnership from the Property has been declared in the tax returns of the Partnership.

4.    The Property was sold in the income year ended June 20XX to an unrelated third party. The sale of the Property resulted in each of the Taxpayers obtaining a capital gain of $X.

5.    The Taxpayers used a registered tax agent (the Tax Agent), to prepare their 2022 tax returns, which were lodged on XX May 20XX.

6.    The Taxpayers did not include any capital gain concessions available to small businesses under Division 152 of the ITAA 1997 in their tax returns for the income year ended June 20XX as they (and the Tax Agent) were unaware of their eligibility to such concessions. At the time the Tax Agent prepared the Taxpayers' 20XX tax returns it had no detailed financial information for some of the entities associated with the Taxpayer (including the Company).

7.    In June 20XX, the Taxpayers reviewed financial statements and income tax returns for the year ended June 20XX prepared by a different tax agent in respect of the Company and another entity associated with the Taxpayers and (having done so) became aware they needed to lodge an amendment to their tax returns for the year ended June 20XX. The Taxpayers forwarded this information to the Tax Agent for consideration and the Tax Agent identified, based on that additional information from the other tax agent, that (in the Tax Agent's view) the Taxpayers were also eligible to apply small business CGT concessions under Division 152 of the ITAA 1997 in the year ended June 20XX in respect of the capital gain from the sale of the Property.

8.    The Taxpayers are 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 any available small business CGT concessions in respect of the capital gain from the sale of the Property.

9.    Should the Commissioner exercise this discretion, the Taxpayers intend to lodge an amendment to their 20XX income tax return to include these concessions.

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 Division 115

Income Tax Assessment Act 1997 Part 3-3

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 section 152-205

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 Taxpayers can make a choice to apply any available small business CGT concessions under Division 152 in the income year ended June 2022.

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 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 each capital gain to which Division 152 applies to be specified in writing.

Under section 152-205, the 50% active asset reduction automatically applies if the 'basic conditions' in Subdivision 152-A are met and the taxpayer has not specifically chosen for it not to apply.

Application to the Taxpayers' circumstances

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 Taxpayers were unaware they were eligible for any CGT small business relief under Division 152 and as such are not regarded as having made 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[1]:

•         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 Division 152, it is reasonable to expect, had the Tax Agent had all relevant information made available to it at the time of preparing the tax returns such that the Taxpayers had consequently been adequately informed of the availability of any small business CGT relief, that the Taxpayers would have made a choice to apply it in their 2022 income tax return, resulting in a further reduction of the capital gain realised from the sale of the Property (beyond the general 50% discount under Division 115).

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

Having regard to these circumstances, it is considered appropriate for the Commissioner to grant the Taxpayers an extension of time in accordance with paragraph 103-25(1)(b) to make a choice to apply any available small business CGT concessions in respect of the remaining capital gain realised in the income year ended June 20XX.

[1] ATO ID 2002/792 (Withdrawn): Capital gains tax: Extension of time to choose small business retirement exemption.