Edited version of private advice

Authorisation Number: 1052227558836

Date of advice: 1 March 2024

Ruling

Subject: CGT - small business concessions

Question 1

Will the Commissioner exercise his discretion pursuant to paragraph 40-365(3)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) and allow the company a further period in which to incur expenditure on replacement assets, more particularly, depreciable plant and equipment, destroyed in fire January 2020?

Answer

Yes.

Question 2

Will the Commissioner exercise his discretion pursuant to paragraph 124-75(3)(b) of the ITAA 1997 and allow the company a further period in which to incur expenditure on replacement assets, more particularly, capital gains tax (CGT) assets, destroyed in a fire in January 2020?

Answer

Yes.

This ruling applies for the following periods:

Year Ending 30 June 2024

Year Ending 30 June 2025

The scheme commenced on:

1 July 2019

Relevant facts and circumstances

The company was severely impacted by fire in January 20XX.

The company lost CGT assets and depreciating assets.

The insurance claim was not finalised until mid-November 20XX.

The company has very limited options for ordering and installing replacement plant, equipment and infrastructure.

Delays were increased by the extent of fire in the local surrounding area, making quotes nearly impossible.

Scarcity of resources in the building industry from the building boom due to Covid-19 making it impossible to for the company to replace its infrastructure before the end of the 2021 financial year.

While the company has been able to replace some depreciable equipment, supply chain delays post COVID continue to make replacing all required equipment difficult.

The replacement of unique equipment needs to be sourced from Europe causing further difficulty due to the COVID-19 pandemic.

The procurement of building quotes and approval applications continue to be very hard on as many are still recovering from the fire's impact and trying to rebuild at the same time.

Building resources and materials therefore continue to be very scarce in the local area and has contributed to ongoing delays in replacing CGT Assets.

The company did not start the rejuvenation project until spring of 20XX as the crop showed no signs of life until after winter rains in 20XX. Due to extreme labour shortages due to COVID and a complete lack of any qualified labour the company had to do all this work with 2 people and sporadic volunteers. The company's number one priority has been getting the crop to a productive state.

You have harvested a small crop in 20XX. The company therefore now believe the business will be able to produce income again and as such have started planning to replace destroyed CGT assets and depreciated assets.

The company sought a planning request in mid-20XX and took 15 months to seek approval. Thus, regulatory resources within the local government have also contributed to delays.

In winter 20XX it was almost impossible to get a car on the ferry to the local area, let alone building materials, due to cancellations and space being held for large shippers which carry essentials such as groceries.

In the past four years you have completed the rebuild of our CGT assets and depreciating assets and retraining crops.

The combination of your specific agricultural challenges combined with labour shortages from an approval and building perspective has caused the delays.

Relevant legislative provisions

Income Tax Assessment Act 1997 paragraph 40-365(3)(b)

Income Tax Assessment Act 1997 paragraph 124-75(3)(b)

Reasons for decision 1

Involuntary disposals

Section 40-365 of the ITAA 1997 allows a taxpayer to choose whether or not to include a balancing adjustment amount in their assessable income where they cease to hold a depreciating asset because it was destroyed.

Subsection 40-365(3) of the ITAA 1997 says you can only make this choice for a replacement asset if you incur the expenditure on the replacement asset, or you start to * hold it:

(a) no earlier than one year, or within a further period the Commissioner allows, before the * balancing adjustment event occurred; and

(b) no later than one year, or within a further period the Commissioner allows, after the end of the income year in which the balancing adjustment event occurred.

The taxpayer can choose to use some or all of the amount that would otherwise be a balancing adjustment as a reduction in the cost and/or opening adjustable value of one or more replacement assets. The cost of the replacement asset is reduced by the otherwise assessable amount.

In accordance with paragraph 40-365(3)(b) of the ITAA 1997 this exclusion can only be made where they incur the expenditure on the replacement assets no later than one year, or within a further period which the Commissioner allows, after the end of the income year in which the balancing adjustment occurred.

As per Taxation Determination TD 2000/40 Income tax: capital gains: what are 'special circumstances' for the purposes of subsection 124-75(3) of the Income Tax Assessment Act 1997? the Commissioner may exercise his discretion to allow further time to acquire the replacement asset in certain circumstances. While TD 2000/40 relates to the discretion available under subsection 124-75(3) of the ITAA 1997, similar principles apply to the discretion contained in paragraph 40-365(3)(b) of the ITAA 1997.

As a fire has destroyed all of the depreciable plant and equipment the company can choose to apply section 40-365 of the ITAA 1997 for the involuntary disposal of the depreciating assets. We consider that you have made continuing efforts and have done what is reasonable in attempting to acquire replacement assets, and the delays have been outside of your control as per example 2 in TD 2000/40.

Taking the company's circumstances into account, the Commissioner's discretion under paragraph 40-365(3)(b) of the ITAA 1997 will be exercised to allow the company a further period of time to 30 June 2025 in order to purchase suitable replacement assets, in particular depreciable plant and equipment, subsequent to the involuntary disposal of the original assets due to fire.

Reasons for decision 2

Other requirements if you receive money

Section 124-75(3) of the ITAA 1997 stated that at least some of the expenditure must be incurred:

(a) no earlier than one year, or within such further time as the Commissioner allows in special circumstances, before the event happens; or

(b) no later than one year, or within such further time as the Commissioner allows in special circumstances, after the end of the income year in which the event happens.

Subdivision 124-B of the ITAA 1997 explains the circumstances when a rollover is available for a CGT asset that is compulsorily acquired, lost or destroyed.

If you receive money as a result of the compulsory acquisition, you can only choose a rollover if you incur expenditure in acquiring another CGT asset. Under subsection 124-75(3) of the ITAA 1997, you must incur at least some of the expenditure no earlier than one year before the event happens or, within one year after the end of the income year in which the event happens, or a longer time allowed by the Commissioner.

As provided above, TD 2000/40 provides guidance on the circumstances where the Commissioner would exercise the discretion and the company's circumstances are considered to align with the principles provided in example 2 of TD 2000/40.

Accordingly, the Commissioner will exercise his discretion under paragraph 124-75(3)(b) of the ITAA 1997 and extend the period for you to acquire replacement assets, in particular CGT assets, to 30 June 2025.