Edited version of private advice

Authorisation Number: 1052228369128

Date of advice: 19 April 2024

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?

Answer

Yes.

This ruling applies for the following period:

Year ending DD MM YYYY

The scheme commenced on:

DD MM YYYY

Relevant facts and circumstances

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

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

3.      A number of assets were sold under the transaction.

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

5.      In the DD MM YYYY income year, you satisfied the basic conditions for CGT relief under section 152-10 of the ITAA 1997 and elected to apply the Small Business Roll-Over Concession in Subdivision 152-E of the ITAA 1997.

Further extension of time

6.      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 you operate.

7.      Accordingly, you 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 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.

8.      In addition to continuing its business in XXX, you and your affiliate,remain in the process of establishing a new business. As at the last application for the extension of time and as a result of the effect COVID-19 on business, 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, Trustee is now confident that it will be able to make the appropriate asset acquisition before DD MM YYYY.

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

10.   You 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

11.   The Commissioner has previously accepted that the replacement asset rollover was available to you and exercised the discretion to extend the replacement asset period.

12.   In your previous application letter of DD MM YYYY, you advised that you would not require any further extensions to the replacement asset period beyond DD MM YYYY. However, you 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

13.   You have provided a number of documents containing detailed information including:

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

•           Further information requested, dated DD MM YYYY and

•           Email outlining the negotiation for a lease.

14.   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(1A)

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

Income Tax Assessment Act 1997 section 104-198

Income Tax Assessment Act 1997 Subdivision 152E

REASONS FOR DECISION

Summary

The facts presented by your circumstances are finely balanced. However, the Commissioner would apply the discretion available under subsection 104-190(2) of the ITAA 1997 and allow an extension of the time for the year ended XXX.

Detailed reasoning

The rules covering the small business roll-over are contained in Subdivision 152-E of the 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) of the ITAA 1997, 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 two years after the last CGT event in the income year for which you obtain the roll-over.

Subsection 104-190(2) of the ITAA 1997, provides that the replacement asset period may be extended by the Commissioner.

In determining whether to allow an extended asset replacement period, the circumstance involved are considered including the following:

•         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

We have considered each of the factors set out above, as follows:

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

You, have been actively seeking replacement assets in efforts to diversify your business.

You have been actively engaged in the process of identifying and acquiring an appropriate asset for continuation of your business.

However, due to the standard lengthy planning processes and strict building requirements having been exacerbated by:

•         the continued impact of the COVID-19 pandemic

•         labour shortages

•         the rate of inflation leading to an increase in labour and construction costs

•         lengthy backlogs of work for all required experts and consultants who have existing works in progress and are continuing to manage an increase in demand for their services, and

•         extensive delays in the supply chain.

This has hindered acquiring replacement assets.

Whilst we accept that the COVID-19 pandemic had a significant impact on your industry, and that there continue to be ongoing impacts, we also consider that these factors are now commonplace for the industry, and that as such they will not in themselves provide sufficient grounds for an extension. We consider that other business in the same industry as you also need to contend with these factors, and that it may not therefore be fair and equitable to others to exercise the discretion on the basis of this factor alone.

We recognise, however, that you are, and have been, taking active steps to procure replacement assets, and that some of these processes are likely to be finalised in the next 6 to 12 months.

We consider that this factor is neutral in the Commissioner's consideration of the discretion.

Whether there is any prejudice to the Commissioner if the additional time is allowed

Consideration of whether there is any prejudice to the Commissioner if the additional time is allowed needs to be determined. If acquisition of a replacement asset is not a realistic prospect, then there is prejudice to the Commissioner in that granting the discretion is likely merely to result in delayed payment of the tax that would otherwise be collected. However, if the likelihood of acquiring a replacement asset is realistic, then there is little or no prejudice as the roll-over defers the CGT event capital gain anyway.

Given the length of time that has passed since the occurrence of the CGT event, it is uncertain whether the argument of deteriorated economic conditions because of COVID delaying the acquisition of a replacement asset is sustainable. At a certain point in time the economic circumstances become normalised, and it is your response to them that determines how realistic it is that you will be able to obtain replacement assets. Whether the Commissioner would allow an extension to the 'replacement asset period' for another entity in similar circumstances, but where the entity's CGT event occurred after the COVID period, is uncertain.

Whether there is any unsettling of people, other than the Commissioner, or of established practices

Granting the discretion in this case does not appear to unsettle any people other than the Commissioner, nor does it unsettle established practices, although we note that it is unusual for a discretion to be granted so long after the initial transaction.

The need to ensure fairness to people in like positions and the wider public interest

Similar to the previous points, your situation also raises the question of whether an exercise of the discretion is unfair to other people in similar positions.

Whether there is mischief involved

We do not consider that there is any mischief involved on the basis of the facts presented to us.

The consequences of the decision

We understand that you have an number processes underway that could result in the acquisition of replacement assets within the next financial year, and that these will be impacted by the Commissioner's decision to exercise or not to exercise the discretion.

Conclusion

In conclusion, you have made attempts to acquire a replacement asset. Evidence of an acceptable explanation for the period of extension requested has been provided. Whilst finely balanced, 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.

At the end of the extended replacement asset period, CGT event J6 in section 104-198 of the ITAA 1997, will automatically apply to any of the disregarded capital gain not expended by this time on replacement assets and improvements. 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.

CONCLUSION

The Commissioner would exercise the discretion undersubsection 104-190(2) of the ITAA 1997 and extend the replacement asset period to XXX.