Edited version of private advice

Authorisation Number: 1052306346194

Date of advice: 17 September 2024

Ruling

Subject: Commissioner's discretion - extension of time

Question

Will the Commissioner exercise the discretion in subsection 104-190(2) of the Income Tax Assessment Act 1997 (ITAA 1997) to extend the replacement asset period to acquire a replacement asset to XX July 20YY in respect of the small business capital gains tax (CGT) replacement asset roll-over relief?

Answer

Yes, the Commissioner will exercise the discretion to extend the replacement asset period to XX July 20YY.

This ruling applies for the following periods:

Year ended 30 June 20YY

Year ending 30 June 20YY

Year ending 30 June 20YY

The scheme commenced on:

XX March 20YY

Relevant facts and circumstances

The Trustee of the Family Trust (Trustee) held an investment which was an active asset. This asset was disposed on XX March 20YY and the small business CGT replacement asset rollover was applied to the capital gain.

The replacement asset was not acquired by the Trustee by the 2-year timeframe (XX March 20YY). This was a direct result of the Trustee's director being involved in divorce proceedings with their then spouse.

The divorce proceedings prohibited the Trustee's director from disposing or acquiring any assets until the proceedings concluded. A final order was issued by the family court under the Family Law Act 1975, which include settlement orders of their interest in the Family Trust.

The Trustee's director was unable to commence undertaking to find a replacement asset until these final orders were made, because it was unknown what funds would be available to the Trustee's director, and what funds would need to be transferred to their ex-spouse as part of the financial settlement.

Since final orders were made, the Trustee's director has been actively seeking a replacement asset; has had several meetings with businesses to invest in; and is currently in negotiations to make various active asset acquisitions. The Trustee's director has signed a contract of sale with one business for 100% ownership and is in the final agreement stage with another to acquire equity and have active involvement and participation in the business.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-190

Income Tax Assessment Act 1997 subsection 104-190(1A)

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

Reasons for decision

Subdivision 152-E of the ITAA 1997 contains the provisions to claim small business roll-over relief. Sections 152-410 and 152-415 provide that the roll-over allows entities that satisfy the basic conditions in Subdivision 152-A to defer all or part of each capital gain arising from a CGT event happening to an active asset.

Note 1 to section 152-410 of the ITAA 1997 explains that the roll-over is available to the entity even if they have not acquired a replacement asset at the time of claiming the roll-over; however, section 104-197 of the ITAA 1997 provides that CGT event J5 will occur if a replacement asset is not acquired by the end of the replacement asset period.

Subsection 104-190(1A) of the ITAA 1997 provides that the replacement asset period is the period starting one year before, and ending 2 years after, the last CGT event in the income year for which you obtain the roll-over. Subsection 104-190(2) provides that the Commissioner may extend the replacement asset period.

ATO Interpretive Decision ATO ID 2001/619 (Withdrawn) Income Tax Capital gains tax: Small business roll-over: extension of time to acquire replacement asset (ATO ID 2001/619) provides factors that the Commissioner has considered in determining if the discretion in subsection 104-190(2) would be exercised. Although ATO ID 2001/619 was withdrawn on the basis that it was a 'simple restatement of the law and does not contain an interpretative decision', it is still illustrative. The following factors are considered in determining whether to grant an extension to the asset replacement period:

•         there should be evidence of an acceptable explanation for the period of extension requested and that it would be fair and equitable in the circumstances to provide such an extension;

•         account must be had to any prejudice to the Commissioner which may result from the additional time being allowed, however the mere absence of prejudice is not enough to justify the granting of an extension;

•         account must be had of any unsettling of people, other than the Commissioner, or of established practices;

•         there must be a consideration of fairness to people in like positions and the wider public interest;

•         whether there is any mischief involved; and

•         a consideration of the consequences.

Having considered the relevant factors above, and the particular circumstances of your case, the Commissioner will exercise the discretion under subsection 104-190(2) of the ITAA 1997 to extend the replacement asset period to XX July 20YY.