Edited version of private advice

Authorisation Number: 1052341377020

Date of advice: 09 December 2024

Ruling

Subject: CGT small business relief

Question 1

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 Taxpayer in the income year ended 30 June 2024?

Answer 1

Yes

This ruling applies for the following period:

Income year ended XX June 20XX

Relevant facts and circumstances

The Taxpayer was registered in 20XX, established to carry on a business.

AA is the sole director of the Taxpayer. AA and BB jointly own all of the issued shares in the Taxpayer in the capacity of trustees for the Family Trust (Shareholder).

In 20XX, the Taxpayer entered into a contract to sell the business to a third party (Purchaser). Settlement occurred in early 20XX.

At the time the contract was entered into, the parties were not associates. However, as a result of the sale, the Shareholder became an XX% owner of the Purchaser.

The sale of the business resulted in the Taxpayer making a capital gain. The Taxpayer's previous tax agent lodged the Taxpayer's income tax return for the year ended 30 June 20XX in August 20XX.

The previous tax agent did not discuss the possibility of using the small business CGT concessions with the Taxpayer. The current tax agent of the Taxpayer (Tax Agent) met AA following the sale of the Taxpayer's business through the Purchaser. The subject of how the capital gain had been treated came up and it was agreed that the Tax Agent would review the treatment.

On review by the Tax Agent, it was identified that the capital gain from the sale of the business was not included in the Taxpayer's income tax return for the year ended 30 June 20XX and that the Taxpayer had not considered any of the small business CGT concessions.

The Tax Agent is of the view that the Taxpayer meets all the relevant basic conditions under Subdivision 152-A of the ITAA 1997.

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 any available small business CGT concessions in respect of the capital gain from the sale of the business.

Should the Commissioner exercise this discretion, the Taxpayer intends to lodge an amendment to their 2024 income tax return to include the capital gain and 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 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 Taxpayer can make a choice to apply any available small business CGT concessions under Division 152 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 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 taxpayer's circumstances

Where a taxpayer chose a particular concession under the CGT provisions, that choice cannot later be changed. However, a taxpayer who failed to include a capital gain in their income tax return and did not consider the CGT concessions 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 Taxpayer was unaware that they were eligible for any CGT small business relief under Division 152 and as such are regarded as not 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:

•                     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 Taxpayer been adequately informed of the availability of any small business CGT relief at the time of preparing the 20XX tax return, that the Taxpayer would have made a choice to apply it in its 20XX income tax return, resulting in a reduction of the capital gain realised from the sale of the business.

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 Taxpayer 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 capital gain realised in the income year ended 30 June 20XX.