Edited version of private advice

Authorisation Number: 1052390691691

Date of advice: 6 May 2025

Ruling

Subject: Commissioner's discretion - extension of time

Question

Will the Commissioner allow an extension of time under subsection 104-190(2) of the Income Tax Assessment Act 1997 (ITAA 1997) until May 20XX to find sufficient replacement assets so the small business capital gains tax (CGT) replacement asset rollover relief can be applied after the sale of the business?

Answer

Yes. The Commissioner will exercise their discretion to extend the replacement asset period pursuant to subsection 104-190(2) of the ITAA 1997 to May 20XX in respect of the small business CGT replacement asset rollover relief. It is acknowledged:

•                     the process for finding replacement assets began within the replacement asset period,

•                     sufficient replacement assets will be acquired after the replacement asset period,

•                     the delay in acquiring replacement assets was beyond the company's control, and

•                     the Commissioner considers the circumstances an acceptable reason to extend the replacement asset period.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commenced on:

May 20XX

Relevant facts and circumstances

In May 20XX, the company sold its business (the original asset). The business was an active asset. The company's net asset value for this income year was less than $X million.

The company received the money from the sale in instalments.

The sale gave rise to a CGT event, which involved a capital gain. The company decided to rollover the capital gain by acquiring replacement active assets.

In May 20XX, the company received the final instalment from the sale. They were unable to search for replacement assets until this date.

In December 20XX, the company acquired a new business. This replacement asset encompasses only a portion of the capital gain. Therefore, the remaining portion of the capital gain is remaining uncrystallised.

Since December 20XX, the company has been attempting to ascertain suitable assets for acquisition to cover the remaining capital gain. The company has seriously considered a few commercial properties for acquisition. The company did not end up purchasing these assets as price negotiation has not been successful. The market was also high and cost-benefit analyses were not providing adequate benefits.

The company is continuing to examine replacement assets.

Relevant legislative provisions

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

Reasons for decision

The small business rollover allows would allow the company to defer the capital gain made from a CGT event if they acquire 1 or more replacement assets and satisfy certain conditions. The conditions which must be met to obtain relief are set out in Subdivision 152-A of the ITAA 1997. These conditions are:

a)            a CGT event occurs,

b)            this event results in a capital gain,

c)            at least 1 of the following applies:

             i.        you are a CGT small business entity,

             ii.        you satisfy the maximum net asset value test, or

             iii.        you are a partner in a partnership that is a CGT small business entity for the income year and the CGT asset is an interest in an asset of the partnership, and

d)            the CGT asset satisfies the active asset test as per subsection 152-35 of the ITAA 1997.

The company can choose the rollover even if they have not yet acquired a replacement asset. However, a CGT event J5 occurs if, by the end of the replacement asset period, the company does not acquire a suitable replacement asset which is an active asset. A CGT event J6 occurs if, by the end of the replacement asset period, the cost base (first, second and fourth elements only) of the replacement assets they acquired is less than the capital gains disregarded under the rollover provisions.

The replacement asset period, defined under subsection 104-190(1A) of the ITAA 1997 starts 1 year before and ends 2 years after the last CGT event in the income year for which the company obtains the rollover. Subsection 104-190(2) of the ITAA 1997 provides the Commissioner may extend the replacement asset period.

The relevant factors in determining whether to extend the replacement asset period are:

a)            whether there is 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,

b)            whether there is 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,

c)            whether there is any unsettling of people, other than the Commissioner, or of established practices,

d)            the need to ensure fairness to people in like positions and the wider public interest,

e)            whether there is any mischief involved, and

f)            the consideration of the consequences.

Application to your circumstances

For the sale of the original asset, the company will meet the basic conditions under Subdivision 152-A of the ITAA 1997 because:

a)            they have sold the original asset and a capital gain event occurred,

b)            they have incurred a capital gain from the capital gain event,

c)            the total net asset value of their CGT assets does not exceed $6 million, and

d)            the CGT asset is an active asset.

As the company will not acquire the sufficient replacement assets within 2 years from selling the original asset, the replacement asset period will only be satisfied if the Commissioner allows a longer period under subsection 104-190(2) of the ITAA 1997.

The company did not obtain the final instalment for the sale of their asset to purchase replacement assets until May 20XX. Subsequently, the company acquired a replacement asset in December 20XX which covers a portion of the capital gain. The company has examined further replacement assets as potential purchases which would cover the remaining capital gain. Despite this, the assets were unsuitable. The company is continuing to examine replacement assets.

For these reasons, to date the company has been unable to acquire sufficient replacement assets.

The Commissioner will grant an extension of time in this case as:

a)            there is an acceptable explanation as to why the delay occurred,

b)            it would not be unfair and unequitable to entities in similar circumstances or like position to the company, and

c)            the company obtained minimal control over the circumstances which arose around the replacement asset period.

Having considered the relevant facts, the Commissioner will apply their discretion under subsection 104-190(2) of the ITAA 1997 and allow an extension of time until May 20XX.