Private ruling: Capital gains tax – j5 – small business concessions – extension of time to make a choice .
Date of advice: 5 April 2018
Published: June 2018
Ruling period: 1 July 2016 to 30 June 2017
Date scheme commenced: 1 July 2014

Ruling: Q1: Will the Commissioner allow you further time as provided in paragraph 103-25(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) for you to choose to apply the small business retirement exemption for the J5 capital gain tax event that arose in the 201X-1Y financial year? | A1: Yes

Relevant facts and circumstances: On a date in 201V you sold your business to a company for a goodwill value of an amount based on an arms-length valuation. The cost base was zero as the business was started from scratch. When preparing your 201V-1W income tax return you applied the general CGT discount, and active asset discount to the gain to produce a taxable gain of an amount. You applied the replacement asset rollover to this amount. At that time you instructed your accountant that if you hadn’t found a replacement asset rollover within the two year deadline you intended to apply the retirement exemption to the amount. A replacement asset was not acquired within the two year period, and so CGT event J5 occurred on a date in 201X. Your accountant prepared a draft of your 201X-1Y tax return on a date in 201Y to provide to your bank. In the draft return your accountant included the J5 capital gain by error. Your accountant lodged your prepared draft 201X-1Y tax return on a date in 201Z, reporting the J5 capital gain, despite not having your authorisation to lodge, and not complying with your prior instructions. Your accountant informed you of the error on a date in 201Z. You instructed them to amend the return, and an amended return was lodged on a date in 201Z applying the retirement exemption to the J5 capital gain, allowing you to disregard the gain.

Relevant legislative provisions: Income Tax Assessment Act 1997 Part 3-1 | Income Tax Assessment Act 1997 Part 3-3

Reasons for decision: Summary: The Commissioner will grant an extension of time under paragraph 103-25(1)(b) to make a choice. | Detailed Reasoning - Detailed reasoning: You may choose to disregard or defer all or part of a capital gain under the small business CGT concessions if you satisfy certain conditions. A choice to obtain the small business retirement exemption must be made by the time the income tax return is lodged, or within such further time as the Commissioner allows: subsection 103-25(1). Under subsection 103-25(2), the way you prepare your income tax return is sufficient evidence of the making of the choice. Paragraph 103-25(3)(b) however, contains an exception in relation to the small business retirement exemption, as subsections 152-315(4) and (5) require the choice for this exemption to be made in writing. The general rule is that a choice available under the capital gains tax (CGT) provisions, once made, cannot be changed. A taxpayer who has considered the application of the CGT concessions and chosen a particular concession has made a choice which cannot later be changed. However a return that has been lodged in error including a capital gain that did not represent the instructions of the taxpayer does not represent making a valid choice. If the Commissioner allows further time, the taxpayer may later make a choice for a CGT concession and amend their return to reduce or disregard the capital gain. You have requested the Commissioner to allow further time for you to make the choice and apply the retirement exemption. In determining if the discretion to allow further time would be exercised, the Commissioner has considered the following factors: (a) 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) (b) 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) (c) unsettling of people, other than the Commissioner, or of established practices; (d) fairness to people in like positions and the wider public interest (e) whether any mischief is involved; and (f) consequences of the decision. | Detailed Reasoning - Application to your circumstances: An error by your tax agent meant that the capital gain resulting from the CGTJ5 event was included in your tax return and the retirement exemption was not applied. Effectively you did not make a valid choice. After consideration of the above factors and your circumstances, the Commissioner has exercised his discretion and granted you an extension to make the choice to apply the small business retirement exemption.