Private ruling: Commissioner’s discretion for an extension of time to make a choice
Date of advice: 26 July 2018
Published: September 2018
Ruling period: Year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Will the Commissioner exercise his discretion in paragraph 103-25(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow an extension of time to make a choice to apply the small business retirement exemption? | A1: Yes, an extension until XX/XX/2018 has been granted.

Relevant facts and circumstances: During the 2014-15 financial year you had a CGT event which resulted in a capital gain of $X. You applied the capital gains tax general discount and the small business active asset reduction to the gain. You then made a choice in writing and contributed $X to your superannuation fund, and elected to roll over the remaining $X under the Small Business Rollover Exemption in your 2014-15 financial year income tax return. At the end of the replacement asset period, a replacement asset had not been purchased. As a result a CGT event occurred and the capital gain amount of $X was to be included in the 2016-17 financial year tax return. In your tax agent’s software program, your 2016-17 financial year tax return had been set as ‘complete’ however the income tax return excluded the capital gain. At that point in time, the income tax return excluded the capital gain information as your tax agent needed to clarify the capacity to contribute money to your superannuation fund as an option to utilise under the retirement exemption. On X January 2018 your income tax return was accidently lodged by your tax agent, without the capital gain disclosed. Your tax agent was made aware of the lodgement error around X January 2018. You are seeking the Commissioners discretion to extend the time so that you can choose to apply the small business retirement exemption. You have not yet made the choice in writing to apply the retirement exemption, however this will be done upon issue of a favourable private ruling. You are under 55 years of age. You will make a payment equal to the exempt amount into a complying superannuation fund when you make the choice to apply the retirement exemption.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 103-25(1) | Income Tax Assessment Act 1997 Paragraph 103-25(1)(b)

Reasons for decision: Summary: The general rule is that a choice available under the CGT provisions once made cannot be changed and such a choice must be made by the time the income tax return is lodged or within such further time as the Commissioner allows as described in subsection 103-25(1) of the ITAA 1997. Paragraph 103-25(1)(b) of the ITAA 1997 allows the Commissioner to grant an extension of time in which to make a choice. However, paragraph 103-25(1)(b) has no application once a choice has been made. Therefore the Commissioner must first consider whether a choice has been made before considering the exercise of a request for an extension of time in which to make a choice. Subsection 103-25(1) of the ITAA 1997 states that a choice that you can make must be made by the day you lodge your income tax return for the year in which a CGT event happened or within a further time as allowed by the Commissioner. The term ‘can’ is not defined and the Macquarie Online dictionary (Sixth Edition) describes it as ‘to be able to; to have the strength; means; authority to and to have permission’. Where a taxpayer does not have the authority to make a choice it is grounds for the Commissioner to allow an extension of time to make a choice about a CGT event as it is considered that no choice has yet been made. There are some circumstances when we consider you have not made a choice. These are if you lodge your tax return without being aware that: ● events have happened that required you to make a choice ● a choice was available, or ● a choice you made was not valid. This is further supported by Sherlinc Enterprises Pty Ltd and Federal Commissioner of Taxation [2004] AATA 113; (2004) 2004 ATC 2022; (2004) 55 ATR 1001 in which GA Barton M stated that taxpayers who prepare their income tax returns on the basis of choices they are not permitted to make are doing no more than purporting to make the choices in question. An entity which has not made a valid choice at the time of lodgement of an income tax return for a period during which a CGT event occurred can apply to the Commissioner for further time under paragraph 103-25(1)(b) of the ITAA 1997 to later make a choice to apply a CGT concession and amend their return to reduce or disregard the relevant capital gain. In exercising his discretion, the Commissioner must consider the following factors: ● there should be evidence of an acceptable explanation for the period of time 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 between the taxpayer and other people in like positions and the wider public interest; ● whether there was any mischief involved; and ● a consideration of the consequences. You have sought further time to include the CGT event in your tax return and apply the small business retirement exemption. Your income tax return was originally lodged without the CGT event included. Because an election was not made, it does not prevent an election now being made under the terms of Subdivision 152-D of the ITAA 1997. It was brought to your attention by your tax agent that the CGT event had not been included in your tax return shortly after the error occurred. You have now made a request for consideration by the Commissioner to allow an extension of time to make an election. If additional time is allowed, there would be no prejudice to the Commissioner, nor would there be any unsettling of people or of established practices. Anyone in a similar position would be able to request a similar extension and there was no mischief involved in the request. The consequence of allowing further time is that the election may be made and the small business CGT exemptions may be applied if you are eligible. You do not need to meet the basic conditions again, because you would have satisfied the conditions at the time you chose the rollover, but you must meet the retirement exemption conditions. You cannot apply the 50 percent discount, small business 50 percent discount or the 15 year exemption to reduce the gain. You have advised that you will make the choice in writing and keep a written record of the amount you choose to contribute, and make a payment to your superannuation fund of this amount. Having regard to all the circumstances, it is considered reasonable for the Commissioner to allow you further time to make a choice under paragraph 103-25(1)(b) of the ITAA 1997 to apply the small business retirement exemption.