Private ruling: Will the Commissioner exercise his discretion to extend the replacement asset period
Date of advice: 9 September 2016
Published: October 2016
Ruling period: Year ended 30 June 2015 | Year ended 30 June 2016
Date scheme commenced: 1 July 2014

Ruling: Q1: Will the Commissioner of Taxation extend the replacement asset period under subsection 104-190(2) of the Income Tax Assessment Act 1997 ? | A1: No.

Relevant facts and circumstances: You operated a business as a sole trader. You sold your business. A capital gain was made on the sale. You elected to use the Capital Gains Tax (CGT) Small Business (SB) roll-over concession. A capital gain was deferred. Within the two year asset replacement period you acquired a replacement asset being shares in a company. Immediately after you purchased the shares in the company you held over 20% of the issued shares. Therefore you met the conditions to be a concession stakeholder. For certain reasons your shareholding was diluted to below 20%. This dilution was temporary but lasted over 12 months. This dilution occurred after the 2 year asset replacement period. After circumstances changed your shareholding in the company returned to over 20% and consequently you returned to being a concession stakeholder. The company holds other assets and is a Small Business Entity (SBE).

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-185 | Income Tax Assessment Act 1997 Subsection 104-185(1) | Income Tax Assessment Act 1997 Subsection 104-185(3) | Income Tax Assessment Act 1997 Section 104-190 | Income Tax Assessment Act 1997 Subsection 104-190(2) | Income Tax Assessment Act 1997 Section 152-55 | Income Tax Assessment Act 1997 Section 152-60

Reasons for decision: Summary: All the legislative references that follow are to the Income Tax Assessment Act 1997 . | Detailed Reasoning - CGT event J2: Section 104-185 states CGT event J2 happens if there is a change in relation to the replacement asset or improved asset after a roll-over under Subdivision 152-E. Subsection 104-185(1) states in part CGT event J2 happens if you choose a small business roll-over under Subdivision 152-E for a CGT event that happens in relation to a CGT asset in an income year and: (a) you acquire a replacement asset, (b) it is your active asset at the end of the replacement asset period (c) if the replacement asset is a share in a company at the end of the replacement asset period either you, or an entity connected with you, is a CGT concession stakeholder in the company; and (d) a change of a kind specified in subsection (3) happens after the end of the replacement asset period. Subsection 104-185(3) in part states that for a share in a company, the change is paragraph(1)(c) stops being satisfied. Section 152-60 states an individual is a CGT concession stakeholder of a company or trust at a time if the individual is a significant individual in the company or trust Section 152-55 in part defines a significant individual as an individual in a company at a time if, at that time, the individual has a small business participation percentage in the company of at least 20%. In your case you elected to use the small business roll-over concession under Subdivision 152-E for a CGT event that happened in relation to the sale of your business. You acquired a replacement asset by acquiring shares. The shares were active assets at the end of the replacement asset period. However, after the end of the replacement asset period your ownership in the company fell below 20% and therefore you stopped being a concession stakeholder in the company (even though your shareholding returned to being over 20% on XX/XX/XXXX). Consequently CGT Event J2 has occurred unless the Commissioner extends the replacement asset period to XX/XX/XXXX. | Detailed Reasoning - Whether the replacement asset period will be extended: Subsection 104-190(2) states the Commissioner may extend the replacement asset period. When deciding whether to exercise the discretion the Commissioner considers 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 that 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 a like position and the wider public interest; • whether any mischief is involved; • consideration of the consequences; and • any other relevant matters. In this case you elected to utilise the replacement asset rollover provisions. An active asset was purchased during the asset replacement period. Both CGT event J5 (failure to acquire a replacement asset and to incur fourth element expenditure after a rollover under Subdivision 152-E) and J6 (where the cost of acquisition of the replacement asset or amount of fourth element expenditure or both is not sufficient to cover the disregarded capital gain) include a subsection (subsection 104-197(5) and subsection 104-198(4) respectively) which specifically states that the replacement asset period under section 104-190 may be extended. No such subsection is contained in section 104-185 with respect to CGT event J2. This indicates that the extension of the replacement asset period provided for by section 104-190 was only intended to be available with respect to CGT events J5 and J6 and not to CGT event J2. This view is supported by the fact that the relevant Explanatory Memorandum (to Tax Laws Amendment (2006 Measures No. 7) Bill 2006) only refers to CGT events J5 and J6 in relation to the extension of the replacement asset period provided for by section 104-190. Unlike the discussions on J5 and J6, the discussion on J2 in the Explanatory Memorandum makes no mention of the extension. To summarise, we believe it is clear that the extension was only ever intended to be available where either a replacement asset was not purchased, or an insufficient amount was expended on a replacement asset, within the required two year period. This is not what has occurred in this case. A replacement asset of a sufficient cost was purchased within the 2 year period. You have argued that the failure to meet the CGT concession stakeholder requirement which triggered CGT event J2 was only temporary rather than permanent. However, although temporary it was for a significant time, being a period of more than 12 months. It is noted that the temporary failure to meet the CGT concession stakeholder requirement took place relatively soon after the 2 year replacement asset period ended so the extension required to avoid CGT event J2 is approximately 2 years which on the surface would not appear to be an unreasonable length of time. However, if the temporary failure to meet the 20% shareholding requirement took place for example 10 years after the replacement asset period ended rather than shortly after, it is difficult to see that it could be argued an extension could be granted for that length of time even if there were understandable reasons for the temporary failure. This also supports our view that the extension of the replacement asset period was not intended to apply to CGT event J2. Having regard to all of the above, an extension to the replacement asset period will not be granted.