Private ruling: Capital gains tax – Replacement asset – Extension of time
Date of advice: 30 May 2018
Published: September 2018
Ruling period: 30 December 2018
Date scheme commenced: 1 June 2016

Ruling: Q1: Will the Commissioner exercise the discretion in subsection 104-190(2) of the Income Tax Assessment Act 1997 (ITAA 1997), to extend the two year time limit under section 104-197(1) to acquire replacement assets? | A1: Yes.

Relevant facts and circumstances: You carried on a business. You sold your business and applied the small business rollover to defer your capital gain. The contract to sell your previous business specified that you could not operate in the same industry within two years. You are commencing another business in the same industry and will be acquiring assets for the new business. You expect this business will start to trade within the next few weeks. You confirm that all the assets will be ready for use by the end of December. You are also acquiring shares in a company. Once the shares are purchased you will be a 50% shareholder in the company. The company purchased land for the purpose of property development. An application was prepared and lodged with the Council. You are still waiting on the application to be approved. You advise the company does not pass the active asset test at this point in time, however once the application is approved and the land is ready for development, the company will meet the active asset test.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-190 | Income Tax Assessment Act 1997 Subsection 104-197(2) | Income Tax Assessment Act 1997 Subdivision 152-A | Income Tax Assessment Act 1997 Subdivision 152-E

Reasons for decision: Summary: The small business roll-over allows you to defer the capital gain made from a Capital Gains Tax (CGT) event if you acquire one 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. CGT event J5 occurs when you choose a small business roll-over under subdivision 152-E of the ITAA 1997 for a CGT event that happens in relation to a CGT asset in an income year and, by the end of the replacement period: a) You have not acquired a replacement asset, and have not incurred forth element expenditure in relation to a CGT asset; or b) The replacement asset does not satisfy the conditions set out in subsection (2). Subsection 104-197(2) of the ITAA 1997 outlines that the replacement asset must be an active asset by the end of the replacement period. An asset will qualify to be an active asset if you own the asset and it is used, or held, ready for use, in the course of carrying on a business by you, your affiliate or another entity that is connected with you. In your circumstances, you currently do not satisfy subsection 104-197(2) of the ITAA 1997 as you have not acquired an active asset by the end of the replacement period. Where that is the case, it is necessary for the Commissioner to exercise his discretion in your favour if the replacement asset is to be allowed under subsection 104-185(2) of the ITAA 1997. In determining if the discretion would be exercised the Commissioner has considered the following factors: ● there should be 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; ● account must be had of 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 to people in like positions and the wider public interest; ● whether there is any mischief involved; and ● a consideration of the consequences. Application to your circumstances We consider that the delay caused by the contract you entered into when you sold your business, which specified that you could not operate in the same industry within two years, is an acceptable explanation for the period of extension requested. You have also started to prepare for your new business to operate and purchase assets that will be used in your business; this shows that you have a commitment to commence business as soon as possible. The Commissioner considers that it is fair and equitable in this circumstance to provide an extension. Further to the above, due to the delay in obtaining approval for the application from the Council the shares in the company will not be considered an active asset until outside of the two year time limit. In this case it is the delay in the approval that has prevented you purchasing an active asset prior to the end of the two year period. Having considered the relevant factors, the Commissioner is able to apply his discretion under subsection 104-190(2) of the ITAA 1997 to extend the time period for you to acquire a replacement asset to 30 December 2018.