Private ruling: Capital Gains Tax – Small Business concessions – replacement asset period – Commissioner’s discretion
Date of advice: 18 September 2018
Published: October 2018
Ruling period: Year ended 30 June 2019
Date scheme commenced: 1 July 2018

Ruling: Q1: Will the Commissioner exercise his discretion under subsection 104-190(2) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow an extension to the replacement asset period to February 2019? | A1: Yes

Relevant facts and circumstances: Due to stalled negotiations with different business operations, the Taxpayer requires a further extension to enable it to complete the current negotiations to purchase a replacement asset. The Taxpayer has been active in pursuing a replacement asset but due to certain constraints has not secured this asset within the time period. The Taxpayer carried on a business which was sold in February 201x. The business was an active asset and at the time of the sale the Taxpayer applied the small business roll-over to the part of the capital gain made on the sale. Since completing the sale process, the Taxpayer has been seeking a suitable replacement asset. The Taxpayer determined the best approach was to purchase another business operating in this industry to ensure the Taxpayer received adequate financial reward for the capital outlay considered. The nature of this business meant that there has been a lack of appropriate businesses for sale and resulted in lengthy and drawn out purchase negotiations due to the due diligence and legal licensing requirements. After considering the above opportunities, the Taxpayer has been forced to look outside their industry for other assets/businesses to purchase as a replacement asset. The Taxpayer has been actively searching for a replacement asset and considered a number of opportunities. The Taxpayer is now in negotiations with other businesses in different industries and markets to the previous business. All these businesses involve actively trading businesses. As these opportunities are outside the Taxpayer’s previous experience the negotiations have been very considered and involved. The directors and the Taxpayer are determined to purchase a replacement asset in the form of one of these business opportunities but, due to constraints, have been unable to do so within the time required pursuant to section 104-197 of the ITAA 1997. Legislation: Income Tax Assessment Act 1997 paragraph 104-185(1)(a) Income Tax Assessment Act 1997 subsection 104-190(2) Income Tax Assessment Act 1997 subsection 104-197(1) Income Tax Assessment Act 1997 subsection 104-197(5) Income Tax Assessment Act 1997 Subdivision 152-A Income Tax Assessment Act 1997 Subdivision 152-E Income Tax Assessment Act 1997 section 152-410 Income Tax Assessment Act 1997 section 152-415


Reasons for decision: Summary: The Commissioner will exercise his discretion under subsection 104-190(2) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow an extension to the replacement asset period to February 2019. | Detailed Reasoning - Detailed reasoning: Subdivision 152-E of the ITAA 1997 contains the provisions regarding the small business roll-over relief. Under sections 152-410 and 152-415 of the ITAA 1997, the small business roll-over relief allows entities that satisfy the conditions in Subdivision 152-A of the ITAA 1997 to defer all or part of each capital gain arising from a CGT event happening to an active asset. Under note 1(a) of section 152-410 of the ITAA 1997, this roll-over is available to the entity even if they have not acquired a replacement asset at the time of claiming the roll-over provided that a replacement asset is acquired by the end of the replacement asset period. CGT event J5 happens if a replacement asset is not acquired by the end of the replacement asset period: pursuant to section 104-197 of the ITAA 1997. Paragraph 104-185(1)(a) of the ITAA 1997 states that the replacement asset period is the period starting one year before and ending two years after the last CGT event in the income year for which you obtain the roll-over. In the current circumstances, the replacement asset period has expired and no replacement asset has yet been acquired. Section 104-190 of the ITAA 1997 provides that the Commissioner may extend the replacement asset period. We consider the following factors when determining whether to grant an extension to the asset replacement period: ● Is there 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? ● Is there any prejudice to the Commissioner if the additional time is allowed (however, the mere absence of prejudice is not enough to justify the granting of an extension)? ● Will the extension unsettle people, other than the Commissioner, or established practices? ● Will the extension be fair to people in like positions and the wider public interest? ● Is there mischief involved? ● What are the consequences of the decision? We have decided to exercise his discretion under subsection 104-190(2) of the ITAA 1997 and extend the replacement asset period up to February 2019 inclusive. This is because: ● the process of acquiring a replacement asset has been more difficult than anticipated due to: ● a lack of appropriate businesses for sale in the taxpayer’s previous market and area of expertise and the restraint of trade provisions of the contract of sale for the previous business limiting the locations in which they could purchase a replacement asset in that field; and ● difficulties experienced in negotiating with vendors of other businesses outside of their field of experience and evidence of the taxpayer’s genuine intention to negotiate with business vendors; ● the taxpayer’s statement that they are very determined to acquire a replacement asset; ● the period of the extension remains within a single income tax year, meaning there is unlikely any prejudice to the Commissioner if the additional six months is granted.