Private ruling: CGT - extension of time for a replacement asset
Published: November 2014
Ruling period: Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017
Date scheme commenced: 1 July 2014

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

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You ran a franchise business which was sold. The sales contract included a restraint of trade clause where you agreed not to operate a like business within Xkm of the former business for a period of X years. The Deed of Surrender with franchisor included a restraint of trade clause where you agreed not to operate a like business within Xkm of the former business and up to a Xkm radius of any franchise store for a period of X years. In 201X, you were looking at buying a competitor franchise and spent four months in negotiations. Due to the restraints of trade that were entered into you were unable to purchase the franchise. In 201X you were, in negotiations with a business owner however the sale was not approved due to lack of experience. You looked into various other business ideas but a lack of training in these areas resulted in an inability to purchase them. You state that as you are both over X years old, you find it difficult to learn new things, forgetting very easily after learning anything new. You therefore decided that you needed to return to what you knew before and continue to do what you can. In 201X you looked at many of the same franchise stores. You were in the final stages of making the sales contract for the store and at the last minute the franchisee pulled out. You have also stated that since 200X both directors have had various health issues with histories of illnesses between them. Health practitioners have advised against the opening of a new business due to heavy lifting. You are now in the process of purchasing another franchise. Contract is expected to finalise shortly. The purchase of this business will only use a portion of your capital gain rollover amount. You want to purchase a subsequent franchise, however as you left the business more than two years ago, the franchisor have stipulated that you need to become familiar with the franchise operation and get the store running smoothly before you can apply for another store. They have said that you can only apply after X months of trading. You have previously been granted an extension of time of 12 months.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 104-190(2) .

Reasons for decision: Summary: In order to apply the small business rollover, a replacement asset must be acquired within two years after the relevant CGT event. However the Commissioner may extend the replacement asset period in certain circumstances (subsection 104-190(2) of the ITAA 1997). The relevant factors in determining whether to extend the replacement asset period are: • 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 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 to people in like positions and the wider public interest • whether there is any mischief involved • a consideration of the consequences. | Detailed Reasoning - Application to your circumstances: You disposed of your franchise business. You were required to acquire a replacement asset within two years of the disposal date. You have previously been granted an extension of time to acquire a replacement asset of 12 months. In considering whether to exercise his discretion, the Commissioner needs to be satisfied that there were circumstances beyond your control that prevented you from finding a replacement asset within two years. You have stated that your initial delays in finding a replacement asset were due to failed attempts at purchasing a store and then a business before coming to the conclusion that you would need to purchase another business from the same franchise. You incurred subsequent delays looking at other franchises to purchase, with one franchisee pulling out when you were in the final stages of making the sales contract. You have also stated that your doctors have advised you not to start a new business due to health issues you have both for more than 10 years. These are not considered to be acceptable explanations for the delay. After considering both the relevant factors for determining whether to exercise the Commissioner's discretion and the specific circumstances of this case, we consider that your circumstances do not warrant an extension of time. This is for the following reasons: • In your case it is difficult to say there is evidence of an acceptable explanation for the period of extension requested. The initial reasoning for the delay occurred before the two year replacement asset period had expired, and it is considered that these relate to the restraint of trade clause within your sale contract. Subsequent delays in looking at other franchises to purchase are not considered to be significant enough to warrant the length of extension that you have requested. • In addition to these delays you have included that your doctors have told you not to start a new business. However, as these health issues relate to periods dating back 10 years, to a period before you sold the business, they are not considered to be reasonable reasons to extend the replacement asset period. The fact that you are now purchasing a replacement business shows that these health issues do not impact your life in such a way to prevent you from purchasing a replacement asset. • These reasons are therefore not considered to be exceptional circumstances beyond your control that prevented you from acquiring a replacement asset. • To allow an extension of time in your case is likely to unsettle people for the reasons discussed above, that is, lack of evidence of an acceptable explanation. • While there is no suggestion of mischief in this case, it would not be considered fair to people in like positions to allow you an extension of time. Another application with similar circumstances would be denied. • To allow a further extension of time of two years effectively allows a deferral of the capital gain for five years. Such an extension of time is well in excess of usual practice without evidence of an acceptable explanation. Therefore, the Commissioner will not exercise the discretion under subsection 104-190(2) of the ITAA 1997 to extend the period for acquiring the replacement asset.