Private ruling: CGT- shares and the replacement asset period - extension of time
Date of advice: 4 March 2019
Published: May 2019
Ruling period: Year ended 30 June 2016 | Year ended 30 June 2017 | Year ended 30 June 2018
Date scheme commenced: 1 July 2015

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: No

Relevant facts and circumstances: You had 100% shareholding with Company X from the date it was set up after 20 September 1985. You sold your shares with the company. You were not carrying on a business during the financial year you sold the shares. The net value of CGT assets that you and your connected entities and affiliates held was the value of the shares held in the company. It was less than $2 million. You applied the small business rollover to defer your capital gain. You acquired shares from Company Y in aggregates. The last acquisition of shares was done outside the two year replacement asset period. You submitted that the delay in acquiring the replacement asset was due to the numerous third parties involved in the transactions such as: the buyer’s accountant and solicitor, the seller’s accountant & solicitor, the company accountant and solicitor.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-190 | Income Tax Assessment Act 1997 section 104-198 | 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. Subsection 104-190(1A) of the ITAA 1997 states: 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, the replacement asset period is the period: (a) starting one year before the last CGT event in the income year for which you obtain the roll-over; and (b) ending at the later of: (i) 2 years after that last CGT event; and (ii) if the first-mentioned CGT event happened because you *disposed of the CGT asset - 6 months after the latest time a possible *financial benefit becomes or could become due under a *look-through earnout right relating to the CGT asset and the disposal. Subsection 104-197(1) of the ITAA 1997 says that: CGT event J5 happens 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 (the replacement asset), and have not incurred fourth 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. There are additional conditions if the replacement asset is a share in a company. In your circumstances you do not satisfy subsection 104-197(2) of the ITAA 1997 for the last parcel of shares as you did not acquire them by the end of the replacement period. Where that is the case, it is necessary for the Commissioner to exercise his discretion 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 ● a consideration of the consequences. | Detailed Reasoning - Application to your circumstances: You submitted that the delay in acquiring the replacement asset was due to the numerous third parties, including their accountants and solicitors, involved in the transactions. Notwithstanding the commercial reality that the different parties had their own deadlines and transactions outside the taxpayer’s sale and acquisition of shares, there is not sufficient evidence of a delay outside your control that would require the Commissioner to consider the extension requested for the last purchase of shares. The Commissioner considers that it is not fair and equitable in these circumstances to provide an extension. Having considered the relevant factors, the Commissioner will not exercise his discretion under subsection 104-190(2) of the ITAA 1997 to extend the time period for you to acquire a replacement asset.