Private ruling: Capital gains tax and the small business roll-over provisions
Published: May 2015
Ruling period: Year ending 30 June 2015. | Year ending 30 June 2016.
Date scheme commenced: 1 July 2014.

Ruling: Q1: Will the Commissioner use his discretion to extend the replacement asset period pursuant to subsection 104-190(2) of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of the Small Business capital gains tax (CGT) replacement asset roll-over relief? | A1: Yes.

Relevant facts and circumstances: You received a capital gain in the 2012-13 financial year. You rolled over the capital gain amount. During the subsequent 2 year period, you examined numerous replacement businesses as potential purchases, however all were unsuitable. You have purchased some replacement assets, however a significant amount of uncrystallised gains is still remaining. The ATO reviewed your transactions for a period of several months, which delayed action you could take during this period. An opportunity has become available for you to acquire shares in a production business. The extension of time will allow you to perform adequate due diligence, and to ensure the required active asset tests are satisfied in relation to these shares. The company operating the production business is currently proposing to purchase land subject to development approval for a large scale operations facility. Once approval is granted the company will then develop the site within 4-6 months in order to commence trading as soon as possible. Once the development is approved completion is expected during the 2016 financial year.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 104-190(2). | Income Tax Assessment Act 1997 section 104-197. | Income Tax Assessment Act 1997 section 104-198. | Income Tax Assessment Act 1997 subdivision 152-A.

Reasons for decision: Summary: The small business roll-over allows you to defer the capital gain made from a 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. You can choose the roll-over even if you have not yet acquired a replacement asset. However CGT event J5 happens if, by the end of the replacement asset period, you do not acquire a suitable replacement asset which is an active asset. CGT event J6 happens if, by the end of the replacement asset period, the cost base (first, second and fourth elements only) of the replacement asset(s) you acquired is less than the capital gains disregarded under the roll-over provisions. The replacement asset period starts one year before, and ends 2 years after, the last CGT event in the income year for which you obtain the roll-over. Subsection 104-190(2) provides that the Commissioner may extend the replacement asset period. You examined numerous replacement businesses as potential purchases, however all were unsuitable. The ATO reviewed your transactions for a period of several months, which delayed action you could take during this period. You are now proposing to acquire shares in a company, however you need some additional time to carry out due diligence, and to ensure the required active asset tests are satisfied in relation to these shares. The company you wish to acquire shares in is currently seeking approval for a development and once approved, construction will take four to six months, after which time the company can commence trading. For these reasons, to date you have been unable to acquire suitable replacement asset(s). In determining if the discretion would be exercised the Commissioner has considered the following factors: • evidence of an acceptable explanation for the period of the extension requested (and whether it would be fair and equitable in the circumstances to provide such an extension) • prejudice to the Commissioner which 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 like positions and the wider public interest • whether any mischief is involved, and • consequences of the decision. Having considered the relevant facts, the Commissioner is able to apply his discretion under subsection 104-190(2) and allow an extension of time.