Private ruling: Capital Gains Tax (CGT) Small Business replacement asset rollover
Date of advice: 16 November 2017
Published: July 2018
Ruling period: 30 September 2017 – 30 June 2018
Date scheme commenced: 1 July 2014

Ruling: A1: Yes

Relevant facts and circumstances: A capital gain was received in the year ended 30 June 2013. The capital gain was rolled over. During the subsequent 2 year period, numerous replacement businesses were examined, however all were unsuitable. A private ruling issued (1012812917869) extending the replacement asset period to 30 June 2016. An extension was required as an opportunity became available during the 2016 income year. The extension was to enable adequate due diligence was observed. The Commissioner approved the request to extend the replacement asset period to 30 June 2016. A second private ruling (1013023318011) requested the Commissioner to use his discretion to extend the replacement asset period to 30 June 2017. There were reasons outside the taxpayer’s control which had stalled the process of acquisition. A third private ruling (1051239944478) requested the Commissioner to use his discretion to extend the replacement asset period to 30 September 2017. The taxpayer investigated another opportunity as the first had not progressed for reasons beyond the taxpayer’s control. The Commissioner approved the request to extend the replacement asset period to 30 September 2017. A fourth private ruling has been requested for the Commissioner to exercise his discretion to extend the replacement asset period to 30 June 2018. The initial investment opportunity has now been approved and the taxpayer would like to purchase shares in this business as the replacement asset. The extension of time will allow the taxpayer time to ensure they meet the replacement asset deadline in an event of any unforeseen circumstances in finalising the contract.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 152-A | Income Tax Assessment Act 1997 Section 104-197 | Income Tax Assessment Act 1997 Section 104-198 | Income Tax Assessment Act 1997 Subsection 104-190(2) Summary | The Commissioner will exercise his discretion to extend the replacement asset period pursuant to subsection 104-190(2) of the ITAA 1997 in respect of the small business CGT replacement asset roll-over relief to 30 June 2018. | Detailed reasoning | The small business roll-over allows the deferral of a capital gain made from a CGT event if a taxpayer acquires one or more replacement assets and satisfies certain conditions. The conditions which must be met to obtain relief are set out in Subdivision 152-A of the ITAA 1997. | A taxpayer can choose the roll-over even if they have not yet acquired a replacement asset. However CGT event J5 happens if, by the end of the replacement asset period, the taxpayer does 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) 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 the roll-over is obtained. Subsection 104-190(2) of the ITAA 1997 provides that the Commissioner may extend the replacement asset period. | The Taxpayer’s circumstances | Numerous replacement businesses were examined as potential purchases, however all were unsuitable. | In 2016 income year, an opportunity became available for shares in a company to be acquired. However, there were several issues which would take time to resolve. | Other opportunities were investigated, however the taxpayer became aware the issues with the initial company had been overcome and the taxpayer wanted to reconsider shares in this business as a replacement asset. The extension of time will allow the taxpayer to meet the replacement asset deadline in an event of any unforeseen circumstances in finalising the contract. | 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 until 30 June 2018. | Additional information | A capital gain will arise if: | ● the replacement asset is a share in a company or an interest in a trust, at the end of the replacement asset period | ● you, or an entity connected with you, are not a CGT concession stakeholder in the company or trust, or | ● CGT concession stakeholders in the company or trust do not have a small business participation percentage in you of at least 90% (CGT event J5) | ● the capital gain previously disregarded under the roll-over is, at the end of the replacement asset period, more than the sum of the following: | ● the amount paid to acquire the replacement asset (that is, the first element of the cost base of the replacement asset) | ● any incidental costs incurred in acquiring that asset, which can include giving property (that is, the second element of the cost base of the replacement asset), and | ● the amount expended on capital improvements to one or more assets that were acquired or already owned (that is, fourth element expenditure) (CGT event J6) | When CGT event J5 or J6 happens, you make a capital gain equal to the amount of the capital gain previously disregarded and not used to acquire a replacement asset(s) that meet the conditions under the small business roll-over provisions. The time of the event is at the end of the replacement asset period. The original private ruling extended this to 30 June 2016. Further to this, another private ruling extended the period to 30 June 2017. The Commissioner again allowed an extension of time until 30 September 2017, to which a further extension is granted until 30 June 2018, which is now the replacement asset period. | Further issues for consideration | For a share in a company or interest in a trust to be an active asset, the company or trust must satisfy the 80% test, that is, the market value of the active assets and certain financial instruments of the company or trust must be 80% or more of the total of the market value of all the assets of the company or trust. | This ruling has not fully considered your eligibility for the small business CGT concessions. You should ensure that you satisfy the relevant conditions for the concessions. More information is available on our website www.ato.gov.au using the keywords small business rollover to search.


Subject: Capital Gains Tax (CGT) Small Business replacement asset rollover: 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 CGT replacement asset roll-over relief to 30 June 2018?