Private ruling: Small business capital gains tax concessions – replacement asset – Commissioner’s discretion to extend the replacement asset period
Date of advice: 19 April 2018
Published: July 2018
Ruling period: Income year ending 30 June 2018 | Income year ending 30 June 2019
Date scheme commenced: November 20XX.

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: Yes.

Relevant facts and circumstances: Company A (the Trustee) is the trustee for the Trust. The Trust is a discretionary trust that operated a business (the Business). Person A is the sole director and shareholder of the Trustee and is also the appointer of the Trust. Person A and their spouse (Person B) separated. A number of months after the separation, an agreement (the Agreement) to sell the Business as a going concern was entered into between Company XYZ, the Buyer, and Company A as the trustee for the Trust, as the Seller. The Agreement includes the following information: ● The Property – the goodwill of the business including the business or trade name, freehold and leasehold plant and equipment (including furniture, fixtures, fittings and chattels), stock in trade, licenses (including any franchise), leases and contracts of business now carried on by the Seller; and ● Purchase price - $X,XXX,XXX During the following month an Initiating Application was filed with the Family Court due to Person B seeking a court order in relation to finalising financial arrangements between them and Person A which included the following information: ● The parties would do all acts and sign all documents necessary to effect the sale of the Business with the proceeds to be put into a trust account in the name of Company A; ● Neither party was at liberty to withdraw the proceeds without prior written consent of the other, or a Court order; and ● Person A would be restrained from selling, disposing or otherwise encumbering the Business, of the proceeds from the sale of the Business without written agreement of Person B. After a number of months, settlement on the sale of the Business occurred. After a period of time, Person A and Person B were divorced. Orders by Consent were issued by the Family Court which included the following information: ● The parties do all acts and sign all documents necessary to distribute the proceeds of sale of the Business in payment of any capital gains tax liability arising from the sale of the Business, with either party being able to take advantage of the small business capital gains tax concessions available to them; ● The remaining balance to be distributed equally to Persons A and B to effect the equal division of net assets and superannuation. The Trust indicated that it had made the choice to apply numerous small business capital gains tax concessions in the 2015-16 income year. Person A commenced searching for a replacement business following the sale of the Business and has registered with various professionals, such as business brokers, to assist in finding a replacement business. Over a number of months Person A has looked at numerous potential businesses. When undertaking due diligence in relation to considering the potential businesses, Person A requests documentation such as financial accounts, balance sheets, depreciation schedules, asset list, copies of warranties and leases, bank statements, tax lodgements, customer lists, information relating to suppliers, workplace agreements and staff entitlements. A replacement asset has not been acquired within the replacement asset period. A request has been lodged for an extension of time for an additional period for the Trust to purchase a replacement business.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Subsection 104-185(1) | Income Tax Assessment Act 1997 Subsection 104-190(2) | Income Tax Assessment Act 1997 Subdivision 152-A | Income Tax Assessment Act 1997 Subdivision 152-C | Income Tax Assessment Act 1997 Section 152-410

Reasons for decision: Summary: Summary The Commissioner will exercise his discretion under subsection 104-190(2) of the ITAA 1997 to extend the time for the Trustee for the Trust to acquire a replacement asset. Detailed reasoning | Detailed Reasoning - Extension to obtain a replacement asset: You may choose to disregard all or part of a capital gain under the small business rollover exemption if you satisfy certain conditions. The general rule is that a choice available under the CGT provisions once made cannot be changed. Generally, such a choice must be made by the time the income tax return is lodged, or within such further time as the Commissioner allows (subsection 103-25(1) of the ITAA 1997). Under subsection 103-25(2) of the ITAA 1997, the way you prepare your income tax return is sufficient evidence of the making of the choice. 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 under subsection 104-190(2) of the ITAA 1997. The relevant factors in determining whether to extend the replacement asset period are: ● your explanation for the period of extension requested and that it would be fair and equitable to provide such an extension; ● if prejudice to the Commissioner of Taxation might result from additional time being allowed to you, however the absence of prejudice by itself is not enough to justify granting an extension; ● if there is any unsettling of other people, other than the Commissioner, or of established practices; ● whether it would be fair and equitable to people in similar positions and the wider public interest, and ● if any mischief is involved. Application to your situation In this case, Person A, the director of the Trustee, experienced a marriage breakdown and went through divorce proceedings. As part of the divorce settlement, Person A or Person B could not access the proceeds from the sale of the Business without written consent from each other, or under a Court Order. Orders of Consent were issued which outlined the distribution of the sale proceeds from the disposal of the Business. It is stated that for a period after the divorce settlement, Person A did not turn their mind to purchasing a new business due to: ● their marriage breakdown and the adjusting to their changed marital status; ● the shared custody arrangement of Person A and B’s children ● a stressful life event that impacted on Person A’s ability to make major financial decisions during the replacement asset period; and ● the Court Order preventing Person A from accessing the proceeds from the sale of the Business during the replacement asset period unless Person B provided written agreement or the Court issued an order to the effect that he could source money from the proceeds of the Business. Person A has investigated a number of businesses following the disposal of the Business for the purpose of buying a replacement business. Having regard to the relevant factors above and the specific circumstances of this case, it is considered reasonable for the Commissioner to exercise the discretion in subsection 104-190(2) of the ITAA 1997 and extend the replacement asset period. | Detailed Reasoning - Further information: 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 by using the search term “ Capital gains tax concessions for small business” .