Private ruling: CGT - extension of time to obtain replacement asset
Date of advice: 18 February 2025
Published: 31 March 2025
Ruling period: Year ending DD MM 20YY | Year ending DD MM 20YY
Date scheme commenced: DD MM 20YY

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 replacement asset period by 2 months to DD MM 20YY? | A1: Yes.

Relevant facts and circumstances: You were a shareholder in Company A. The company has operated a business for over XX years. The company's shares were sold at arm's length to a third party by way of call option which was entered into on DD MM 20XX. The call option was exercised approximately X months later. A share sale agreement that was subject of the call option was entered into on DD MM 20XX, with settlement taking place on DD MM 20XX. You decided to defer your net capital gain in the relevant income year by applying the small business rollover. Due to the nature of the asset, the expertise required to operate the particular type of business, and the area in which you are located, it took you some time to identify a suitable opportunity. Since settlement of your sale occurred, you entered into negotiations with various parties to acquire a replacement asset but were unsuccessful. In MM 20XX, you entered into negotiations with a party to acquire a replacement asset. Negotiations have been protracted as the seller seeks to sell their shares in their company rather than selling their business. As this manner is more complicated, you have had to seek legal and financial advice to be able to proceed with the purchase. In MM 20XX, you and the seller had a 'meeting of the minds' about the purchase. A 'heads of agreement' has been prepared, and you have been in the process of undertaking due diligence investigations. Your bank applications and valuations are also underway. The parties' legal and financial advisors have been working to finalise the relevant terms of the agreement. You anticipate that a contract will be ready to sign in the next few months.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-5 | Income Tax Assessment Act 1997 subsection104-40(2) | Income Tax Assessment Act 1997 subsection 104-40(5) | Income Tax Assessment Act 1997 subsection 104-190(1A) | Income Tax Assessment Act 1997 subsection 104-190(2) | Income Tax Assessment Act 1997 Subdivision 152-E

Reasons for decision: Summary: Section 104-5 of ITAA 1997 provides that CGT event D2 occurs when granting an option. The timing of the event under subsection 104-40(2) of the ITAA 1997 is when the option is granted. An exception is set out under subsection 104-40(5) of the ITAA 1997. A capital gain made from the grant of the option is disregarded if the option is exercised. Subsection 104-190(1A) of the ITAA 1997 sets out the replacement asset period for small business roll-overs in compliance with Subdivision 152-E of the ITAA 1997. The replacement asset period starts one year before the CGT event for which you obtain the roll-over and ends 2 years after the last CGT event. Subsection 104-190(2) of the ITAA 1997 provides that the Commissioner has discretion to extend the replacement asset period. The Commissioner has considered the following factors in determining whether to exercise the discretion to extend the time limit set out in subsection 104-190(2) of the ITAA 1997: • whether there is evidence of an acceptable explanation for the period of extension requested and whether it would be fair and equitable in the circumstances to grant the extension, • whether it would be prejudicial to the Commissioner to grant further time. The absence of prejudice is not enough to justify the granting of the extension, • whether the decision will unsettle people other than the Commissioner or unsettle established practices, • whether it is fair to people in similar positions and the wider public interest, • whether there is any mischief involved, and • the consequences of granting the extension. | Detailed Reasoning - Application to your circumstance: You entered into the call option on DD MM 20XX, at which time a CGT event D2 occurred. The option was then exercised on DD MM 20XX when the share sale agreement was entered into, being a CGT event A1. Applying the exception in subsection 104-40(5) of the ITAA 1997, the capital gain from granting the option is disregarded. This means that the CGT event for which you obtained the roll-over was the CGT event A1 that occurred on DD MM 20XX. The replacement asset period therefore commenced on DD MM 20XX and ends on DD MM 20XX. The extension until DD MM 20XX to facilitate the purchase is approximately X months outside of the replacement asset period. The delay in disposing of the property before the expiry of the replacement asset period is due to the following reasons: • the length of time it took to identify a suitable replacement asset, as your expertise is in a specific field, • various negotiations with multiple parties to obtain a replacement asset, all of which fell over, and • the complex nature of the current transaction requiring the parties on both sides to obtain relevant advice before the agreement could be formed. The circumstances of the case and explanation for the delay support the case for an extension of the time limit. The request for an extension to the time limit was received on DD MM 20XX, which is prior to the expiry of the replacement asset period. There appears to be no prejudice on the Commissioner. The extension requested is reasonable as it is for X months outside of the X-year period. There is an acceptable explanation for the extension requested and it is fair and equitable in the circumstances to grant the extension. The decision to grant the extension is fair to those in similar positions and the wider public interest. There does not appear to be any mischief involved and no ill consequences resulting from the extension being granted. Having considered your circumstances, the Commissioner will exercise the direction under subsection 104-190(2) of the ITAA 1997 to extend the replacement asset period to DD MM 20XX. This ruling has not considered your eligibility for the CGT small business concessions. You should ensure that you satisfy the relevant conditions to apply the concessions.