Private ruling: Small business concessions
Date of advice: 11 August 2017
Published: November 2017
Ruling period: The year ended 30 June 2017. | The year ending 30 June 2018.
Date scheme commenced: DDMMYY

Ruling: Q1: Will the Commissioner allow further time under paragraph 103-25(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) for you to make to choose to apply the small business rollover to the capital gain that arose? | A1: Yes.

Relevant facts and circumstances: You were an initial shareholder, with another individual in a private company (the Company). The Company carries on a business, with you and the other individual as principals. You held one ordinary share, which was equal to 50% of the issued shares. You were a CGT Concession Stakeholder. You anticipated that you would become a resident of another country for tax purposes. You sought advice from an accountant of that country who suggested that holding shares in a private company may be treated harshly by their tax authorities. Following this advice, your Australian accountant (at the time) recommended that you transfer your shares in the Company into a trust. You then transferred your share to a discretionary trust. You are also a resident of Australia for tax purposes. Following the advice of your accountant, who considered the market value of the shares was negligible, the relevant tax return was lodged without any acknowledgement of the capital gain arising from the transfer of the shares, and in turn, no consideration of the small business concessions. In later years, you sought professional advice from another firm, in relation to the advice provided by your previous accountant after some doubts about the correctness of the earlier advice. Following this professional advice, you formed the view that the share transfer was a capital gains tax (CGT) event. As the market value rule applied, and the market value of the shares at the time was a specified amount; you made a capital gain of approximately that amount. At the time of lodging the relevant tax return you were unaware of the CGT implications of the share transfer and in turn, any small business concessions that may have applied. Following the share transfer until now, you have been actively searching for businesses that you could run in conjunction with your siblings, or may purchase a further interest in the Company. While you have recently explored acquiring a replacement asset, you are aware that the relevant replacement period has ended. You are aware that if you acquire a replacement asset now, you will need to seek the Commissioner’s discretion to extend the 'replacement asset period’, however, prior to pursuing this course of action, you wish to first confirm whether the Commissioner will apply his discretion to allow you to make a choice to apply the replacement asset rollover. At the time of the share transfer, you met the $6,000,000 maximum net asset value test.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 152. | Income Tax Assessment Act 1997 Subsection 103-25(1).

Reasons for decision: Summary: The Commissioner will allow an extension of time for you to make the choice to apply the small business rollover. | Detailed Reasoning - Detailed reasoning: The general rule is that a choice available under the capital gains tax (CGT) provisions once made cannot be changed. Generally, such a choice must be made by the time the income tax return is lodged but may be made within such further time as the Commissioner allows under subsection 103-25(1). A taxpayer who has considered the application of the CGT concessions and chosen a particular concession has made a choice which cannot later be changed. However, a taxpayer who did not consider the CGT concessions has not made a choice and can, if the Commissioner allows further time under subsection 103-25(1), later make a choice to apply a CGT concession and amend their return to reduce or disregard the relevant capital gain. You were unaware that a CGT event had occurred and were unaware of the choices available to you under the small business concessions, in particular under subdivision 152-E of the ITAA 1997. At the time of preparing the relevant income tax return, your accountant did not inform you of the choices available to you and you had no consideration of the CGT event. Due to the advice of your previous accountant, you had no consideration of the relevant CGT concessions and effectively have not made a choice. Therefore, it is considered reasonable for the Commissioner to grant an extension of time to make a choice in relation to the capital gain made on the transfer of your shares. | Detailed Reasoning - Further issues for you to consider: Eligibility for the small business concessions In your request you have indicated that you qualify for the relevant small business CGT concessions. The Commissioner has not considered your eligibility for the small business CGT concessions in this ruling. You should ensure that you satisfy the basic conditions and any other relevant conditions. More information is available in the publication Capital gains tax concessions for small business , which is available on our website www.ato.gov.au . Small business asset rollover Section 104-197 of the ITAA 1997 provides that CGT event J5 happens if you choose to obtain a rollover, and by the end of the replacement asset period: ● you have not acquired a replacement asset, and have not made a capital improvement to an existing asset ● the replacement or capital improved asset is not your active asset (for example you have sold it, it has become your trading stock or it is no longer used in the business), or ● where the replacement asset is a share in a company or an interest in a trust ● the share or trust interest fails the 80% test (unless the failure is only of a temporary nature) ● 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 the interposed entity of at least 90%. When CGT event J5 happens, you make a capital gain equal to the amount of the capital gain previously disregarded under the small business rollover. The time of the event is at the end of the replacement asset period. A capital gain from CGT event J5 may be eligible for the retirement exemption if you meet the relevant conditions. You don't need to meet the basic conditions again but you must meet the retirement exemption conditions. However you cannot apply the 50% discount, small business 50% active asset reduction or the 15 year exemption to reduce this gain.