Date of advice: 30 April 2020
Published: June 2020
Ruling period: 1 July 2018 to 1 July 2021

Ruling: Q1: Will the Commissioner exercise 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 replacement asset roll-over relief? | A1: Yes

Relevant facts and circumstances: The entity operates farming activities. The farming operation sold farm land with the CGT event occurring. The land was an active asset. The farming operation is applying the small business CGT concessions to the sale of the land, and utilising the rollover relief. The entity's intention is to purchase new farm land in another location as the replacement asset. The entity entered into a contract to purchase a large amount of land for an amount less than the capital gain amount. This new land is an active asset. However, the applicants were unable to secure a second parcel of land. The applicants have been regularly attending the auctions for land in the area, actively seeking a second lot of farm land in order to operate their business however, due to the asking prices they have been unable to secure a suitable property. Recently the entity has entered into negotiations to purchase land which will take some time to finalise, hence the request for an extension of time. This land, once acquired, will be an active asset.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 104-190(1) | Income Tax Assessment Act 1997 subsection 104-190(2) | Income Tax Assessment Act 1997 section 152-10

Reasons for decision: Summary: The Commissioner will exercise 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 replacement asset roll-over relief. | Detailed Reasoning - Detailed Reasoning: The small business asset rollover relief allows an eligible taxpayer to choose to defer the making of a capital gain from a CGT event happening in relation to one or more small business assets. To be eligible, the taxpayer needs to satisfy the basic "access" conditions discussed below. The capital gain is deferred on an automatic basis for two years. The deferred capital gain will be reinstated in specific circumstances, such as where a replacement asset is not acquired within a specified period of time or a replacement asset loses its active asset status. | Detailed Reasoning - Access Conditions: In order for the rollover relief to be available, a taxpayer must satisfy the basic "access" conditions in section 152-10 as follows: 152-10(1) A capital gain you make may be reduced or disregarded under this Division if the following basic conditions are satisfied for the gain: a) a CGT event happens in relation to a CGT asset of yours in an income year; b) the event would (apart from this Division) have resulted in the gain; c) at least one of the following applies: i) you are a CGT small business entity for the income year; ii) you satisfy the maximum net asset value test; iii) you are a partner in a partnership that is a CGT small business entity for the income year and the CGT asset is an interest in an asset of the partnership; iv) the conditions mentioned in subsection (1A) or (1B) are satisfied in relation to the CGT asset in the income year; d) the CGT asset satisfies the active asset test. Provided that all of these basic conditions are satisfied where relevant, then potentially the rollover relief will be available. However certain further conditions contained within Subdivision 152-E will need to be satisfied (discussed below). | Detailed Reasoning - Application of the "access" conditions to your circumstances: Your entity carries on a business. You sold your farm land with a CGT event occurring. The CGT event resulted in a capital gain. The farming land is an active asset. | Detailed Reasoning - Further Conditions: In order to access the rollover relief, in addition to satisfying the relevant basic conditions (discussed above): · the taxpayer must make a choice to access the rollover relief; · the taxpayer must acquire one or more CGT assets as replacement assets or make capital improvement to one or more existing CGT assets; · the replacement asset must be an active asset when acquired or by the end of two years after the rollover is chosen; · the taxpayer must acquire the replacement asset(s), or incur the capital improvement expenditure, within the "replacement asset period", that is, the period commencing one year before and ending two years after the last CGT event in the income year for which the rollover is chosen; · the capital gain that is being rolled over must not be 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 the replacement asset. That is, the second element of the cost base of the replacement asset; and - the amount expended on capital improvements to one or more CGT assets that were acquired or already owned. That is, the fourth element expenditure. If the taxpayer fails to satisfy these conditions then the rolled over capital gain will be reinstated. For example, if the taxpayer fails to acquire a replacement asset(s) or incur relevant capital improvement expenditure within the "replacement asset period", CGT event J5 or J6 will apply respectively to reinstate the capital gain. Application to your circumstances You have made your choice to access the rollover relief. You purchased land for an amount less than your capital gain. You were unable to acquire further parcels of land in order to exhaust the balance of your capital gain. You have now entered into negotiations to purchase additional land in which you expect will take some time to finalise. You have failed to satisfy the further conditions for the rollover relief. However, you are applying to the Commissioner for a general discretion to extend the time limits in which replacement assets must be acquired. | Detailed Reasoning - Replacement Asset Period: A replacement asset must be acquired, or capital improvement expenditure must be incurred, in the period commencing one year before and ending two years after the last disposal in a year of a CGT asset for which rollover relief is claimed. Note, the definition of "replacement asset period" is contained in CGT event J2 in section 104-185(1)(a), The replacement asset period can be extended in circumstances where capital proceeds from a CGT event are not received immediately (section 104-190(1)), or at the discretion of the Tax Office (section 104-190(2)). | Detailed Reasoning - Commissioner's Discretion: Section 104-190(2) gives the Commissioner a general discretion to extend time limits in which replacement assets must be acquired. Such discretion may be exercised with respect to the two year time limit where the acquisition of a replacement asset falls through and there is insufficient of the two year period left to find an alternative replacement asset. The factors the Commissioner typically considers when exercising the discretion are as follows: · There should be evidence of an acceptable explanation in the circumstances to provide such an extension and that it would be fair and equitable in the circumstances to provide such an extension. · Account must be had to any prejudice to the Commissioner which may result from the additional time being allowed, however the mere absence of prejudice is not enough to justify the granting of an extension. · Account must be had of any unsettling of people, other than the Commissioner, or of established practices. · There must be a consideration of fairness to people in like positions and the wider public interest. · Whether there is any mischief involved. · A consideration of the consequences. | Detailed Reasoning - Conclusion: You were unable to acquire a suitable property however you have entered into negotiations to purchase land which you expect to take time to finalise. The Commissioner will exercise his general discretion under section 104-190(2) to extend the "replacement asset period" time limit by 12 months.