Private ruling: CGT –small business concessions –Commissioner’s discretion –replacement asset
Date of advice: 8 August 2017
Published: November 2017
Ruling period: Income year ending 30 June 2011 | Income year ending 30 June 2012 | Income year ending 30 June 2013 | Income year ending 30 June 2014 | Income year ending 30 June 2015 | Income year ending 30 June 2016
Date scheme commenced: DDMMYY

Ruling: Q1: Will the Commissioner exercise his discretion under subsection 104-190(2) of the ITAA 1997 and allow you to choose as a replacement asset, an asset acquired more than 12 months prior to the disposal of the asset being replaced? | A1: Yes.

Relevant facts and circumstances: Person A and Person B are qualified medical professionals who started practising after 20 September 1985 in leased premises, with limited facilities. Person A and Person B operate as business partners (you) under a trust (the Trust). The trustee of is a company (the Company) and Person A and Person B are both directors and equal shareholders in the Company. Person A and Person B wanted to acquire larger commercial premises to operate their practice and entered into a contract to purchase a property (the Property) a number of years after they had commenced practising in the same area as their original practice. The Property was purchase in Person A and Person B’s individual names as tenants in common. The Property offered Person A and Person B the opportunity to operate a larger practice. Person A and Person B commenced operating their practice from the Property after it was purchased. Within a number of years after Person A and Person B had commenced their practice at the Property, water ingress from the floors in the rear section of the unit after periods of rain began to occur. A building inspection report had been obtained which identified the problems and the cause of the water penetration. In the following year, legal representatives engaged by Person A and Person B sent a letter to the Management of the building (the Management) in which the Property is located in relation to the ongoing water issues. Urgent action was requested to provide an effective drainage system to the area and to install an effective waterproof membrane. A copy of the building inspection report was supplied with the letter. Despite continued correspondence between the managing agents and Person A and Person B’s legal representatives the response to remedy the issue was slow with nothing being done to remedy the issue. After a number of months Person A and Person B’s legal representatives sent a letter to the Management in which it was confirmed that appropriate evidence had been obtained to suggest that the water penetration problems to the Property was a building problem which fell under the responsibilities of the Management. During the following years the water issue had not arisen as the area in which the Property is located had endured drought conditions. However, the area experienced severe storm weather and flooding and after several days of continuous heavy rain and flash flooding, water penetration issues were experienced with heavy flooding occurring in the Property, with water deluge entering through the back wall and gushing out through the gaps in the vinyl flooring and skirting. As a result, the practice fit-out suffered major damage including damage to the walls, floors, furniture and other fixtures. Person A and Person B were only able to continue working at the Property for a short period after the flash flooding had occurred due to the flooring peeling away from the concrete and the interior wall linings deteriorating with moisture damage which affected the timber finishes. After a few months the walls began showing evidence of mould, which kept returning despite being constantly scrubbed clean. A building report was obtained and was sent to the Management in which it was stated that it had been determined that there had been a defect at the time of construction and that there had been no provisions for the collection of water from the adjoining property, or any form of adequate waterproof membranes at the rear wall. This had resulted in water ponding against the wall and entering into the walls either through absorption or through cracks in the brickwork. After a number of months Person A and Person B entered into a contract to purchase a new property (the new premises) to operate their practice. They moved into the new premises a number of months later and have continued to operate their practice at the new premises until the present time. A number of months after Person A and Person B had moved into the new premises, a report had been obtained in which it was expressed that the water penetration to the Property was adversely affecting the habitability of the Property, the water penetration was from the property at the rear of the Property through the external wall due to omitted waterproofing and flashing in the external wall. A number of years later, Person A and Person B were granted access for the remedial work to be undertaken on the Property. However, it was not until the annual general meeting of the building Management a number of months that the final go ahead was given for the rectification works to commence. In the following month a contract for the works was signed and the remedial works commenced in a number of months later and were completed around a month after they had commenced. A number of months later the internal fit-out of the Property was demolished and removed with the final warranty on the repairs being received a number of months after the fit-out demolition occurred. The premises remained vacant during the period that the remedial work was being undertaken. Person A and Person B continued to make monthly repayments on their commercial mortgage during that period. Following the receipt of the final warranty, the Property was put on the market and a number of months later a contract for the sale of the Property was entered into, with settlement occurring a number of months later. The net value of the assets of you, your affiliates and connected entities was less than $X million at the time the Property was sold. The combined aggregated turnover of your practice was less than $X million. You would like to apply subdivision 152-E of the ITAA 1997 to the capital gain. However, you have acquired the replacement asset more than 12 months prior to the CGT event. You would like to request that the Commissioner extend the time limit to acquire the replacement asset to earlier than 12 months prior to the CGT event.

Relevant legislative provisions: Income Tax assessment Act 1997 Section 104-185 | Income Tax assessment Act 1997 Section 104-190 | Income Tax assessment Act 1997 Subdivision 152-E

Reasons for decision: Summary: The small business rollover allows you to defer the capital gain made from a Capital Gains Tax (CGT) event if you acquire one or more replacement assets and satisfy certain conditions. The conditions which must be met to obtain relief are set out in Subdivision 152-A of the ITAA 1997. For you to obtain a rollover, subsection 104-185(1) of the ITAA 1997 requires you to acquire a replacement asset within a period starting one year before, and ending two years after the date of disposal of the original asset. Subsection 104-190(2) of the ITAA 1997 states that the Commissioner may exercise his discretion to extend those time limits. In this case, the contract for the sale of the Property was entered into in mid-late 20XX. The date the time limit period commenced for the acquisition of a replacement asset starting one year before the date the Property was sold was mid-late 20XX. In determining if the discretion would be exercised the Commissioner has considered the following factors: ● there should be evidence of an acceptable explanation for the period of extension requested 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; and ● a consideration of the consequences. We have made the following observations when making our decision on whether the time limit in relation to the purchase of the replacement asset will be extended to commence at a date earlier than one year prior to the sale of the Property: ● water damage in the Property occurred and in 200X a building inspection of the Property was undertaken in relation to the water damage; ● due to the dry weather, no further water issues were experienced until 20XX when the Property was flooded after heavy rains; ● from 201X, and for the following two years, there were many starts and stops to the remedial work, with things that had been agreed on being overturned or rescinded. The process involved numerous consultations with various building industry experts, builders, plumbers, solicitors and numerous communications between the parties involved, including the strata management and members of the Owners Committee: ● there were conflicts with the Owners Corporation and an additional issue with the owner of an adjoining property, the rear property, who was initially unwilling to grant right of entry to the building from their side of the boundary line: ● the premises had remained vacant during the period that the remedial work was being undertaken because it could not be rented or leased due to the water damage and ongoing water penetration issue. Person A and Person B continued making monthly repayments on their commercial mortgage during that period; the water penetration to the Property was adversely affecting the habitability of the Property and as a result they had entered into a contract in mid-late 20XX to purchase the new premises so that they could operate their practice: ● a contract for the works was signed in late 20XX, with the remedial works commencing in early 20XX, and being completed in early-mid 20XX; and ● the final warranty on the repairs was received in mid 20XX and the Property was put on the market with a contract of sale being entered into in mid-late 20XX. After reviewing the facts of your situation, the Commissioner is able to apply his discretion under subsection 104-190(2) of the ITAA 1997 and allow a reasonable extension to the time limit. In view of this, the time limit that would require the replacement asset to be purchased no sooner than mid-late 20XX will be extended to commence from late 20XX in accordance with your request.