Private ruling: Extension of time to make a choice to access the retirement exemption
Date of advice: 26 June 2018
Published: September 2018
Ruling period: Year ending 2017 | Year ending 2018 | Year ending 2019
Date scheme commenced: 1 July 2016

Ruling: Q1: Will the Commissioner allow you further time as provided in paragraph 103-25(1)(b) of the ITAA 1997 for you to choose to apply the small business retirement exemption to the capital gain tax event that arose in the 2017 income year? | A1: Yes

Relevant facts and circumstances: You, being Company T (the company) owned a business (the business). U and V were equal shareholders in the company and operated the business for several years. A contract for the sale of the goodwill of the business was entered into and settlement of the sale of the business occurred in 20XX. U and V sold 100% of their shares in the company to the vendor. The sale of the shares generated a taxable gain to both of them after applying the 50% general discount and active asset reduction discount of 50%. The shares sold by U and V in the company are not the subject of this private ruling. The sale of the goodwill of the business generated a gross capital gain, which was discounted by 50% by applying the small active asset reduction. The company intended to defer the net capital gain arising from the sale of the goodwill of the business by acquiring a replacement asset or in the event of not being able to acquire a suitable business, access the small business retirement exemption. A short time after selling their shares, U and V commenced full time employment with an employer. U and V made an offer to buy another business, but discontinued with this purchase. After this time, U and V were unable to find any other suitable replacement asset. On the advice of their financial planner, U and V were informed that the company would need to make a contribution to their superannuation fund by the end of the financial year in order to access the small business retirement concession. The financial planner provided U and V with an emailed copy of the capital gain cap election form and instructions in how to fill out this form. This information was emailed to U. On the instruction of the financial planner, U as a director of the company deposited X separate cheques and the completed Capital Gains Tax Cap Election Forms with an intermediary on behalf of the superannuation fund. The amount of superannuation contributions deposited equalled the taxable capital gain which was payable by the company as a result of selling the business goodwill. Unfortunately, the CGT tax election forms were not received by the superannuation provider. U and V held discussion with intermediary and superannuation fund in relation to the missing CGT tax cap election forms and neither organisation were able to locate a copy of these forms. U and V’s financial planner had tried to access closed circuit television footage held by the intermediary and mailing details of all correspondence received and dispatched by the intermediary to prove that U had lodged the CGT cap election forms. Due to the time which had elapsed, the financial planner was unable to access any written records or CCTV footage. U and V’s separate contributions to their individual superannuation funds were treated as concessional contributions from the date of receipt and subject to 15% taxation. U and V’s accountant lodged a tax return on behalf of the company, showing a gross capital gain which was reduced by 50% after applying the small business active asset reduction. As the small business retirement exemption was not chosen at the time of lodging the company income tax return, the company is now seeking the commissioner’s discretion to extend the time to access the small business retirement exemption and to amend the company’s tax return. The accountant has advised that it was an oversight in not electing the retirement exemption at the time of submitting the company tax return. The accountant had knowledge that U and V both wanted to access the retirement exemption at the time of completing the company tax return and the superannuation contribution was incorrectly recorded as an expense in the tax return for the company. The superannuation provider have allowed U and V additional time to amend their superannuation contributions to include contributions to the CGT retirement cap and require consent from the ATO in the form of a private ruling for this to occur.

Relevant legislative provisions: Income Tax Assessment Act 1997 Part 3-1 | Income Tax Assessment Act 1997 Part 3-3

Reasons for decision: Summary: The Commissioner will grant an extension of time under paragraph 103-25(1)(b) of the ITAA 1997 to allow you to make the choice to apply the small business retirement exemption. | Detailed Reasoning - Detailed reasoning: You meet the conditions under subdivision 152-D of the ITAA 1997 and are therefore entitled to the small business retirement exemption. A choice to obtain the small business retirement exemption 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). Under subsection 103-25(2), the way you prepare your income tax return is sufficient evidence of the making of the choice. Paragraph 103-25(3)(b) however, contains an exception in relation to the small business retirement exemption, as subsections 152-315(4) and (5) require the choice for this exemption to be made in writing. The general rule is that a choice available under the capital gains tax (CGT) provisions, once made, cannot be changed. 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 return that has been lodged including a capital gain by error that did not represent the instructions of the taxpayer does not represent a valid choice. If the Commissioner allows further time, the taxpayer may later make a choice for a CGT concession and amend their return to reduce or disregard the capital gain. You have requested the Commissioner to allow further time for you to make the choice and apply the retirement exemption. In determining if the discretion to allow further time would be exercised, the Commissioner has considered the following factors: (a) evidence of an acceptable explanation for the period of extension requested (and whether it would be fair and equitable in the circumstances to provide such an extension) (b) prejudice to the Commissioner which may result from the additional time being allowed (but the mere absence of prejudice is not enough to justify the granting of an extension) (c) unsettling of people, other than the Commissioner, or of established practices; (d) fairness to people in like positions and the wider public interest (e) whether any mischief is involved; and (f) consequences of the decision. | Detailed Reasoning - Application to your circumstances: The company tax return did not reflect your choice to apply the small business retirement exemption to your taxable capital gain resulting from the sale of the business goodwill. U and V acted under a misapprehension of the time available to them to either obtain a replacement asset or contribute the equivalent of the taxable capital gain into their individual superannuation funds. By acting on these instructions, U and V personally deposited the funds, along with the CGT cap election forms with an intermediary acting on behalf of the superannuation provider. Subsequent to the superannuation contribution being made, the CGT cap election forms completed by U and V were misplaced and their contributions were treated as a concessional contribution. Effectively, U and V ruled out obtaining another replacement business when they discontinued purchasing another asset replacement and embarked on employment with another employer. While your instructions to choose the retirement concession was communicated to your accountant, the choice you made was not evident by the way you completed your company tax return. This choice did not reflect your intention to access the small business retirement exemption. After consideration of the above factors and your circumstances, the Commissioner has exercised his discretion and granted you an extension to make the choice to apply the small business retirement exemption.