Private ruling: Income Tax - Capital Gains Tax - Replacement Asset - Extension of Time
Date of advice: 30 August 2016
Published: October 2016
Ruling period: Year ending 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Will the Commissioner pursuant to subsection 104-190(2) of the Income Tax Assessment Act 1997 (ITAA 1997), extend the two year time limit under section 104-185(1) for the trust to acquire a replacement asset? | A1: Yes.

Relevant facts and circumstances: You disposed of your shareholding in an active asset which resulted in a capital gain in an income year. After applying the relevant capital gains tax discounts you elected to roll over the remaining capital gain as per section 152-415 of the ITAA 1997. The replacement asset period will end in the relevant income year. During this period you have been examining and researching for a suitable business to purchase. You advised that you have found it difficult to find a replacement asset with potential. You have inspected a business previously but after careful evaluation of the business you decided it was not commercially viable. You have found another business and are currently in negotiations to purchase this business. You expect to sign a contract in the next few weeks; however settlement will not occur until late until outside of the two year time limit. You have applied to extend the time limit.

Relevant legislative provisions: Income Tax Assessment Act 1997 Paragraph 104-10(3)(a) | Income Tax Assessment Act 1997 Subsection 104-185(1) | Income Tax Assessment Act 1997 Subsection 104-197(2) | Income Tax Assessment Act 1997 Section 104-190 | Income Tax Assessment Act 1997 Subsection 109-5(2) | Income Tax Assessment Act 1997 Subdivision 152-A | Income Tax Assessment Act 1997 Subdivision 152-E

Reasons for decision: Summary: The small business roll-over 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 roll-over, 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 the 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 circumstances where you have entered into a contract for the disposal of the asset, paragraph 104-10(3)(a) of the ITAA 1997 states that the time of the event is when you enter into the contract. CGT event J5 occurs when you choose a small business roll-over under subdivision 152-E of the ITAA 1997 for a CGT event that happens in relation to a CGT asset in an income year and, by the end of the replacement period: a) You have not acquired a replacement asset, and have not incurred forth element expenditure in relation to a CGT asset; or b) The replacement asset does not satisfy the conditions set out in subsection (2). Subsection 104-197(2) of the ITAA 1997 outlines that the replacement asset must be an active asset by the end of the replacement period. An asset will qualify to be an active asset if you own the asset and it is used, or held, ready for use, in the course of carrying on a business by you, your affiliate or another entity that is connected with you. In the present case, the settlement and use of a replacement is likely to occur outside the two year limit. Where that is the case, it is necessary for the Commissioner to exercise his discretion in your favour if the replacement asset is to be allowed under subsection 104-185(1) of the ITAA 1997. 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 of 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. Application to your circumstances Having considered the relevant facts, the Commissioner is able to apply his discretion under subsection 104-190(2) and allow a reasonable extension to the time limit. You have attempted to purchase a replacement asset within the two year time period however due to an extended settlement period the asset will not be considered an active asset until outside of the two year time limit. Allowing an extension is not prejudicial to the Commissioner in this case nor is it unfair to other people in similar positions; it would be unlikely in this situation that the Commissioner would grant a further extension.