Private ruling: Capital gains tax small business rollover
Published: January 2013
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Will the Commissioner exercise his discretion under subsection 104-190(2) of the Income Tax Assessment Act 1997 (ITAA 1997) to extend the beginning of the replacement asset period to the date you acquired the property B? | A1: Yes | Q2: If so, will property B qualify as a replacement asset in relation to the small business rollover? | A2: Yes

Relevant facts and circumstances: You owned a property (property A) that was leased to an entity that is connected to you for the purposes of the capital gains tax (CGT) small business concessions. The connected entity operated a business and used property A in their business. During the 2010-11 income year you signed a contract to purchase a new property (property B). Property B did not meet the requirements of the connected entity for their business. You spent $X fitting out property B to enable it to be suitable for use in the connected entity's business. The fit out was completed and property B was ready and available for use by the connected entity in their business during the 2010-11 income year. The connected entity began to occupy property B as soon as it was available for use. Meanwhile, you engaged a real estate agent during the 2010-11 income year to lease or sell property A. Several negotiations for the sale of property A took place, however these negotiations were unsuccessful due to an agreement not being reached or the contract never becoming unconditional. Through frustration, you engaged a second agent during the 2011-12 income year to look after property A. A contract for the sale of property A was signed during the 2011-12 income year. You chose the small business rollover to defer the capital gain made on the sale of property A. The sale of property A occurred more than one year after the purchase of property B. The connected entity and their affiliates are a small business entity with an annual aggregated turnover of less than $2million in the year of the CGT event.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 104-190(2) | Income Tax Assessment Act 1997 Section 109-5

Reasons for decision: Summary: Where a taxpayer elects to take advantage of the small business rollover, there are rollover conditions that must be satisfied by the end of the replacement asset period. This period starts one year before and ends two years after the CGT event for which you choose the rollover to occur, or a longer period that the Commissioner allows. If the rollover conditions are not met within the replacement asset period the gain will become assessable. You satisfy the rollover conditions where you meet all the following conditions: · you acquire one or more CGT assets as replacement assets or make a capital improvement to one or more existing assets, or both, within the replacement asset period · the replacement asset, or the asset to which the capital improvement was made is an active asset at the end of the replacement asset period · if the replacement asset is a share in a company or an interest in a trust, at the end of the replacement asset period: · you, or an entity connected with you, are a CGT concession stakeholder in the company or trust, or · CGT concession stakeholders in the company or trust have a small business participation percentage in the interposed entity of at least 90% · the capital gain that is being rolled over is not 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 that asset, which can include giving property (that is, the second element of the cost base of the replacement asset), and · the amount expended on capital improvements to one or more assets that were acquired or already owned (that is, fourth element expenditure). | Detailed Reasoning - Extension to the asset replacement period: The general rules for the acquisition of CGT assets are contained in section 109-5 of the ITAA 1997. The table in subsection 109-5(2) of the ITAA 1997 specifically states that where an entity disposes of a CGT asset to you, you acquire it when the disposal contract is entered into or, if none, when the entity stops being the asset's owner. You are taken to have disposed of property A on the date of the contract of sale. Accordingly the replacement asset period is one year before, and two years after this date. You are taken to have acquired property B on the contract date. This acquisition occurred outside of the replacement asset period. However the Commissioner may extend the replacement asset period in certain circumstances (subsection 104-190(2) of the ITAA 1997). The relevant factors in determining whether to extend the replacement asset period are: · 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 · a consideration of the consequences. In your case you had listed property A for sale. You were unable to sell property A in time to ensure the purchase of property B would be within the asset replacement period due to a number of unsuccessful negotiations. In these circumstances, we consider that you have provided an acceptable explanation for the delay in disposing of property A. We do not consider that extending the asset replacement period by a period of less than two months would unsettle others or that any mischief is involved. Accordingly, the Commissioner will exercise his discretion to allow an extension to the beginning of the replacement asset period to the acquisition date of property B. Property B is therefore eligible to be a replacement asset for the small business rollover.

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