Private ruling: CGT - replacement asset - extension of time
Date of advice: 5 June 2018
Published: August 2018
Ruling period: Year ending 30 June 201x
Date scheme commenced: 1 July 201x

Ruling: Q1: Will the Commissioner exercise the discretion in subsection 104-190(2) of the Income Tax Assessment Act 1997 (ITAA 1997), to extend the two year time limit under section 104-197(1) to acquire a replacement asset? | A1: Yes

Relevant facts and circumstances: You owned and operated a business for a number of years. You entered into a contract to sell the business. The sale of the business resulted in a net capital gain which was calculated after applying total prior and current year losses, then applying the small business active asset reduction and small business retirement exemption. You elected to apply the small business rollover to defer your capital gain. The replacement asset period ended 12 months later. You had not obtained a replacement asset by this time and CGT event J5 occurred. As part of the sale of your business, you entered into a restraint of trade agreement with the new owner that meant that you could not operate another business within a specific area for a number of years. For the eight months following the sale of your business you investigated purchasing other businesses. You made offers in relation to these businesses, however your offers were not accepted. You also made an offer to the owner who had purchased your business to buy back the business, however the owner rejected this offer. During that period you also investigated purchasing another business, but discontinued the purchase after failing to negotiate the rental terms with the landlord. No other businesses were offered for sale within a location in proximity to your home since you sold your business. Around this time, you became a carer for a family member who was seriously ill and who later passed away during that year. You have now entered into a contract to purchase a replacement asset. Settlement of the purchase of the business occurred shortly after.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-190 | Income Tax Assessment Act 1997 Subsection 104-197(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. 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 your circumstances, you currently do not satisfy subsection 104-197(2) of the ITAA 1997 as you have not acquired an active asset by the end of the replacement period. 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(2) 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. | Detailed Reasoning - Application to your circumstances: We consider that the delay in acquiring a replacement asset was attributed to the shortage of suitable businesses available for purchase in your preferred area during the eight month period following the sale of your last business. During most of the following year you were caring for your family member who had a serious illness and passed away in during that year. The Commissioner considers that it is fair and equitable in these circumstances to provide an extension. Having considered the relevant factors, the Commissioner is able to apply his discretion under subsection 104-190(2) of the ITAA 1997 to extend the time period for you to acquire a replacement asset.