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Can a taxpayer, who chose the small business roll-over in former Division 123 of the Income Tax Assessment Act 1997 (ITAA 1997) for a capital gain made before 21 September 1999, later change their choice and apply the 50% goodwill exemption in former section 118-250 of the ITAA 1997 if a replacement asset is not acquired within the required time?

No. A choice made for the small business roll-over in former Division 123 of the ITAA 1997 to apply cannot later be changed.

The taxpayer sold their business in February 1999 and a capital gain arose on the disposal of goodwill.

The taxpayer chose the small business roll-over in former Division 123 of the ITAA 1997 to disregard the capital gain as indicated in their income tax return lodged for the year ended 30 June 1999. No other CGT events happened in that year for which the roll-over was chosen.

The taxpayer signed a contract to purchase a new business before 30 June 2001 but after February 2001. A replacement asset was therefore not acquired within the period ending 2 years after the CGT event. The Commissioner does not have any discretion under the former Division 123 of the ITAA 1997 to extend the period in which a replacement asset must be acquired.

The taxpayer sought to amend the assessment for the year ended 30 June 1999 to firstly include the capital gain and then apply the 50% goodwill exemption in former section 118-250 of the ITAA 1997, thus including half the capital gain in their assessable income.

A choice between inconsistent courses of action, once made, is binding and cannot be withdrawn or recanted - unless this is specifically provided for. ( Scarf v. Jardine (1882) 7 AppCas 345; Motor Oil Hellas (Corinth) Refineries SA v. Shipping corporation of India (The "Kanchenjunga") [1990] 1 Lloyd's Rep. 391 The Commonwealth v. Verwayen 64 ALJR 540).

A choice is made for the small business roll-over at the time a decision is taken to disregard the capital gain. On the basis of having made a choice for the roll-over, a taxpayer is not required to include the capital gain in their income tax return notwithstanding a replacement asset has not yet been acquired.

However, if a replacement asset is not acquired within the relevant time, the taxpayer must amend their income tax return for the year in which the capital gain was made to include the capital gain.

Accordingly, a choice made for the small business roll-over in former Division 123 of the ITAA 1997 is irrevocable and can not later be changed. That is, the taxpayer is not able to later apply the 50% goodwill exemption in former section 118-250 of the ITAA 1997 if a replacement asset has not been acquired. This reflects the general rule that applies to the making of choices throughout the Income Tax Assessment Act 1936 and the ITAA 1997.