Capital gains tax: Making a choice and Small business roll-over

Does the application of the 50% goodwill exemption under former section 118-250 of the Income Tax Assessment Act 1997 (ITAA 1997) to a capital gain constitute the making of a choice and therefore prevent the taxpayer from later making a choice to have the small business roll-over apply under former section 123-10 of the ITAA 1997?

No. The application of the 50% goodwill exemption under former section 118-250 of the ITAA 1997 does not constitute the making of a choice for the purposes the CGT provisions of the ITAA 1997.

The taxpayer made a capital gain on the disposal of goodwill in late August 1999.

The tax agent included half the capital gain (after half was disregarded under the former 50 per cent goodwill exemption) in the taxpayer's tax return for the income year ended 30 June 2000. The tax agent lodged the tax return for the income year ended 30 June 2000 in June 2001. However the tax agent overlooked the fact that the taxpayer was to acquire a replacement asset.

The taxpayer struck a header agreement for the purchase of a replacement asset in April 2001. A contract to purchase the replacement asset was signed in early August 2001, less than two years after the disposal of the goodwill.

The taxpayer would satisfy the requirements set out in section 123-10 of the ITAA 1997.

The general rule is that a choice available under the capital gains tax (CGT) provisions once made can not be changed. Generally, such a choice 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) of the ITAA 1997).

The 50 per cent goodwill exemption under former section 118-250 of the ITAA 1997 did not require a choice to be made for its application. Rather, the concession applied automatically if its conditions were satisfied and no choice was made otherwise. Accordingly the application of the goodwill exemption does not mean that a choice has been made. The taxpayer may later choose to apply the small business roll-over in former Division 123 of the ITAA 1997 if the Commissioner allows further time to make a choice under paragraph 103-25(1)(b) of the ITAA 1997.

Former section 118-255 of the ITAA 1997 states that former section 118-250 of the ITAA 1997 does not apply, and is taken never to have applied, if the entity makes a choice to obtain a roll-over on the goodwill under former Division 123 of the ITAA 1997. As a result, rather than half of the capital gain being disregarded, the full amount of the capital gain will be rolled-over (deferred) if the small business roll-over is chosen. Note Section 104-10 of the ITAA 1997 states that CGT event A1 happens if you dispose of a CGT asset and the time of the event is when you enter into the contract for the disposal or when the change of ownership occurs if there is no contract. In the taxpayer's situation, because the contract of sale of the original asset was entered into in August 1999, former Subdivision 118-C of the ITAA 1997 and former Division 123 of the ITAA 1997 are the relevant provisions.