Capital gains tax: Choice for small business retirement exemption

Does the automatic application of the active asset reduction under section 152-205 of the Income Tax Assessment Act 1997 (ITAA 1997) to a capital gain constitute the making of a choice for the purpose of the small business concessions in Division 152 of the ITAA 1997 and therefore prevent the taxpayer from later choosing the retirement exemption?

No. The automatic application of the active asset reduction under section 152-205 of the ITAA 1997 does not constitute the making of a choice for the purposes of the small business concessions in Division 152 of the ITAA 1997.

The taxpayer made a capital gain on the sale of goodwill in the income year ending 30 June 2000 (but after 21 September 1999). The basic conditions for the 50% active asset reduction were satisfied and section 152-205 of the ITAA 1997 automatically applied to reduce the capital gain by 50%. The taxpayer chose to apply the retirement exemption to the remaining capital gain resulting in the entire capital gain being disregarded.

The taxpayer rolled over that part of the capital gain to which the retirement exemption applied into a CGT concession stakeholder's superannuation fund prior to lodging a 1999-2000 tax return. Later, the taxpayer paid the balance of the capital gain (that is the amount that was subject to the active asset reduction) into the CGT concession stakeholder's superannuation fund.

Subsequently, section 152-220 of the ITAA 1997 was enacted (with retrospective effect) to allow a taxpayer to choose not to apply the 50% active asset reduction.

Subdivision 152-C of the ITAA 1997 sets out the order in which the CGT small business concessions are to be applied to a capital gain, if the basic conditions for relief outlined in Subdivision 152-A of the ITAA 1997 are satisfied.

The 50% active asset reduction in section 152-205 of the ITAA 1997 applies automatically if the basic conditions are satisfied and a choice is not made otherwise. With the enactment of section 152-220 of the ITAA 1997 a taxpayer can now choose not to apply the 50% active asset reduction. (Section 152-220 of the ITAA 1997 was enacted on 21 December 2000 but applies retrospectively to CGT events happening after 11.45 am, by legal time in the Australian Capital Territory, on 21 September 1999.)

The general rule is that a choice available under the 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 (see subsection 103-25(1) of the ITAA 1997).

However, as section 152-205 of the ITAA 1997 had automatic application it is considered that no choice was made in relation to that part of the capital gain to which the 50% active asset reduction applied. Accordingly, in view of the later enactment of section 152-220 of the ITAA 1997, a choice may now be made to apply the retirement exemption to the whole of the gain if the Commissioner grants further time in which to make that choice.