Capital Gains Tax: Extension of time to choose small business retirement exemption

Will the Commissioner allow further time under paragraph 103-25(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) for a taxpayer to make a choice for the retirement exemption to apply to that half of a capital gain to which the 50% active asset reduction previously applied.

Yes, the Commissioner will allow further time under paragraph 103-25(1)(b) of the ITAA 1997 for the taxpayer to make the choice to apply the small business retirement exemption to that half of a capital gain to which the 50% active asset reduction previously applied.

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. Such a choice must usually 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 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.

In determining if the discretion to allow further time 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 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; and • a consideration of the consequences.

The disposal that gave rise to the capital gain took place before section 152-220 of the ITAA 1997 was enacted and the 50% active asset reduction automatically applied to the capital gain. This disadvantaged the taxpayer as only one-half of the capital gain could be treated as a CGT exempt amount when rolled over into a CGT concession stakeholder's superannuation fund. The remaining gain, when paid into a CGT concession stakeholder's superannuation fund would be treated as an employer superannuation contribution and taxed at 15 percent. If section 152-220 of the ITAA 1997 was in effect at the time the taxpayer made the gain, the taxpayer could have chosen the retirement exemption for the entire capital gain, thus treating the entire capital gain as a CGT exempt amount, resulting in no tax being payable when paid into the CGT concession stakeholder's superannuation fund.

Having considered the relevant factors, the Commissioner will exercise the discretion under paragraph 103-25(1)(b) of the ITAA 1997 to allow an extension of time for the taxpayer to choose the retirement exemption for that half of the capital gain to which the 50% active asset reduction previously applied.