Capital gains tax: Choice and the small business 50% reduction.

Does the inclusion of a capital gain in a taxpayer's income tax return without any consideration of the small business capital gains tax (CGT) concessions in Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997) constitute the making of a choice and therefore prevent the application of the small business 50% reduction in section 152-205 of the ITAA 1997?

No. The inclusion of a capital gain in a taxpayer's income tax return without any consideration of the small business CGT concessions in Division 152 of the ITAA 1997 does not constitute the making of a choice and therefore does not prevent the application of the small business 50% reduction in section 152-205 of the ITAA 1997.

The taxpayer made a capital gain after 21 September 1999 on the disposal of goodwill in the 1999-2000 income year.

Due to an oversight by the taxpayer's former tax agent, the small business CGT concessions in Division 152 of the ITAA 1997 were not considered and the whole of the capital gain was returned in the taxpayer's income tax return. The taxpayer's new tax agent detected this oversight and almost immediately notified the Commissioner. The taxpayer would now like to apply the small business 50% reduction to the capital gain (and choose the small business roll-over for the remaining gain). The taxpayer satisfies the basic conditions under Subdivision 152-A of the ITAA 1997.

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, the small business 50% reduction in section 152-205 of the ITAA 1997 applies automatically if the basic conditions in Subdivision 152-A of the ITAA 1997 are satisfied and a choice is not made otherwise. Section 152-220 of the ITAA 1997 allows a taxpayer to choose not to apply the small business 50% reduction.

Due to an oversight, the taxpayer did not consider the application of any of the small business CGT concessions and therefore did not make any choice under section 152-220 of the ITAA 1997 not to apply the small business 50% reduction. Accordingly, the taxpayer returned the whole of the capital gain.

As the small business 50% reduction applies automatically if the basic conditions are satisfied and a choice is not made otherwise, the fact that the taxpayer included the capital gain in their income tax return without any consideration of the small business CGT concessions does not prevent the application of the small business 50% reduction. The taxpayer is able to amend their return to give effect to its application and disregard 50% of the capital gain.