CGT small business concessions: replacement asset not acquired - remission of penalty tax

Will the penalty tax imposed under section 226G of the Income Tax Assessment Act 1936 (ITAA 1936) be remitted under subsection 227(3) of the ITAA 1936 where a replacement asset is not acquired by a taxpayer who has chosen a small business roll-over?

Yes. The penalty tax imposed will be remitted in full under subsection 227(3) of the ITAA 1936.

The taxpayer sold a business in the year ended 30 June 1999 and made a capital gain in respect of goodwill.

The taxpayer chose the small business roll-over in former Division 123 of the Income Tax Assessment Act 1997 (ITAA 1997) to disregard the capital gain for the year ended 30 June 1999.

However, due to poor health, the taxpayer did not buy a replacement asset.

The Commissioner has a discretion to remit penalty in part or in full under subsection 227(3) of the ITAA 1936. Taxation Ruling TR 94/7 provides guidelines as to the manner in which the discretion in subsection 227(3) of the ITAA 1936 may be exercised to remit penalty otherwise payable under sections 226G, 226H, 226J, 226K, 226L and 226M of the ITAA 1936.

The discretion to remit penalty otherwise attracted under a shortfall section will be exercised in exceptional cases where, having regard to all of the circumstances, the application of a particular shortfall section and/or the rate of penalty prescribed under that section would provide a clearly unreasonable or unjust result. However, the guidelines provided by Taxation Ruling TR 94/7 do not fetter authorised officers when exercising the discretion to remit. Each case should be decided on the basis of its own facts and circumstances.

The taxpayer did not have an assessable capital gain until the expiration of the two year period after the CGT event happened, and it was the non-acquisition of a replacement asset by the taxpayer due to ill health that resulted in the taxpayer requesting an amendment to include the disregarded capital gain from the small business roll-over claimed under Division 123 of the ITAA 1936.

Having regard to all the circumstances, the Commissioner's discretion is exercised and the tax shortfall penalty is remitted in full under subsection 227(3) of the ITAA 1936.