Issue
Will the Commissioner allow further time under subsection 160ZZO(3) of the Income Tax Assessment Act 1936 (ITAA 1936) for a taxpayer to make an election for capital gains tax (CGT) roll-over under section 160ZZO, where the original election notice was invalid?
Decision
Yes. In the particular circumstances described, the Commissioner will allow further time under subsection 160ZZO(3) of the ITAA 1936 for the taxpayer to make an election for CGT roll-over under section 160ZZO.
Facts
The taxpayer transferred all of the shares that it owned in two wholly-owned companies to another company (the transferee) in the same corporate group, in July 1997.
The taxpayer wanted to apply the capital gains tax roll-over provisions to the above transfers of shares. The taxpayer signed an election notice (the original notice) prior to the lodgement of the income tax return for the year. However the original notice incorrectly referred to section 160ZZPC of the ITAA 1936, when it should have referred to section 160ZZO of the ITAA 1936.
The taxpayer could not fulfil all of the requirements of section 160ZZPC of the ITAA 1936. Except for a valid election notice, the transaction met all of the other requirements of section 160ZZO of the ITAA 1936 at the time the transaction occurred.
The taxpayer and the transferee executed an election notice in the form required by section 160ZZO of the ITAA 1936 (new election notice) in November 2002.
Reasons for Decision
The general rule is that a choice between inconsistent courses of action, once made, is binding and cannot be withdrawn or recanted-unless this is specifically provided for in the legislation (Scarf v. Jardine (1882) 7 App. Cas. 345, Motor Oil Hellas (Corinth) Refineries SA v. Shipping Corporation of India (The "Kanchenjunga") [1990] 1 Lloyd's Rep. 391, The Commonwealth v. Verwayen (1990) 170 CLR 394).
However, where a taxpayer has made a mistake in preparing an election notice by referring to the wrong provision, and could not, in any case, have qualified under the provision they mistakenly referred to, it is appropriate to disregard the original election notice, on the basis that it was ineffective.
One of the requirements of section 160ZZO of the ITAA 1936 is that the taxpayer must make a written election on or before the date of lodgement of the taxpayer's income tax return for the year in which the disposal took place. The Commissioner may allow the election to be made at a later time.
In determining if the discretion to allow further time should be exercised, the Commissioner considers the following factors: (1) 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 (2) 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 (3) unsettling of people, other than the Commissioner, or of established practices (4) fairness to people in like positions and the wider public interest; and (5) the consequences to the taxpayer in granting an extension.
The new election was not made within the required time because of the error in the original election notice. The taxpayer's new tax agent detected the error, and promptly notified the Commissioner.
In addition, the law regarding these types of roll-overs has since changed and it is no longer a requirement to make a written election. Indeed, the transferor's other actions would have been sufficient evidence of making a valid election if the transfers had occurred a year later, in the 1998-99 income year.
A decision to allow further time to make the election would not prejudice the Commissioner, the general public or disrupt established practices. The mistake in the election notice was due to a lack of attention to detail. The consequence of a decision to allow the extra time is that the transferor would obtain CGT roll-over, which would defer the taxing of any capital gain that arose from the transfer.
Taking all these factors into account, it is appropriate to exercise the Commissioner's discretion and allow the extension of time to November 2002 to make the election under section 160ZZO of the ITAA 1936.