1 Will the Commissioner exercise discretion under paragraph 103-25(1)(b) Income Tax Assessment Act 1997 (ITAA 1997) to allow an extension of time until DD MM 20XX to make a choice to apply any available small business capital gains tax (CGT) concessions in respect of the capital gain arising from the 20XX sale contract?
Yes. This ruling applies for the following period : Year ended 30 June 20XX The scheme commenced on: 1 July 20XX
• You own a property, comprising of a dwelling and land. • You entered a contract for the sale of a parcel of the land in the 20XX financial year. • The parcel of land was used exclusively for storing heavy machinery and equipment used in your business. • A CGT event occurred at the time the contract was signed in 20XX, however, the settlement did not occur until DD MM 20XX, due to delays in getting council approval for the subdivision. • At the time of preparing the 20XX income tax return, you were not advised by your previous tax agent that the capital gain should be included in your 20XX tax return. You were also unaware that under subsection 104-10(3) ITAA 1997, the CGT event was triggered at the contract date rather than the settlement date. Consequently, the capital gain was not included in the 20XX return, and no choice was made to apply the small business CGT concessions in accordance with section 103-25 ITAA 1997. • You have since changed tax agents and have been advised that the small business CGT concessions are available in respect of the transaction.
• The intentions are that you will amend the 20XX income tax return to report the CGT event and capital gain and apply the small business 50% reduction and the small business retirement exemption.
Income Tax Assessment Act 1997 104-10(3) ( Income Tax Assessment Act 1997 103-25(1)(b)
Detailed reasoning Under subsection 103-25(1) ITAA 1997, a taxpayer is required to make a CGT choice by the time the income tax return for the year in which the CGT event occurs is lodged, unless the Commissioner grants an extension of time. Subsection 104-10(3) ITAA 1997 provides that the time of a CGT event is either when you enter into the contract for the disposal, or, if there is no contract, then the time is when the change of ownership occurs. Taxation Determination TD 94/89 clarifies how these provisions operate where a contract is signed in one income year, but settlement occurs in a later year. It explains that although the law treats the CGT event as occurring at the contract date - and therefore the capital gain or loss belongs to that earlier income year - a taxpayer is not required to include the gain or loss in their tax return until settlement has occurred. This is because an actual change of ownership is needed before the obligation to recognise the gain is triggered. After settlement takes place, the taxpayer must then amend the earlier year's return to include the resulting capital gain or loss.
According to ATO ID 2003/103, once a taxpayer actively chooses to apply a particular CGT concession, that choice is generally irrevocable. However, where the taxpayer did not consider the CGT concessions at all, no choice is taken to have been made. In such cases, and provided the Commissioner grants further time, the taxpayer may later make a valid choice to apply a CGT concession and amend their return to reduce or disregard the capital gain. In your circumstances, you lodged your 20XX income tax return without including the CGT event. This was appropriate under TD 94/89, as settlement and therefore the change in ownership had not occurred at the time of lodgement. You now intend to amend your return to include the capital gain. Because you did not turn your mind to the small business CGT concessions at the time of lodgement, you did not make a choice regarding those concessions. Having considered the relevant circumstances, the Commissioner will exercise the discretion under paragraph 103-25(1)(b) ITAA 1997 to allow you further time to make a choice to apply any available small business CGT concessions.