Edited version of private ruling

Authorisation Number: 1011498342736

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Ruling

Subject: capital gains tax and compulsory acquisition of a capital gains tax asset

Question 1

Are the properties considered to be sold when the notice was published in the Government gazette?

Yes.

Question 2

Unless granted further time were you required to incur expenditure on a replacement asset by the end of the second financial year in order to apply roll-over?

Yes.

Question 3

When a replacement property is purchased, is the acquisition date the date the purchase contract was signed?

Yes.

Question 4

Can the replacement asset be a commercial rental property, a residential rental property or a mixture of both?

Yes.

Question 5

Except for the interest component of the compensation payment is the compensation payment considered to be capital proceeds arising from the compulsorily acquisition of the properties?

Yes.

Question 6

Is any interest component assessable as ordinary income in the year of receipt?

Yes.

This ruling applies for the following period

Year ended 30 June 2009

Year ended 30 June 2010

Year ended 30 June 2011

The scheme commenced on

1 July 2008

Relevant facts and circumstances

You acquired 2 commercial properties after 20 September 1985.

The properties are used for income producing purposes.

The areas where the properties are situated were gazetted for compulsory acquisition by a State Government authority (first financial year).

The Government authority made a financial offer. You were given 3 months to respond.

You disputed the valuation of the properties and the final compensation amount and rejected the offer but accepted the value of the offer as an "advancement of compensation" whilst reserving the right to negotiate a better settlement.

The Government authority paid the market value as the "advance of compensation".

The matter was referred to a tribunal for a preliminary hearing.

You attempted further negotiation and this resulted in a small increase of the compensation offered.

You accept this offer as another "advancement of compensation" and received this payment.

You pursued the matter further at tribunal.

The preliminary hearing at the tribunal failed to reach a satisfactory settlement and the matter has now been referred for a full hearing.

The settlement amount will be made up of:

· The value of the property;

· Penalty interest on the disputed difference between your valuation and that of the Government authority;

· Acquisition related expenses incurred and reimbursed by the tribunal; and

· Solatium fees

Relevant legislative provisions

Income Tax Assessment Act 1997 paragraph 104-10 (6)(b),

Income Tax Assessment Act 1997 Subsection 109-5(2),

Income Tax Assessment Act 1997 Section 116-20 and

Income Tax Assessment Act 1997 Section 124-75.

Reasons for decision

Question 1

Compulsory acquisition - ownership

When your shops were compulsory acquired by a State Government authority a change of ownership occurred. The time of the CGT event A1 is taken to have happened at the earliest of the following:

· when you received compensation from the entity; or

· when the entity became the asset's owner; or

· when the entity entered it under that power; or

· when the entity took possession under that power.

In your case the earliest was the publication of the notice in the gazette as this was when the State Government authority became the owner of the properties.

Question 2

Replacement Asset Rollover

If you receive money for a CGT event happening, you can choose to obtain a roll-over only if you incur expenditure in acquiring another CGT asset (the replacement asset), and at least some of the expenditure must be incurred no earlier than one year before the event happens or no later than one year after the end of the income year in which the event happens, or within such time as the Commissioner allows in special circumstances.

In your situation, your event happened when the notice was published. Therefore, at least some expenditure must be incurred in the purchase of a replacement asset before the end of the second financial year or within further time as allowed by the Commissioner where a request for the Commissioner's discretion is made.

The time of the actual payment of compensation monies does not change the time of acquisition of the land by the State Government authority. CGT event A1 occurred when the notification was published in the Government gazette, as this is when the State Government authority became the owner of the land.

Question 3

Acquisition date of replacement asset

In general, you acquire a CGT asset when you become its owner. The time you acquire the asset is when you become its owner. When the entity disposing of the CGT asset enters into a purchase contract with you, the date you sign the purchase contract will be the date of acquisition. If there is no contract, ownership will occur when you become the legal owner of the CGT asset.

However, for CGT discount purposes you will be taken to have acquired the replacement properties on the date that you acquired the original properties.

Question 4

Replacement asset

The replacement asset must be used for the same or similar purpose for which you used the original asset for, just before the event happened.

Taxation Determination TD 2000/42 provides some guidance as to what the scope of the words use the other asset for the same purpose or for a similar purpose is for the purposes of the rollover. The determination states that whether a CGT asset is used for the same or similar purpose as another asset is a question of fact and degree.

In this situation, the original asset has been used for investment purposes through the rental of 2 shops. Where a replacement property is also used for investment purposes, then generally, it would satisfy the same or similar purpose test. This means that irrespective of whether you incur expenditure in building a dwelling for rental or purchasing a rental property or building or purchasing a commercial property for rental, or a combination of both, it will satisfy the same use test provided the replacement asset is used for investment purposes.

Question 5 & 6

Compensation and interest

The capital proceeds from a CGT event are the total of the money you have received, or are entitled to receive, in respect of the CGT event happening.

The compensation payment is included in the capital proceeds for the sale of your land as it is an amount received for the event (the loss of the property that was acquired by the State Government agency) happening. 

Taxation ruling 95/35 provides guidance on compensation payments. Paragraph 26 advises that interest awarded as part of a compensation amount is assessable income of the taxpayer under general income provisions. If the taxpayer receives an undissected lump sum amount and the interest can not be separately identified and segregated out of that receipt, no part of that receipt can be said to represent interest. If the compensation cannot be dissected, it is likely that the whole amount relates to the disposal of the right to seek compensation.

The fact that amounts included in the compensation payment are calculated under different headings does not determine the character of the payment. The concepts that the payment is for the disposal of the property and part of that payment has an intended use in your hands, are not mutually exclusive.

In your situation, you received an initial compensation payment from the State Government authority in one year and a second amount the following year. The matter was pursued through an administrative appeal and remains under consideration. The payments were received by you following the compulsory acquisition of the properties by the State Government authority and there was no requirement to use the compensation payment for any particular purpose. The purchase price plus the additional compensation payment can reasonably be seen as compensation for the loss of the original property. That is, it represents a reasonable assessment of the compensable loss that results from the disposal of your properties to the State Government agency.

Taxation Ruling 95/35 (TR 95/35) states that Interest awarded as part of a compensation amount is assessable income under the general income provisions. If the taxpayer receives an undissected lump sum compensation amount and the interest cannot be separately identified and segregated out of that receipt, no part of that receipt can be said to represent interest. If the compensation cannot be dissected, it is likely that the whole amount relates to the disposal of the right to seek compensation.

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