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Edited version of your written advice

Authorisation Number: 1012839399718

Date of advice: 14 July 2015

Ruling

Subject: CGT - compensation - property destroyed by fire

Question 1

Will the money received as compensation for the loss of the buildings be assessable under the capital gains tax (CGT) provisions?

Answer

Yes

Question 2

Is the roll-over relief under Subdivision 124-B available to defer the capital gain?

Answer

Yes

This ruling applies for the following periods

Year ended 30 June 2014

Year ended 30 June 2015

Year ending 30 June 2016

Year ending 30 June 2017

The scheme commences on

1 July 2013

Relevant facts and circumstances

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

You and your spouse jointly acquired a property (the property) on after 20 September 1985.

The property consisted of X structures, X houses and X shed.

In October 20XX, the property was impacted by a bush fire. The structures on the property were burned to the ground and major damage also occurred to the trees, fences, machinery and personal belongings on the property.

You received a 'Total Loss' payout from your insurance company in November 20XX.

A government department (GD) admitted liability for starting the bush fire and you approached the GD in relation to damage the fire caused to your property. After protracted negotiations, the GD paid compensation for the loss caused by the fire, taking into account the amount you have already received from your Insurance policy. You received the compensation money from the GD in December 20XX.

You received a total payment of $ $X,XXX,XXX in compensation from the insurance company and the GD, with $X,XXX,XXX relating specifically to the loss of the structures on the property.

You intend to build buildings to replace the X buildings lost in the fire. The buildings will replace the total facilities of the X buildings destroyed.

You have almost completed one of the new buildings. You estimate the cost of the building will be approximately $XXX,XXX at completion.

The other building is currently being planned. You intend to have the plans lodged with council for approval within the next three months with an anticipated construction period of 12 months.

You estimate the building will cost approximately $XXX,XXX to construct.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 subsection 104-20(1)

Income Tax Assessment Act 1997 subsection 104-20(2)

Income Tax Assessment Act 1997 subsection 104-20(3)

Income Tax Assessment Act 1997 section 124-B

Income Tax Assessment Act 1997 section 124-75

Income Tax Assessment Act 1997 section 124-85

Reasons for decision

A capital gain or a capital loss may arise if a capital gains tax event (CGT event) happens to a capital gain tax asset (CGT asset). Section 108-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a CGT asset is any kind of property, or a legal or equitable right that is not property.

CGT event C1 happens if a CGT asset (or part of a CGT asset) is lost or destroyed (subsection 104-20(1) of the ITAA 1997). When an asset is lost or destroyed and you receive compensation, the time of the CGT event is when you first receive the compensation. If no compensation is received, the event occurs when the loss is discovered or the destruction occurred (subsection 104-20(2) of the ITAA 1997).

A capital gain arises if the capital proceeds from the loss or destruction are more than the asset's cost base. A capital loss arises if the capital proceeds from the loss or destruction are less than the asset's reduced cost base (subsection 104-20(3) of the ITAA 1997).

Subdivision 124-B of the ITAA 1997 provides you with the opportunity to choose rollover relief where a CGT asset you own, or part of it, is lost or destroyed.

Section 124-75 of the ITAA 1997 allows you to choose to obtain a roll-over if you receive money for the event occurring and you satisfy the following requirements.

You must incur expenditure

To qualify for the roll-over at least some of the expenditure must be incurred:

In your case, CGT event C1 occurred when you received the compensation payment you're your insurance company in November 20XX, due to your property being destroyed by fire, as this was when you first received the compensation.

You are able to choose the roll-over as you have received money for the event occurring. As you have incurred some of the expenditure prior to the end of the income year in which the event occurred, that is before 30 June 20XX, you have met the requirements for the roll-over and there is no need for the Commissioner to exercise his discretion to extend the time further.

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