Edited version of your written advice

Authorisation Number: 1051202661055

Date of Advice: 11 May 2017

Ruling

Subject: Replacement Asset Rollover - Extension of Time

Question 1

Is the replacement asset rollover provided for in subdivision 124-B of the Income Tax Assessment Act 1997 (ITAA 1997) available in relation to the compulsory acquisition of Building A (The Property)?

Answer

Yes

Question 2

Will the Commissioner allow the E consolidated Group (the E Group) further time under paragraph 124-75(3)(b) of the ITAA 1997 to acquire a replacement capital gains tax (CGT) asset, following the compulsory acquisition of The Property?

Answer

Yes

Question 3

Will the Commissioner allow further time until 30 June 2018 for the E Group to acquire a replacement asset following the compulsory acquisition of The Property and the special circumstance that followed?

Answer

Yes

This ruling applies for the following periods:

Income year ending 30 June 2016

Income year ending 30 June 2017

Income year ending 30 June 2018

The scheme commences on:

The scheme has commenced.

Relevant facts and circumstances

The E consolidated Group (the E Group) is an Australian resident taxpayer.

The E Group (the taxpayer) is in the business of property management and deriving rental income from commercial real estate in an Australian Capital City. All commercial property held by the company is on capital account.

Building A (The Property) was originally acquired by the taxpayer as a replacement asset for Building B.

Building A was acquired in 2010 and had a tax cost base of approximately $x after the rollover on Building B.

On xx/yy/zzzz a Transport government agency of an Australian State Government provided the taxpayer with notice of their intention to acquire the Building A as part of a major infrastructure project.

Early negotiations failed and the Government exercised its powers and took ownership of The Property on xx/yy/zzzz

After lengthy mediation, the parties settled an amount of cash compensation where an amount of $x plus disbursements would be paid as compensation (as described in the Determination of Compensation letter by the Valuer General of an Australian State).

The proceeds payment was delayed and paid to the taxpayer approximately four months after the compulsory acquisition.

Despite the delayed proceeds payment, the CGT event gives rise to a capital gain of approximately $y which occurred in the 2016 financial year.

The company seeks to apply the Subdivision 124-B rollover in Income Tax Assessment Act 1997 (“ITAA 1997”) (“the Rollover Provisions”) in order to defer this capital gain as otherwise permitted.

The taxpayer is using the proceeds on sale to acquire a number of commercial buildings in an Australian Capital City in line with its business objective to derive income from the buildings.

The taxpayer has acquired the following properties, utilising part of the compensation received, since receiving the proceeds to which it may choose to apply the Rollover Provisions:

● Property 1

● Property 2

It is the taxpayer's intention to utilise the roll-over on both these properties and any others purchased with the remaining funds (subject to all finalised transactions meeting the taxation legislation requirements).

There is currently a shortage of commercial buildings for sale in the market, particularly of the same quality and location of Building A, due to various factors such as a major infrastructure project which has taken a number of buildings out of the market.

Traditionally, in any twelve month cycle, the largest volume of commercial property sales occur in Spring. The remaining months are relatively quiet in relation to sales, in particular the January to June period. Traditionally sales in the June period only take place where property managers are “cleaning up” their portfolios.

For reasons outlined it is expected that it will take in excess of the period allowed by the Rollover Provisions, to spend all of the compensation money received, to find commercial properties in the Australian Capital City which are in line with business objectives of the company.

The taxpayer has until the 30^th of June 2017 to satisfy 124-B.

The trustee for Property 1 Trust and the trustee for Property 2 Trust are a part of the E Group.

Relevant legislative provisions

Income Tax Assessment Act 1997

Income Tax Assessment Act 1997 subsection 124-70

Income Tax Assessment Act 1997 subsection 124-75

Income Tax Assessment Act 1997 section 995-1

Income Tax Assessment Act 1997 subsection 104-10(6)

Acts Interpretation Act 1901 (Cth) (AIA)

Reasons for decision

Question 1

Detailed reasoning

Subdivision 124-B of the ITAA 1997 - Asset compulsorily acquired, lost or destroyed is the general provision relevant for the issue described.

Specifically paragraph 124-70(1)(a) describes that a capital gain on an asset may be chosen to be rolled-over if a CGT asset you own is compulsorily acquired by an Australian government agency.

Taxpayers that receive compensation solely in the form of money meet the first test outlined in subsection 124-70(2).

'You must receive money or another *CGT asset (except a *car, motor cycle or similar vehicle), or both:

a) as compensation for the event happening; or

b) under an insurance policy against the risk of loss or destruction of the original asset.'

Accordingly, subsection 124-70(3) states that you must satisfy the requirement in subsection 124-70(4) if:

'… (a) you are a foreign resident just before the event happens; or

b) you are the trustee of a trust that is a *foreign trust for CGT purposes for the income year in which the event happens.'

Further to the conditions above there are other requirements under section 124-75 if money is received.

These conditions being:

124-75(1)

If you receive money for the event happening, you can choose to obtain a roll-over only if these other requirements are satisfied.

124-75(2)

You must:

(a) incur expenditure in *acquiring another *CGT asset (except a *depreciating asset whose decline in value is worked out under Division 40 or deductions for which are calculated under Division 328); or

(b) if part of the original asset is lost or destroyed - incur expenditure of a capital nature in repairing or restoring it.

124-75(3)

At least some of the expenditure must be incurred:

(a) no earlier than one year, or within such further time as the Commissioner allows in special circumstances, before the event happens; or

(b) no later than one year, or within such further time as the Commissioner allows in special circumstances, after the end of the income year in which the event happens.

Without the commissioner's exercise of his discretion the timing of the event is outlined under subsection 104-10(6) as being the earliest of:

a) when you received compensation from the entity; or

b) when the entity became the asset's owner; or

c) when the entity entered it under that power; or

d) when the entity took possession under that power.

124-75(4)

If just before the event happened the original asset:

(a) was used in your *business; or

(b) was *installed ready for use in your business; or

(c) was in the process of being *installed ready for use in your business;

the other asset must be used in the business, or be installed ready for use in the business, for a reasonable time after you *acquired it.

Otherwise, you must use the other asset (for a reasonable time after you *acquired it) for the same purpose as, or for a similar purpose to, the purpose for which you used the original asset just before the event happened.

124-75(5)

The other asset cannot become an item of your *trading stock just after you *acquire it, nor can it be a *depreciating asset whose decline in value is worked out under Division 40 or deductions for which are calculated under Division 328.

124-75(6)

The other asset cannot become a *registered emissions unit *held by you just after you *acquire it.

Given the above the taxpayer has provided facts and evidence to support that their situation falls within this provision.

This is described as follow:

● The legal owner of the properties is the taxpayer.

● A Transport government agency of an Australian state government notified the company of its intention to acquire Building A as a result of a major infrastructure project, which resulted in the transfer of ownership to the Transport government agency, representing an Australian State government.

● The taxpayer received compensation solely in cash proceeds from the Transport government agency approximately four months after the compulsory acquisition of Building A.

● In accordance with Note 2 of Tax Determination 2000/41, the expenditure made does not need to be incurred on a single asset and may be incurred on multiple assets, provided some expenditure on each asset has been incurred.

● The business of the taxpayer is to manage commercial property for the purpose of deriving rental income, as such any other commercial properties acquired related to the roll-over should meet the same or similar purpose and satisfy conditions outlined in subsection 124-75(4). If this is not the case the roll-over would otherwise not be available for assets that fail this test.

Therefore, based the information received, the taxpayer will meet the requirements under subsections 124-75(4), 124-75(5) and 124-75(6) for all assets purchased utilising the compensation payment of $x plus disbursements for replacement of the compulsorily acquired property Building A. The taxpayer is eligible to request an extension under subdivision 124-B.

Question 2

Detailed reasoning

In order to determine whether 'special circumstances' exists in this situation consideration of the scenario and actions taken will need to be considered under the guidance of:

● TD 2000/40 - Income tax: capital gains: what are 'special circumstances' for the purposes of subsection 124-75(3) of the Income Tax Assessment Act 1997?

The taxpayers situation is similar to example one in TD 2000/40, whereas due to legal proceedings a delay in receiving compensation was incurred. This delay is evidenced in a provided bank statement for the taxpayer, which shows the amount being paid approximately 4 months after the compulsory acquisition. Nevertheless, in addition to this the taxpayer did what is reasonable in order to utilise all the funds received to acquire a replacement asset/s.

The taxpayer provided evidence to suggest:

● They have continued to drawdown on the compensation amount and have provided proof of purchasing two investments (property 1 and property 2) from the amount received (refer to settlement statements and sales contract extract under doc id: 681961128).

The taxpayer has continued its efforts in acquiring a suitable replacement asset but its efforts have been unsuccessful because of the following reasons:

● The current commercial real estate market does not have sufficient supply of buildings in the CBD or elsewhere of sufficient quality of the property or to meet the business objectives of the company. This is due to a number of factors including the recent increase in compulsory acquisitions by the state government because of major infrastructure projects.

● The January to June period is traditionally a quiet period.

Furthermore, there is an implicit concern that a potential capital gain liability will erode a significant amount of cash for the taxpayer so that they would be forced to acquire a lesser property and/or borrow funds to obtain the right property.

In accordance with TD 2000/40 the ATO would accept a case that this delay in receiving compensation combined with the taxpayer doing what is reasonable to acquire a replacement asset(s) constitutes special circumstance warranting an extension of time, as per example one in TD 2000/40.

Question 3

Detailed reasoning

As previously described, due to legal proceedings delaying the payment of the compensation amount combined with the fact that the taxpayer has done what is reasonable in order to replace the asset an extension until 30 June 2018 is granted.

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