Edited version of private advice

Authorisation Number: 1051548743734

Date of advice: 16 July 2019

Ruling

Subject: Replacement Asset Roll-Over Relief

Question 1

Will the Commissioner exercise his discretion under section 124-75(3)(b) of the Income Tax Assessment Act 1997 to allow the Trustee until 2 years after the Original Extension Date to incur expenditure to acquire another CGT asset under section 124-75(2) of the Income Tax Assessment Act 1997?

Answer

Yes.

Question 2

In the alternative, will the Commissioner exercise his discretion under section 124-75(3)(b) of the Income Tax Assessment Act 1997 to allow the Trustee until 1 year after the Original Extension Date to incur expenditure to acquire another CGT asset under section 124-75(2) of the Income Tax Assessment Act 1997?

Answer

Not Applicable as the two year extension was granted.

Question 3

Will the Commissioner accept that the acquisition of freehold land upon which there is a hotel business operated by a third party would be a replacement asset used "for a similar purpose" under section 124-75(4) of the Income Tax Assessment Act 1997 to the leasehold interest used for the original asset in the property?

Answer

Yes.

This ruling applies for the following period:

1 July 2018 to 30 June 20XX

The scheme commences on:

22 September 20XX

Relevant facts and circumstances

The Trustee previously obtained a private ruling in which the Commissioner agreed to exercise his discretion under section 124-75(3)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow the Trustee until 1 year after the date on which the Trustee resolved its dispute with the Government Authority in relation to the quantum of compensation for the compulsory acquisition of the leasehold interest in the Property to incur expenditure to acquire another CGT asset under section 124-75(2) of the ITAA 1997.

For ease of reference, the facts of the original private ruling are repeated below:

·         The Trustee attained a leasehold interest in the Property.

·         The property was a commercial premise from which the Trustee operated a bar.

·         The Government Authority acquired the Property by way of Gazette Notice, the effect of which was that the Trustee's leasehold interest in the Property was terminated.

·         The Trustee is entitled to compensation under the Land Acquisition (Just Terms Compensation) Act 1991 in respect of the acquisition.

·         The Trustee sought an amount in compensation for the acquisition. However, negotiations to reach an agreement on the amount of compensation payable to the Trustee failed.

·         Later that year, the Valuer-General assessed the compensation payable to the Trustee for the acquisition.

·         The Trustee filed an application with the Land & Environment Court (the Court) objecting to the Valuer-General's determination of the compensation payable.

·         The Directions Hearing for the court proceedings in respect of the application was held.

·         At the Directions Hearing, the parties agreed to first meet informally and attempt to resolve the dispute.

·         If no resolution is reached at the meeting, mediation proceedings will be held.

·         If mediation fails, a hearing for the proceedings is scheduled to occur the following year.

·         However, the time frame for the settlement of this matter is unknown and difficult to predict.

·         As at the time of issuing the original ruling, the Trustee has received nil compensation in respect of the compulsory acquisition.

·         The Trustee has not incurred any expenditure to date to acquire a replacement property.

The dispute with the Government Authority was finalised and monetary compensation was received.

The Trustee has reviewed multiple possible locations to acquire as the replacement asset but has not yet found a suitable venue. The majority of sites originally considered potentially suitable have been rejected as overpriced following completion of due diligence.

Currently the Trustee is considering the acquisition of a suitable property. The land is freehold land upon which a hotel business is currently being operated by a third party.

If the Trustee acquires this property it would acquire the freehold interest in the land, together with the business on the land which are currently being leased to the tenant.

The Trustee is a publican and has significant experience in the bar and club industry and may choose to run the new hotel business directly following the termination of the lease with the third party operator.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 subsection 124-70(1)

Income Tax Assessment Act 1997 subsection 124-70(2)

Income Tax Assessment Act 1997 section 124-75

Income Tax Assessment Act 1997 subsection 124-75(2)

Income Tax Assessment Act 1997 subsection 124-75(3)

Income Tax Assessment Act 1997 paragraph 124-75(3)(b)

Income Tax Assessment Act 1997 subsection 124-75(4)

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision

Question 1

Summary

The Commissioner will exercise his discretion under section 124-75(3)(b) of the Income Tax Assessment Act 1997 to allow the Trustee until 2 years after the Original Extension Date to incur expenditure to acquire another CGT asset under section 124-75(2) of the Income Tax Assessment Act 1997.

Detailed reasoning

If a change of ownership triggers Capital Gains Tax (CGT) event A1 as a result of acquisition of a CGT asset by another entity under a power of compulsory acquisition, subsection 104-10(6) of the ITAA 1997 provides that the time of the event is the earliest of when compensation is received or when the change of ownership of an asset occurs.

Roll-over relief for the compulsory acquisition of a CGT asset is available where the conditions outlined in Subdivision 124-B of the ITAA 1997 are met.

Under subsection 124-70(1) of the ITAA 1997, an entity may be able to choose a replacement asset rollover if a CGT asset owned by the entity is compulsorily acquired by an Australian government agency.

A replacement asset roll-over allows you, in special cases, to defer the making of a capital gain or loss from one CGT event until a later CGT event happens.

Subsection 995-1(1) of the ITAA 1997 defines an Australian government agency as a Commonwealth, a State or a Territory, or an authority of Commonwealth or of a State or Territory.

A further requirement is that the owner of the original asset must receive money or another CGT asset or both for the CGT event to be eligible for a rollover (subsection 124-70(2) of the ITAA 1997). Should the owner of the original asset receive money, section 124-75 of the ITAA 1997 then provides further requirements which must be satisfied if only money is received for the event happening.

Subsection 124-75(2) of the ITAA 1997 requires that the owner of the asset must incur expenditure in acquiring another CGT asset. Paragraph 124-75(3)(b) of the ITAA 1997 requires the entity to incur at least some of the expenditure in acquiring this replacement CGT asset 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.

In determining whether special circumstances exist for the Commissioner to extend the period in which to acquire a replacement asset, Taxation Determination TD 2000/40 Income tax: capital gains: what are 'special circumstances' for the purposes of subsection 124-75(3) of the ITAA 1997? (TD 2000/40) provides guidance on interpreting subsection 124-75(3) of the ITAA 1997, in particular what could be considered 'special circumstances'.

TD 2000/40 states that the expression 'special circumstances' by its nature is incapable of a precise or exhaustive definition. What constitute 'special circumstances' depends on the facts of each particular case.

Example 3 in TD 2000/40 provides an example in which a taxpayer's asset is compulsorily acquired by a State authority. The taxpayer is then involved in a protracted legal dispute with the authority over the quantum of the compensation. In this instance, the Commissioner accepts that there are special circumstances to allow further time for the taxpayer.

In determining whether the discretion will be exercised, the Commissioner also considers the following factors:

·         there should be evidence of an acceptable explanation for the period of the extension requested and that it would be fair and equitable in the circumstances to provide such an extension;

·         account must be had to any 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;

·         account must be had of any unsettling of people, other than the Commissioner, or of established practices;

·         there must be a consideration of fairness to people in like positions and the wider public interest;

·         whether there is any mischief involved; and

·         a consideration of the consequences.

Subdivision 124-B of the ITAA 1997 allows the Trustee to choose rollover relief for the land (CGT assets) compulsorily acquired by the Government Authority, as they received money from the Government Authority as compensation. The compulsory acquisition by the Government Authority of the land on which the Trustee leased its premise satisfies the conditions in subsection 124-70(1) of the ITAA 1997. The receipt of monetary compensation as payment for compulsory acquisition of the land also meets the conditions of subsection 124-70(2) of the ITAA 1997.

Here, the following events occurred:

·         the land was gazetted and the change of ownership of the asset occurred, and

·         the Government Authority took possession of the land and CGT event A1 occurred under subsection 104-10(6) of the ITAA 1997

Under paragraph 124-75(3)(b) of the ITAA 1997, the Trustee would need to acquire a replacement asset no later than one year after the end of the income year in which the gazettal took place.

However, due to special circumstances of the Trustee, mainly because of its ongoing dispute with the Government Authority, it was not feasible for the Trustee to acquire a suitable replacement asset by the required time. Accordingly, the Trustee requested the Commissioner's discretion to allow an extension of time in accordance with paragraph 124-75(3)(b) of the ITAA 1997 to acquire a replacement asset should it not find a suitable replacement asset in time. This was done by an application for a private ruling. This ruling was favourable to the Trustee and an extension of time was granted until 1 year after the date on which the Trustee resolved its dispute with the Government Authority.

The Trustee objected to the amount offered by the Government Authority as compensation for the lease/land compulsorily acquired, and commenced proceedings to claim a greater amount under the Land Acquisition (Just Terms Compensation) Act 1991. As such, purchasing a replacement asset was delayed.

The lack of certainty as to the amount and timing of the compensation to be received also delayed the Trustee's ability to search and acquire an appropriate replacement asset. Furthermore, the specific nature of the asset to be replaced, the substantial amount to be invested, and the possibility of a lengthy process in respect of such an acquisition would mean further delays in purchasing a replacement asset was anticipated.

To date, the Trustee has considered numerous properties and leases to become the replacement asset and may need to consider further opportunities.

Based on these facts, it is concluded that special circumstances exist to warrant the Commissioner to exercise his discretion and allow an extension of time to obtain a replacement asset. It would be fair and equitable to do so given that the circumstances represent an acceptable explanation for the delay.

Also by granting this extension of time to acquire replacement asset:

·         there does not appear to be any prejudice to the Commissioner or any other parties;

·         there is no unsettling of people or of established practices;

·         there does not appear to be any mischief involved in this case; and

·         the Commissioner considers it to be fair to people in like positions and the wider public interest.

Therefore, the Commissioner will exercise his discretion under paragraph 124-75(3)(b) of the ITAA 1997 to allow an extension to obtain a replacement asset for a leasehold interest that was compulsorily acquired by the Government Authority.

Question 2

Summary

The Commissioner will not need to exercise his discretion under section 124-75(3)(b) of the Income Tax Assessment Act 1997 to allow the Trustee until 1 year after the Original Extension Date to incur expenditure to acquire another CGT asset under section 124-75(2) of the Income Tax Assessment Act 1997.

Detailed reasoning

The reasoning for this question is not applicable as the two year extension was granted under question 1.

Question 3

Summary

The Commissioner will accept that the acquisition of freehold land upon which there is a hotel business operated by a third party to be a replacement asset used "for a similar purpose" under section 124-75(4) of the Income Tax Assessment Act 1997 to the leasehold interest used for the original business.

Detailed reasoning

Subsection 124-75(4) contains two "use" tests which are applied to the replacement asset.

In Taxation Determination TD 2000/41, the ATO states that these two tests impose alternative and mutually exclusive requirements. It also indicates that if the replacement asset is used in a business, the second test can be satisfied if the original asset was used in the course of carrying on a different business provided the replacement asset was used for the same or a similar purpose as the original asset.

The first "use" test

The first requirement in subsection 124-75(4) relates to the use of the "other asset" (that is, the replacement CGT asset) in your business or its installation ready for use in the business.

The first test applies where, just before the roll-over event, the original asset was used in the taxpayer's business, installed ready for use in the business, or was in the process of being installed ready for such use. The test requires the replacement asset to be used in the business or be installed ready for use for a reasonable time after it is acquired.

The first requirement is satisfied if, just before the event giving rise to a roll-over under Subdivision 124-B happened, the original asset:

·         was used in your business;

·         was installed ready for use in your business; or

·         was in the process of being installed ready for use in your business;

and the other asset is used in the same business, or is installed ready for use in the same business, for a reasonable time after it is acquired (emphasis added).

It is considered that the Trustee fails the first "use" test because the freehold business is not the same business as the leasehold business.

Here, the original asset is a leasehold business. Therefore, in order to pass the first "use" test the replacement asset would also need to be an asset used in the leasehold business.

The second "use" test

The second test applies to assets which fall outside of the circumstances in which the first test applies. It requires the replacement asset to be used for a reasonable time after it is acquired for the "same" or a "similar" purpose as the original asset was being used just before the roll over event.

Here, if you use the other asset in the course of carrying on a business, the second requirement in subsection 124-75(4) can also be satisfied if you had used the original asset in the course of carrying on a different business - provided you use the other asset for the same purpose as, or for a similar purpose to, the purpose for which you used the original asset (emphasis added).

It is considered the use of the leasehold business to derive assessable income by operating a hotel and bar was used in the original business just before the CGT event giving rise to roll-over event. Further, the "use" of the freehold business to operate a hotel and bar which will be used to derive assessable income are for the same purpose, or similar purpose, in the replacement business.

Therefore the second "use" test is satisfied.

What a "reasonable time" is for the purpose of both tests will be determined according to the facts of each case. This is beyond the scope of this ruling and will not be considered further.

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