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Edited version of private advice
Authorisation Number: 1051638007070
Date of advice: 21 February 2020
Ruling
Subject: Roll-over relief under section 124-B
Question 1
Can the assessable capital proceeds of the insurance payout for the total loss of a house at a rental property be reduced by expenditure on capital improvements at another rental property?
Answer
No
Question 2
Can the assessable capital proceeds relating to the total loss of depreciable items, of the insurance payout for the total loss of a house at a rental property be reduced by expenditure on the acquisition of or replacement of depreciable items at another rental property?
Answer
No
Question 3
Can the assessable capital proceeds of the insurance payout for the total loss of a house at a rental property be reduced by expenditure on non-deductible aesthetic improvements to another rental property?
Answer
No
Question 4
Can the assessable capital proceeds of the insurance payout for the total loss of a house at a rental property be reduced by expenditure on purchasing another rental property?
Answer
No
This ruling applies for the following period:
Year ending 30 June 2019
The scheme commences on:
1 July 2018
Relevant facts and circumstances
You hold a number of rental and commercial properties.
During the 2019 income year one of your properties burned down.
The insurer cleared the block and paid out your policy.
A payment was made to your bank with the remaining proceeds being paid directly to you.
You have advised us that the rebuild costs would exceed the funds you have available and due to you reaching retirement age are unable to secure further funds.
You have advised us that you wish to utilise the funds received from the insurance payout in the following ways:
· Expenditure on capital improvements of your remaining properties such as adding bathrooms, replacing floors etc.
· Expenditure on depreciable capital items such as adding a solar system to your remaining properties.
· Expenditure on non-deductible aesthetic improvements such as landscaping, fencing and retaining walls on your remaining properties.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 124-B
Income Tax Assessment Act 1997 subsection 124-70(1)
Income Tax Assessment Act 1997 subsection 124-70(2)
Income Tax Assessment Act 1997 subsection 124-75
Income Tax Assessment Act 1997 subsection 124-75(4)
Reasons for decision
Summary
You will not be eligible for the roll-over relief under Subdivision 124-B ITAA 1997 as the legislation does not make a provision for redirecting CGT funds to improve other existing assets.
Detailed reasoning
Subdivision 124-B ITAA 1997 provides that a replacement asset roll-over may be available to a taxpayer regarding involuntary disposal events if this event meets with particular factors listed in subsection 124-70(1) ITAA 1997 and it occurs to a CGT asset the taxpayer owns (the original asset).
One of these events occurs when a CGT asset, or part of the asset is lost or destroyed.
For roll-over to apply the taxpayer must receive money or another CGT asset or both as compensation for the CGT event happening or under an insurance policy against loss of the original asset (subsection 124-70(2) ITAA 1997).
If the taxpayer receives money as compensation or as an insurance payment, the conditions in section 124-75 ITAA 1997 must also be satisfied for the roll-over relief to apply:
· paragraph 124-75(2)(a) ITAA 1997 - the taxpayer must incur expenditure in acquiring another CGT asset; and
· paragraph 124-75(3)(b) ITAA 1997 - at least some of the expenditure must be incurred no later than one year after the end of the income year in which the event occurred or within such a time as the Commissioner allows in special circumstances.
In addition, the replacement asset must be used, or installed ready for use in the business, for a reasonable time after it is acquired by the taxpayer. Otherwise the taxpayer must use the replacement asset for the same or similar purpose for which the original asset was used just before the CGT event happened (subsection 124-75(4) ITAA 1997).
In your case, your rental property was destroyed by fire. You received a payment from your insurance company which entailed a payout to your bank and the remaining proceeds being paid to you directly.
You have informed us that you are unable to utilise the funds received to build a replacement asset on the property and wish to use the funds received to improve the other properties in your portfolio.
As roll-over requirements in subsection 124-75(4) ITAA 1997 state that the replacement asset must be used for the same or similar purpose for which the original asset was used, diverting the funds received from the CGT event to improve other assets in your portfolio will not be compliant with the legislation.
The effect of utilising CGT funds to improve other assets in your portfolio will not reduce your capital gain or satisfy the relevant roll-over conditions under Subdivision 124-B ITAA 1997.
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