Edited version of your private ruling

Authorisation Number: 1051724066410

Date of advice: 4 August 2020

Ruling

Subject: Extension of time to acquire a replacement asset

Question

Will the Commissioner of Taxation allow the taxpayer further time until 31 December 20XX, pursuant to subsection 124-75(3) of the Income Tax Assessment Act 1997, to incur expenditure to acquire a replacement asset?

Answer

Yes

This ruling applies for the following periods:

Income year ended 30 June 20XX

Income year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The taxpayer, the Trustee of an Australian discretionary trust, acquired a property (the property) which was leased to third parties and from which rental income was derived. The property was acquired after 20 September 1985.

The property was partially compulsorily acquired by a government agency and full compensation for the compulsory acquisition was received by the Trustee.

The Trustee's primary decision maker took steps soon after the receipt of the full compensation to find and negotiate to purchase a replacement asset. However, due to the fact that this individual has medical circumstances over an extended period of time, the Trustee had difficulties acquiring a replacement asset.

Due to the emergence of the COVID-19 pandemic in early March 2020, there has been an enormous detrimental impact on the NSW property market and the Trustee's ability to acquire a replacement asset. Some government restrictions and new rules under the COVID-19 pandemic which has affected the property market include:

·         On 3 April 2020 the "National Cabinet Mandatory Code of Conduct, SME Commercial Leasing Principles During Covid-19" came into force.

·         In March 2020, the government announced a six-month moratorium on residential and commercial evictions.

·         Social distancing measures, a blanket ban on physical property auctions and restrictions of open houses imposed from 25 March 2020 were announced by the government to stem the spread of the COVID-19 virus through the community. Some of these restrictions were eased from May 2020, but there continue to be limits imposed on these activities.

The Trustee has enlisted other parties to assist the primary decision maker in acquiring a replacement asset. The Trustee has made investments in higher skilled full time office support staff. The Trustee has also hired external consultants to assist in the search and acquisition of a replacement asset e.g. a property valuation consultant, architectural firm, town planning consultants and solicitors for legal advice.

In addition, the Trustee and primary decision maker has also made additional undertakings to ensure that a replacement property will be acquired by 31 December 20XX:

·         The primary decision maker is providing training to an employee to act on their behalf with a buyer's agent likely engaged if the primary decision maker deteriorates to such an extent that they can no longer participate in the search for suitable replacement properties.

·         The Trustee will continue to search for suitable properties during the 20XX calendar year.

·         The Trustee will be prepared, in the absence of other available and more suitable options, to acquire an industrial or commercial property (for a smaller value than the compensation received) in order to meet that deadline.

Relevant legislative provisions

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

Reasons for decision

Involuntary disposal of a CGT asset

Section 124-70 describes different incidents when a roll-over is available to an entity if that incident happens to the Capital Gains Tax (CGT) asset of that entity. According to subsection 124-70(1), an entity is able to choose a roll-over if the CGT asset that the entity owns is compulsorily acquired by an Australian government agency. Subsection 124-70(2) states that to be eligible for a roll-over, the entity must receive money or another CGT asset (except a car, motor-cycle or similar vehicle) or both as compensation for the event happening.

Subsection 995-1(1) defines an Australian government agency as a Commonwealth, a State or a Territory or an authority of Commonwealth or of a State or Territory. In this case, the property was compulsorily acquired by a government agency, and the Trustee received full payment for the acquisition.

Therefore, the Trustee is able to choose a roll-over in relation to the capital gain that the Trustee received from the partial compulsory acquisition, provided other requirements as stated in section 124-75 are met.

According to section 124-75:

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.

In this case, the Trustee's original asset, namely the Property, is not partially lost or destroyed. Therefore, the relevant provision for the Trustee is paragraph 124-75(2)(a) whereby the Trustee is required to incur expenditure to acquire another CGT asset.

Subsection 124-75(3) requires you to incur some of the expenditure either one year before or one year after the end of the income year in which the event happens or within such further time as the Commissioner allows in special circumstances.

The time of the event is determined by subsection 104-10(6). The time of the event will be the earliest of:

·         when you received full compensation from the entity; or

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

·         when the entity entered it under that power, or

·         when the entity took possession under that power.

The Trustee has requested further time to incur expenditure in acquiring a replacement asset under paragraph 124-75(3)(b).

Special circumstances

There are no legislative provisions which provide guidance as to what may constitute special circumstances for the purposes of subsection 124-75(3). The matter depends on the facts of each particular case.

In determining whether special circumstances exist that will allow the Commissioner to extend the period to acquire a replacement asset, regard must be had to Taxation Determination 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? (TD 2000/40).

In determining if the discretion would be exercised, the Commissioner will consider the following factors:

·         there should be evidence of an acceptable explanation for the period of 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;

·         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.

TD 2000/40 states that the expression 'special circumstances', in the context of subsection 124-75(3) of the ITAA 1997 by its nature, is incapable of a precise or exhaustive definition. Some examples of special circumstances are provided under the tax determination. In prior cases, the Commissioner has granted an extension of time where there have been special circumstances and an acceptable explanation for the period of extension requested. These can include, but are not limited to, medical or financial issues, personal issues or natural disasters.

To date the Trustee has been unable to acquire a replacement asset.

On a consideration of the Trustee's submissions, the Commissioner agrees to grant the Trustee a further extension of time to 31 December 20XX for the acquisition of a replacement asset pursuant to subsection 124-75(3) of the ITAA 1997. This decision is based on the following considerations:

·         The primary decision maker for the Trustee has continued to have severe and complicated medical circumstances.

·         In recognition of, and notwithstanding, the primary decision maker's condition, steps were actively taken to ensure that the Trustee remains able to continue its pursuit of replacement assets. This includes the engagement of professional advisors and experts and staff to assist in the endeavour.

·         It is evident on the facts that the Trustee has, in fact, continued to be active in its pursuit of replacement assets.

·         Most importantly, the Trustee has provided an undertaking that it will acquire a replacement property by 31 December 20XX even if the only replacement properties which it can acquire will cost less than the compulsory acquisition proceeds received. In another words, the Trustee is prepared to only be eligible for a partial replacement asset roll-over in order to meet the 31 December 20XX deadline.

·         The Commissioner accepts that the on-going COVID-19 pandemic has disrupted, and has had severe adverse effects on, the general property market and business normal operations.

·         Social distancing measures, a blanket ban on physical property auctions and restrictions of open houses imposed from 25 March 2020 were announced by the government to stem the spread of the COVID-19 virus through the community. Some of these restrictions were eased from May 2020, but there continue to be limits imposed on these activities.

·         The supply of properties for sale has also reduced due to the COVID-19 pandemic. The reduction in the availability of properties on the market will make it more difficult for potential buyers to acquire suitable properties. The lasting impact of the property market downturn is unknown.

·         It is also accepted that the pandemic has resulted in the incurrence of greater health risks to the primary decision maker due to their current health conditions.

Conclusion

On the basis of the guidelines in TD 2000/40, it is considered that the Trustee's situation falls within the scope of what would be considered special circumstances which would warrant the Commissioner allowing further time under paragraph 124-75(3)(b) to 31 December 20XX.

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