Edited version of private advice

Authorisation Number: 1051734394516

Date of advice: 09 September 2020

Ruling

Subject: Commissioner's discretion to allow an additional three years to acquire a replacement asset compulsorily acquired by State government

Question

Will the Commissioner exercise his discretion under section 124-75(3)(b) of the Income Tax Assessment Act 1997 to allow the taxpayers an additional three years from 30 June 20XX, namely, until 30 June 20XX to acquire a replacement asset?

Answer

The Commissioner will exercise his discretion under section 124-75(3)(b) of the Income Tax Assessment Act 1997and allow until 30 June 20XX, that is, additional two years to acquire a replacement asset.

This ruling applies for the following periods:

01 July 20XX to 30 June 20XX

01 July 20XX to 30 June 20XX

The scheme commences on:

01 July 20XX

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You advised that you previously owned an unencumbered estate, XXXX, and being the whole of the land identified as XXXX lodged in the Land Titles Office.

The land is located at XXXX was purchased in XXXX and is approximately XXXX in area. You have used the land to carry on primary production activities (potato and cereal cropping).

On or around XXXX you were verbally informed by the XXXX that the Department intended on compulsorily acquiring the land. You were told from this date to cease all primary production activities on the land.

On XXXX the Department served written notice on to you outlining its intention to compulsorily acquire the land under section 10 of the Land Acquisition Act 1969 (SA).

You then entered negotiations with the Department regarding for the purchase price. Despite these ongoing negotiations on XXXX, before the purchase price for the land had been agreed, you received a Notice of Acquisition from the Department and the land was compulsorily acquired. This triggered capital gains tax ("CGT") event A1 in the income year ended 30 June 20XX.

Negotiations between you and the Department ensued with respect to the purchase price of the land before a price of XXXX was agreed around XXXX, being over eight months from the date of the compulsory acquisition and over 13 months from the date the Department first approached you.

On XXXX, you received partial consideration totalling $ XXXX for the purchase price.

As at the date of this application, you have not received the balance of $ XXXX relating to the purchase price. You are unsure of when you will receive the balance of the purchase price and as at the date of this application you have not received any written guidance or advice from the Department in this regard.

You have self-assessed your eligibility to access roll-over relief contained under subdivision 124-B to defer the capital gains which would otherwise arise on the disposal of the land. As the land was compulsorily acquired on XXXX, the CGT event occurred on that date. It is your desire to defer the whole of the capital gain arising from the disposal of the land.

It is your understanding that, in order to defer the whole of the capital gain arising from the disposal of the land, you must incur expenditure on a replacement asset equal to at least the capital proceeds received from the disposal (i.e. $ XXXX).

You have commenced investigating suitable replacement assets. This has involved discussions with a XXXX government department regarding the potential acquisition of land situated near the previous land. You are also involved in making of inquiries with private landowners in the vicinity of the previous land.

You have experienced considerable difficulty in identifying a suitable replacement asset to date due to:

·   The protracted negotiations between the parties regarding the purchase price for the land, resulting in the delay in the date from which you could commence search for a replacement asset.

·   The fact that you have not received the full purchase price from the Department. This, when coupled with the issue immediately above, financially restricts you from acquiring a replacement asset in the absence of assuming significant debt.

·   The quantum of the purchase price, with the implication that you must acquire a substantial replacement asset in order to apply the 124-B roll-over to the extent desired by yourselves.

·   The impact of the global COVID-19 pandemic on the Australian real property market with regards to national lockdowns and overall property listings being, in the experience of yourselves, far less than would ordinarily be the case.

You have considerable experience with buying and selling real property and instruct that, in the current circumstances, listings of property of the kind required as a replacement asset and for the consideration involved are far fewer.

You are therefore, concerned that you will be unable to acquire a replacement asset on or before 30 June 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 104-10(6)

Income Tax Assessment Act 1997 124-1

Income Tax Assessment Act 1997 995-1(1)

Income Tax Assessment Act 1997 124-70(2)

Income Tax Assessment Act 1997 124-75

Income Tax Assessment Act 1997 103-25

Reasons for decision

These reasons for decision accompany the Notice of private ruling for XXXX.

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Summary

Commissioner's discretion to allow an additional three years to acquire a replacement asset compulsorily acquired by State government.

Detailed reasoning

A change of ownership of an asset may trigger a Capital Gains Tax (CGT) event A1. In respect of an 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.

Section 124-1 of the ITAA 1997 states that 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. It involves your ownership of one CGT asset ending and you acquiring another one. The roll-over under Division 124 provides the taxpayer to either choose to exercise the roll-over or trigger the capital gain or capital loss in the income year in which the CGT event occurs. If the taxpayer chooses to obtain the roll-over, section 103-25 governs when and how the choice is made and the consequences are as set out in Division 124.

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.

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 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. 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.

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.

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.

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

·   when you received full compensation from the entity

·   when the entity becomes the asset's owner

·   when the entity entered it under that power, or

·   when the entity took possession under that power.

In your case, your property has been compulsorily acquired. You have not received full compensation payment. However, the transfer of ownership of the property occurred in the 20XX-20XX income year when the land was compulsorily acquired on 30 July 20XX. The time of the event under subsection 104-10(6) is therefore when the land was legally acquired.

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? It further 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.

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.

On the basis of the guidelines in TD 2000/40, it is considered that this situation is one of special circumstances which would warrant the Commissioner allowing further time under paragraph 124-75(3)(b).

Application to your Circumstances

Subdivision 124-B of the ITAA 1997 allows you to choose rollover relief for the property at XXXX (the CGT asset) compulsorily acquired by XXXX, as it received money from the department as compensation. XXXX is a state department of XXXX government, therefore, the compulsory acquisition by XXXX government of the land 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.

Under paragraph 124-75(3)(b) of the ITAA 1997, you 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, that is until 30 June 20XX.

You have not acquired a replacement CGT asset prior to transfer and therefore to satisfy subsection 124-75(3), a replacement CGT asset must be acquired no later than 30 June 20XX, being one year after the end of the income year in which the event happened (paragraph 124-75(3)(b)). You have requested further time until 30 June 20XX as full compensation has been not received from the government to satisfy the requirements of subsection 124-75(3) as well as you are experiencing considerable difficulty in identifying a suitable replacement asset due to:

·   the protracted negotiations between the parties regarding the purchase price for the land, resulting in the delay in the date from which you could commence search for a replacement asset.

·   the fact that you have not received the full purchase price from the Department. This, when coupled with the issue immediately above, financially restricts you from acquiring a replacement asset in the absence of assuming significant debt.

·   the quantum of the purchase price, with the implication that you must acquire a substantial replacement asset in order to apply the 124-B roll-over to the extent desired by yourselves.

·   the impact of the global COVID-19 pandemic on the Australian real property market with regards to national lockdowns and overall property listings being, in the experience of yourselves, far less than would ordinarily be the case.

To date, you have considered numerous properties to become the replacement asset and may need to consider further opportunities if current negotiations prove unsuccessful. 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.

Furthermore, 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 you an extension to obtain a replacement asset for property that was compulsorily acquired by XXXX until XXXX. Any future request for extension will be assessed based on your facts at the time of your application.

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