Edited version of private advice

Authorisation Number: 1051754494804

Date of advice: 18 September 2020

Ruling

Subject: Capital gains tax - insurance compensation

Question 1

Is any capital gain or capital loss the company makes due to the destruction of the house disregarded?

Answer

Yes.

In your case:

·         The shareholding changes do not re-set the acquisition date of the house and land. Therefore, the house and land were one pre-CGT asset at the time of the fire.

·         CGT event C1 happened to the house when it was destroyed.

·         The insurance proceeds are the capital proceeds, but they relate to a pre-CGT asset so any capital gain or capital loss is disregarded.

Question 2

Will the replacement house and land continue to be treated as pre-CGT assets?

Answer

Yes.

The land remains the same pre-CGT asset. The destruction of the house does not change this.

The replacement house would be considered to be a separate post-CGT asset except that the rollover applies to treat it as a pre-CGT asset (giving it the same status as was held by the house that was destroyed).

The rollover applies because you meet the rollover conditions and you will choose to apply the rollover. The rollover conditions in your case are:

·         A house you owned was destroyed

·         You received money as compensation for the destruction of the house

·         You will spend money to construct a replacement house

·         You will spend at least some of the money within the replacement asset period

·         You will use the replacement house for the same or a similar purpose as the original house

·         You will spend less than 120% of the market value of the house that was destroyed.

This ruling applies for the following period:

Financial year ending 30 June 20XX

The scheme commences on:

X November 20XX

Relevant facts and circumstances

ABC Pty Ltd was incorporated before 1985 and owns pastoral land in two Australian states. The only changes in the shareholders have occurred as inheritances.

Historically the company has operated cattle farming activities on their properties.

The farm property at XXXX was bought by ABC Pty Ltd before 1985, and contained two houses, sheds, equipment and machinery.

The property was leased out for grazing and the house, sheds and yards formed part of the lease package. The house was not rented separately and was lived in by the father of the lessee.

In 20XX a large bushfire in the area burned thousands of hectares of bush and destroyed many houses and sheds.

One house, two sheds, machinery and equipment at your property was destroyed by fire in 20XX. The other house was saved.

The dwellings, sheds, machinery and equipment and were insured.

ABC Pty Ltd lodged a claim with their insurer for the fire damage incurred and the insurance claim was successful. The total insurance payout is approximately $XX.

A portion of the of the payout relates to the destroyed plant and equipment which will be taxable proceeds to be applied against the written down depreciable values.

A portion of the payout relates to the destroyed house that was constructed pre-CGT and is located on pre-CGT land.

The replacement house will not cost more than the insurance proceeds received. An exact figure is not yet known but the company is not in a position to spend more than what has been afforded to them by the insurer.

Minor improvements were made to the house in 20XX, 20XX and 20XX due to the significantly deteriorated state of the buildings. These improvements were below the threshold to be treated as separate CGT assets meaning that they are merely capital improvements to the pre-CGT asset.

Assumptions

For the purpose of this ruling it is assumed that you will:

·         construct a replacement house within the replacement asset period

·         spend approximately $XX in constructing the replacement house, and

·         choose to claim the rollover under Subdivision 124-B of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Subdivision 124-B

Income Tax Assessment Act 1997 Subsection 124-85(3)

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