Edited version of private advice

Authorisation Number: 1051867569241

Date of advice: 2 September 2021

Ruling

Subject: CGT rollover - compulsory acquisition

Question

Does the replacement asset roll-over provision in Subdivision 124-B of the Income Tax Assessment Act 1997 (ITAA 1997) for compulsory acquisition apply to the disposal of a unit?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 20XX

The scheme commences on:

XX Month 20XX

Relevant facts and circumstances

1.            Company A is a foreign resident for Australian taxation purposes.

2.            Company A is the registered proprietor of a unit in State (Unit).

3.            The Unit was purchased in 19XX.

4.            The Unit is located in a commercial building (Building).

5.            The Building is situated on the land in a Strata Plan, which contains a strata scheme registered under the State Act.

6.            In 20XX, Company A leased the Unit until June 20XX to derive rental income.

The Proposed Purchase

7.            Company B wishes to acquire the Unit in order to redevelop the Building and in 20XX, Company B and Company A began negotiations for the sale of the Unit and eventually Company A agree to sell the unit for $XXXX. If Company A had refused to sale the unit it would have been compulsorily acquired by Company B under the State Act.

Company A's agreement to sell the Unit to Company B

8.            Company B and Company A subsequently agreed on a purchase price of $XXXX for the Unit, exclusive of GST.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 Subdivision 124-B

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

Income Tax Assessment Act 1997 paragraph 124-70(1)(b)

Income Tax Assessment Act 1997 subsection 124-75(1)

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

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

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

Income Tax Assessment Act 1997 section 124-85

Income Tax Assessment Act 1997 subsection 124-85(2)

Reasons for decision

CGT Event A1

Pursuant to subsection 104-10(1) a capital gains tax (CGT) event A1 occurs on the disposal of a CGT asset.

Pursuant to subsection 104-10(2) the disposal of a CGT asset happens if a change of ownership of the asset occurs.

Under subsection 104-10(6), if the asset is acquired by an entity under a power of compulsory acquisition conferred by an Australian law or a foreign law, the time of the event is the earliest of:

(a) when you received compensation from the entity; or

(b) when the entity became the asset 's owner; or

(c) when the entity entered it under that power; or

(d) when the entity took possession under that power.

The Unit is a CGT asset.

CGT event A1 will occur when Company A disposes of the Unit (subsection 104-10(1)) and as the Unit is being compulsory acquired the timing of the event will be in accordance with subsection 104-10(6). In this situation it will be when the contract for sale has been entered into and Company A has received the sale price for the Unit.

Company A is therefore entitled to choose roll-over relief in accordance with Subdivision 124-B as the Unit is being compulsory acquired.

Event giving rise to roll-over

Subdivision 124-B outlines the requirements for a replacement asset roll-over where an original asset has been compulsorily acquired, lost or destroyed.

Subsection 124-70(1)(c) states that an entity is able to choose a roll-over if the CGT asset is disposed to an entity (other than a foreign government agency) and the following conditions are met:

(i) the disposal takes place after a notice was served on you by or on behalf of the entity;

(ii) the notice invited you to negotiate with the entity with a view to the entity acquiring the asset by agreement;

(iii) the notice informed you that if the negotiations were unsuccessful, the asset would be compulsorily acquired by the entity;

(iv) the compulsory acquisition would have been under a power of compulsory acquisition conferred by a law covered under subsection (1A);

A law under subsection 124-70(1A) is an Australian law other than Chapter 6A of the Corporations Act 2001, or a foreign law other than a foreign law corresponding to Chapter 6A of the Corporations Act 2001.

Company B has served notices inviting Company A to negotiate with a view to Company B acquiring the Unit by agreement and if negotiations were unsuccessful that they would take steps to commence the strata renewal process stipulated under the State Act in order to acquire the Unit. The State Act is an Australian law that satisfies subsection 124-70(1A). Therefore, Company A will meet the conditions set under paragraph 124-70(1)(c).

Paragraph 124-70(2)(a) states that the entity must receive money or another CGT asset or both as compensation for the CGT event happening. Company A will satisfy paragraph 124-70(2)(a) as it will receive money by way of compensation for the compulsory acquisition being the sale of the Unit.

Subsections 124-70(3) and (4) state that if the entity is a foreign resident just before the CGT event happens, the original asset must be a taxable Australian property before the event happens and the replacement asset must also be taxable Australian property.

Pursuant to item 1 of section 855-15, taxable Australian property includes taxable Australian real property. Under section 855-20, taxable Australian real property is defined as real property situated in Australia or a mining, quarrying or prospecting right where the minerals, petroleum or quarry materials are situated in Australia.

Company A is a foreign resident and therefore must meet the requirements in subsections 124-70(3) and (4). The Unit is real property situated in Australia and therefore is taxable Australian property. Consequently, Company A will meet the requirements in subsection 124-70(3).

Company A intends to purchase a replacement unit in Australia and therefore meet the requirements under subsection 124-70(4).

Additional requirements if money is received

Subsections 124-75(1) and paragraph 124-75(2)(a) state that if you receive money for the CGT event happening you can choose to obtain a roll-over if you incur expenditure in acquiring another CGT asset (except a depreciating asset whose decline in value is worked out under Division 40 or deductions which are calculated under Division 328).

Subsection 124-75(3) states that at least some of the expenditure must be incurred:

(a) no earlier than one year before the event happens, or

(b) no later than one year after the end of the income year in which the event happens.

Additionally, subsection 124-75(4) requires that if just before the CGT event the original asset was used in your business, installed ready for use in your business, or was in the process of being installed ready for use in your business that the replacement asset must also be used in the business, or be installed ready for use in the business, for a reasonable time after you acquired it. Otherwise, the replacement asset must be used for a reasonable time after its acquisition for the same or similar purpose for which the original asset was used for just before the CGT event happened.

Taxation Determination TD 2000/41 Income tax: capital gains: are the two requirements in subsection 124-75(4) of the Income Tax Assessment Act 1997 for a CGT asset acquired to replace an original asset alternative and mutually exclusive requirements? (TD 2000/41) provides that either of the two elements in subsection 124-75(4) can be satisfied.

Taxation Determination TD 2000/42 Income tax: capital gains: what is the scope of the words 'use the other asset... for the same purpose... or for a similar purpose' in subsection 124-75(4) of the Income Tax Assessment Act 1997 in relation to a replacement asset? (TD 2000/42) provides that whether a CGT asset is used for the same or similar purpose as another asset is a question of fact and degree.

Just before the CGT event, the Unit was leased by Company A to third party to derive investment income. The replacement asset roll-over provisions in Subdivision 124-B will apply if Company A acquires a replacement asset within the time frame stipulated by subsection 124-75(3) when the event occurs being the disposal of the Unit and compensation being received.

As the Unit is being used as an investment property when CGT event A1 happened, then the replacement asset must also be used in the same or similar manner for a reasonable amount of time after its acquisition.

Section 124-85 sets out the consequences where you receive money for the event happening and you choose to obtain a roll-over. As Company A is receiving $XXXX for the disposal of the Unit, and if it makes a capital gain then it will need to have regard to the application of subsection 124-85(2) in how the capital gain should be treated.

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