Edited version of private advice

Authorisation Number: 1052010410505

Date of advice: 26 July 2022

Ruling

Subject: CGT - replacement asset

Question

Will the Commissioner exercise his discretion under subsection 124-75(3) of the Income Tax Assessment Act 1997 to allow the taxpayer additional time to acquire a replacement asset?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 20XX

Relevant facts and circumstances

Your property was purchased in 19XX and was used as a residential rental property throughout the ownership period.

In XX 20XX you received notice from XX advising that your interest in the property was to be compulsorily acquired.

Following the notice of compulsory acquisition of the property, an initial letter of offer was received from XX on XX XX 20XX.

Since your valuer had not completed the valuation of the properties by XX XX 20XX, XX's initial offer was not accepted by you. Your valuer took an excessive amount of time finalising their valuation of the properties, which caused a prolonged negotiation period.

Upon the conclusion of your valuer's assessment, XX made a revised offer on XX XX 20XX. You received a total of $XX for the property.

Settlement occurred on XX XX 20XX. Your search for a replacement property began at the same time.

You are searching for a semi-detached house with 2-3 bedrooms and 1-2 bathrooms in a number of suburbs.

You attended several auctions for sale of properties from XX XX 20XX. However, you were not successful in finding a suitable replacement property by attending auctions.

Your parent passed away on XX XX 20XX after an extended period of immobility and palliative care.

You are the executor of your late parent's estate. The issues of thier estate have been ongoing and are still being dealt with.

You engaged a buyer's agent to assist with your search for a suitable replacement property in XX 20XX. However, you ended your engagement with this buyer's agent due to their unsuitability to the type of replacement property you are searching for.

You engaged a new buyer's agent in XX 20XX. You were shown several properties by this agent, however, you did not find any of the properties suitable.

COVID-19 restrictions and lockdowns made inspection of respective replacement properties difficult due to the limited opportunities.

Relevant legislative provisions

Section 124-70of the Income Tax Assessment Act 1997

Section 124-75of the Income Tax Assessment Act 1997

Subsection 104-10(6)of the Income Tax Assessment Act 1997

Subsection 124-70(2)of the Income Tax Assessment Act 1997

Subsection 124-75(1)of the Income Tax Assessment Act 1997

Subsection 124-75(2)of the Income Tax Assessment Act 1997

Subsection 124-75(3)of the Income Tax Assessment Act 1997

Subsection 995-1(1)of the Income Tax Assessment Act 1997

Paragraph 124-75(2)(a) of the Income Tax Assessment Act 1997

Paragraph 124-75(3)(a) of the Income Tax Assessment Act 1997

Paragraph 124-75(3)(b) of the Income Tax Assessment Act 1997

Reasons for decision

Section 124-70 describes different events when a roll-over is available to an entity if that event happens to the CGT asset of that entity. According to subsection 124-70(1), an entity can 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, motorcycle, or similar vehicle) or both as compensation for the event happening.

Subsection 995-1(1) defines an Australian government agency to mean the Commonwealth, a State or a Territory, or an authority of the Commonwealth or of a State or Territory.

XX is an Australian government agency. Therefore, XX's compulsory acquisition of your property is an event which gives rise to a roll-over.

You can choose a roll-over in relation to the capital gain, 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.

The relevant provision for you is paragraph 124-75(2)(a) whereby they are required to incur expenditure to acquire another CGT asset to obtain the roll-over.

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 CGT event happens or within such further time as the Commissioner allows in special circumstances.

The time of the CGT event A1 is determined by subsection 104-10(6):

If the asset was acquired from you 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 time of the event under subsection 104-10(6) is therefore the date the property was compulsorily acquired by the agency in XX 20XX.

As you did not acquire a replacement asset prior to the disposal of the property, to satisfy subsection 124-75(3), you must incur at least some of the expenditure in acquiring another CGT asset no later than 30 June 20XX, (being one year after the end of the income year in which the event happened), or within such further time as the Commissioner allows in special circumstances (paragraph 124-75(3)(b)).

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 case.

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? explains that the expression special circumstances in the context of subsection 124-75(3) by its nature is incapable of a precise or exhaustive definition. Some examples of special circumstances are provided under the tax determination.

Restrictions and lockdowns imposed by the government arising from the COVID-19 pandemic have significantly affected your ability to look for a replacement asset for majority of the 20XX calendar year.

Your situation falls within scope of what would be considered special circumstances therefore the Commissioner will exercise his discretion under paragraph 124-75(3)(b) to allow an extension of time until XX XXX 20XX for you to acquire a replacement CGT asset.

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