Edited version of private advice

Authorisation Number: 1052036407517

Date of advice: 4 October 2022

Ruling

Subject: CGT - extension of time for incurring expenditure to acquire a replacement asset

Question

Will the Commissioner exercise his discretion under subsection 124-75(3) of the Income Tax Assessment 1997 to extend the time required to obtain a replacement asset for a compulsorily acquired asset?

Answer

Yes.

This ruling applies for the following periods:

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Your property was used by you as part of a business.

The property was purpose built for the operation of the business and included specific features as required for the business.

These attributes are not generally required for the operation of other types of businesses.

You received notice from XX advising that the property was to be compulsorily acquired in XX 20XX.

You received an amount of compensation from XX on or around XX XX 20XX.

You have been in negotiations with XX to obtain a fair and reasonable compensation since XX 20XX.

As part of the acquisition agreement of the property, XX agreed to assist you in finding a suitable replacement asset.

You have engaged in substantial efforts in locating a suitable replacement asset.

XX and your joint efforts have been unsuccessful in finding an appropriate replacement asset.

You are still in a protracted legal dispute with XX, and reluctant to commit to the acquisition of a replacement asset until such time as the quantum of the compensation can be ascertained.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 124-70

Income Tax Assessment Act 1997 Section 124-75

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

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

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 995-1(1)

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

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

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

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), a taxpayer 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 taxpayer 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 falls under the definition of an Australian government agency. Therefore, its compulsory acquisition of your property is an event which gives rise to a potential 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:

If you receive money for the event happening, you can choose to obtain a roll-over only if these other requirements are satisfied.

The roll-over consequences are set out in section 124-85.

(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.

(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 you 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 you received compensation from XX on or around XX 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? (TD 2000/40) provides guidelines as to when the Commissioner will extend the period in which a replacement asset can be acquired, in particular what are special circumstances.

Example 3 in TD 2000/4 provides a scenario in which a taxpayer's asset is compulsorily acquired by a State authority. The taxpayer is then involved in a protracted legal dispute with the authority over the quantum of the compensation. In this instance, the Commissioner accepts that there are special circumstances to allow further time for the taxpayer.

The lack of certainty as to the amount and timing of the compensation to be received has delayed your ability to search for and acquire an appropriate replacement asset. We consider that you have made continuing efforts and have done what is reasonable in attempting to acquire a replacement asset as per example 3 in TD 2000/40.

Accordingly, the Commissioner will exercise his discretion under paragraph 124-75(3)(b) and extend the period for you to acquire a replacement asset to XX XX 20XX.

Additional information

A private ruling is a written expression of the Commissioner's opinion of the way in which a relevant provision applies, or would apply, to you in relation to a specified scheme.

A private ruling will specify the time it begins to apply and the time it ceases to apply. As specified in the Notice of decision above, this private ruling applies for the period ending XX XX 20XX.

Subsection 124-75(3) does not provide a period within which you can request that the Commissioner allow further time. If you wish to make such a request for further time after XX XX 20XX you may do so by applying for another private ruling, requesting the Commissioner to exercise his discretion under subsection 124-75(3) and providing evidence of meeting the criteria as set out in this ruling.

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