Edited version of private advice

Authorisation Number: 1052103710609

Date of advice: 16 June 2023

Ruling

Subject: CGT - replacement asset

Question

Will the Commissioner exercise his discretion under subsection 124-75(3) of the Income Tax Assessment 1997 (ITAA 97) to allow the Entity additional time until 30 June 20XX to acquire a replacement asset?

Answer

Yes.

This ruling applies for the following period

Year ending June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

1.     The Entity acquired a property (Building X & X) XX-XX XXXXXXXXX Street, XXXXXXX, XXX XXXX prior to 30 June 20XX which was used as a commercial rental property throughout the ownership period.

2.     On 24 June 20XX, the Entity received a notice of intention from the agency for compulsory acquisition of the property in accordance with the State Government Act WWWW.

3.     On 11 December 20XX, the agency compulsorily acquired the property.

4.     On 13 February 20XX, the entity acquired a first replacement asset with part of the compensation proceeds and a second replacement asset was being pursued at the same time.

5.     On 23 December 20XX, the Entity received an initial offer of compensation letter and valuation of property letter with the compensation proceeds of $X,XXX,XXX initially deposited on 19 March 20XX.

6.     The Entity was in negotiations with the agency on the amount of final compensation from 23 December 20XX (the date of the initial offer of compensation received).

7.     Due to ongoing negotiations, the Entity was reluctant to commit to an acquisition of a replacement asset prior to confirmation of the compensation amount.

8.     On 30 June 20XX, the Entity received the final compensation amount.

9.     The Entity experienced difficulties in finding a suitable replacement asset with a high demand for the same type of properties in the area due to lack of availability caused by the large-scale compulsory acquisition process.

10.  The Entity found appropriate properties at Unit X/X-X XXXXXX Court, XXXXXXXXX on 25^th March 20XX, XX/XX, VVVVVV Road, JJJJJJJ on 11^th May 20XX and X/XX XXXXXXXXX Road XXXXXX XXXXX on 1^st September 20XX.

11.  The final replacement asset property(ies) will be used in the entity's business.

12.  The replacement assets will not be used as items of trading stock, depreciating asset or become a register emissions unit.

Relevant legislative provisions

Section 104-5 of the ITAA 1997

Subsection 104-10(1) of the ITAA 1997

Subsection 104-10(2) of the ITAA 1997

Subsection 104-10(6) of the ITAA 1997

Section 124-70 of the ITAA 1997

Section 124-75 of the ITAA 1997

Subsection 124-75 (1) of the ITAA 1997

Subsection 124-75 (2) of the ITAA 1997

Subsection 124-75 (3) of the ITAA 1997

Subsection 124-75(4) of the ITAA 1997

Subsection 124-75(5) of the ITAA 1997

Subsection 124-75(6) of the ITAA 1997

Subsection 995-1 (1) of the ITAA 1997

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless indicated otherwise.

Question 1

Will the Commissioner exercise his discretion under subsection 124-75(3) of the Income Tax Assessment 1997 to allow the Entity additional time until 30 June 20XX to acquire a replacement asset?

EXPLANATION OF LEGISLATION

Disposal of CGT Asset - CGT event A1

13.  Section 104-5 sets out a summary of the CGT events. CGT event A1 is the disposal of a CGT asset as per subsection 104-10(1) ITAA 97. Subsection 104-10(2) further explains, the taxpayer will dispose the CGT asset if a change of ownership occurs from the taxpayer to another entity.

14.  Subsection 104-10(6) summarises that a compulsory acquisition of a CGT asset will commence if the CGT asset was acquired by the agency from the entity under a power of compulsory acquisition conferred by an Australian law or foreign law, at the earliest the time of the CGT event:

•         (a) When the taxpayer received the 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.

CGT events giving rise to the roll-over

15.  Section 124-70 explains the events giving rise to a roll-over. Paragraph 124-70(1)(a) provides that a roll-over is obtainable to a taxpayer who owns a CGT asset that has been compulsorily acquired by an Australian government agency.

16.  Subsection 124-70(2) details that a taxpayer must receive money or another CGT asset (except a car, motorcycle, or similar vehicle) or both, as compensation for the CGT event happening.

Definition of Australian Government agency

17.  The term 'Australian Government agency' is defined in subsection 995-1 (1) as:

•         The Commonwealth, a State or a Territory, or

•         An authority of the Commonwealth or of a State or a Territory

Other requirements to CGT event if taxpayer received money

18.  Subsection 124-75(1) provides that if money has been received for the CGT event, other requirements must be satisfied to allow a taxpayer to choose to obtain a roll-over.

19.  Subsection 124-75(2) provides that to be eligible for the roll-over, the taxpayer 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.

20.  Subsection 124-75(3) further details that at least some 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

Special rules if another CGT asset is acquired

21.  Subsection 124-75(4) details the special rules in the CGT event that a previous original CGT asset was acquired. If the original CGT asset was:

•         (a) - used in the taxpayer's business or

•         (b) - installed ready for use in the taxpayer's business or

•         (c) - In the process of being installed ready for use in the taxpayer's business.

22.  Just before the event happened, the other asset must be used in the business or installed ready for use in the business, for a reasonable time after the taxpayer acquired it. Otherwise, subsection 124-75(4) provides that the taxpayer must use the other asset for the same, similar, purpose for which the original assets was used prior to the event happening.

23.  Subsections 124-75(5) & (6) explain that the other assets cannot become an item of the taxpayer's trading stock after it has been acquired, be a depreciating asset, or become a registered emissions unit held by the taxpayer after it has been acquired.

What are 'special circumstances'

24.  As detailed by Taxation Determination (TD 2000/40) Income tax - capital gains - what are 'special circumstances' for the purposes of subsection 124-75 (3) of ITAA 1997? - the expression special circumstances in relation to subsection 124-75(3) is by its nature incapable of a detailed or comprehensive definition.

25.  Some examples of special circumstances are provided in the Tax Determination to give extra guidance on what would be considered special circumstances by the Commissioner.

26.  Example 1 in TD 2000/40 provides a scenario in which an entity's asset is compulsorily acquired by a State Authority. The Entity is then involved in a legal dispute with the authority over the compensation amount. The compensation is received within the 12-month period before they are required by subsection 124-75(3) to replace the asset. However, it is only received with a month of that 12-month period to go. In this instance, the Commissioner accepts that an acquisition within this short period of time is not feasible and that there are special circumstances to allow further time for the Entity to acquire a replacement asset.

27.  Example 3 of TD 2000/40 outlines another case in which it would be accepted that special circumstances would exist. In this example Graeme's commercial property was compulsorily acquired by a State authority. He was in protracted legal disputes with the State authority regarding the quantum of the compensation figure. Based on these facts the Commissioner would accept that there are special circumstances to allow further time, pursuant to subsection 124-75(3).

Application to the Entity's circumstances

28.  The disposal of the Commercial property by the taxpayer through compulsory acquisition to the agency satisfies section 104-5 such that CGT event A1 occurred.

29.  In relation to a CGT event giving rise to a roll-over based on the CGT asset being compulsory acquired the Entity must satisfy the relevant provisions in Division 124. Paragraph 124-70(1) requires that for a roll-over to be obtainable to an entity which owns a CGT asset, the asset must have been compulsorily acquired by an Australian government agency. The agency is an Australian government agency, so this provision is satisfied.

30.  In addition, subsection 124-70(2) is satisfied due to the Entity receiving a disclosed amount of money of $X,XXX,XXX as compensation proceeds for the CGT event occurring.

31.  The relevant provision for the Entity is paragraph 124-75 (2)(a) due to the Entity being required to incur expenditure to acquire another CGT asset to gain the rollover.

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

33.  As the subsequent replacement properties were used in the Entity's business, this satisfies the special rules in the CGT event under paragraph 124-75(4)(a) of the ITAA 1997.

34.  The subsequent replacement properties were not used as an item of trading stock, a depreciating asset or to become a register emissions unit, thus they meet the requirements under subsection 124-75(5) & (6) of the ITAA 1997.

35.  Although the Entity acquired the first of the replacement assets on 13 February 20XX, prior to the end of the financial year on 30 June 20XX, the purchase of the final replacement asset on 1 September 20XX was acquired post 30 June 20XX deadline requiring the request for an extension.

36.  The Commissioner accepts that the reason for the failure to acquire a replacement asset was due to special circumstances, being that:

•         delays in negotiation with the government agency on the amount of final compensation for the compulsory acquisition of the original property did not allow the purchase of a replacement property within the 12-month period.

•         The large scale of competition in the search for replacement properties for the ensured properties were difficult to acquire in a timely fashion.

37.  Therefore, the Commissioner will exercise his discretion under paragraph 124-75(3)(b) to allow additional time until 30 June 20XX for the Entity to acquire a replacement CGT asset.

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