Edited version of private advice

Authorisation Number: 1052115574926

Date of advice: 11 May 2023

Ruling

Subject: Replacement asset roll-over

Question

Will the Commissioner exercise his discretion under subsection 124-75(3) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow the Owner an extension of time to 30 June 20XX to incur expenditure to acquire another CGT asset under subsection 124-75(2) of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

30 June 20XX

The scheme commenced on:

30 June 20XX

Relevant facts and circumstances

The Owner is an Australian resident.

The Owner is in the business of owning, developing and managing properties in Australia.

The Owner was the owner of two parcels of land (collectively referred to as 'the Property').

The Owner received written notification from a State authority dated 20XX that the Property will be required for the Project.

On 20XX (Acquisition Date), the State authority compulsorily acquired the Property in accordance with the Land Acquisition (Just Terms Compensation) Act 1991 (the Act) for the purpose of the Project.

On 20XX the Owner received a written notice of the compulsory acquisition, for the purposes of section 42 of the Act, which provided for their entitlement to compensation and the amount of compensation of $XX and their right to object to the amount offered.

On 20XX, the Owner lodged an objection to the amount of compensation offered by the State authority and have determined that the compensation amount should be $XX plus interest payable under section 49 of the Act.

The Land and Environment Court listed the matter for a directions hearing in 20XX and a joint conciliation conference is scheduled for 20XX.

If the conciliation conference is unsuccessful, the parties will attend a further directions hearing and the case will move to trial.

If so, the Owner's advice is that a hearing is unlikely until sometime between March and June 20XX and a decision is expected to take up to six months (assuming no further appeal).

The Owner intends to acquire one or more replacement properties with the compensation which it is awarded in consequence of its current Court proceedings.

The Owner cannot reasonably determine the amount of proceeds it will need to invest to acquire a replacement asset until the relevant court proceedings have been completed and the final compensation amount is known.

As a consequence, the Owner will not reasonably be in a position to determine the appropriate compensation available to acquire a replacement asset until the 30 June 20XX income year (or later if there is an appeal).

As the Property was compulsorily acquired during the year ended 30 June 20XX, replacement expenditure must ordinarily be incurred prior to 30 June 20XX being one year after the end of the income year in which the acquisition happened.

Relevant legislative provisions

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

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

Section 124-70 of the Income Tax Assessment Act 1997

Reasons for decision

Summary

The Commissioner of Taxation will exercise his discretion to allow the Owner an extension of time to 30 June 20XX under subsection 124-75(3) of the Income Tax Assessment Act 1997.

Detailed reasoning

All legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated.

Section 124-70 describes different events when a roll-over is available to an entity if that event happens to the Capital Gains Tax (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 as a Commonwealth, a State or a Territory or an authority of Commonwealth or of a State or Territory. In this case, the Property was compulsorily acquired by the State authority on 2 September 2022. Therefore, the Owner can choose a roll-over in relation to the capital gain that they received from the compulsory acquisition, 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.

In the Owner's case, their original asset, namely the Property, is not lost or destroyed. Therefore, the relevant provision for the Owner is paragraph 124-75(2)(a) whereby it is required to incur expenditure to acquire another CGT asset in order 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 event happens or within such further time as the Commissioner allows in special circumstances.

The time of the event is determined by subsection 104-10(6). The time of the event will be the earliest of:

•         when you received full compensation from the entity;

•         when the entity becomes the asset's owner;

•         when the entity entered it under that power, or

•         when the entity took possession under that power.

In the Owner's case, the Property was compulsorily acquired on 20XX. The time of the event under subsection 104-10(6) is therefore the date when the Property was compulsorily acquired, which was 20XX.

The Owner did not acquire a replacement CGT asset prior to the disposal of the Property and therefore to satisfy subsection 124-75(3), a replacement CGT asset must be acquired 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)).

Special circumstances

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.

In determining whether special circumstances exist that will allow the Commissioner to extend the period to acquire a replacement asset, regard must be had to 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).

In determining if the discretion would be exercised, the Commissioner will consider the following factors:

•         there should be evidence of an acceptable explanation for the period of extension requested and that it would be fair and equitable in the circumstances to provide such an extension;

•         account must be had to any prejudice to the Commissioner which may result from the additional time being allowed, however the mere absence of prejudice is not enough to justify the granting of an extension;

•         there must be a consideration of fairness to people in like positions and the wider public interest;

•         whether there is any mischief involved; and

•         a consideration of the consequences.

TD 2000/40 states that the expression 'special circumstances' in the context of subsection 124-75(3) of the ITAA 1997 by its nature is incapable of a precise or exhaustive definition. Some examples of special circumstances are provided under the tax determination. The Commissioner has granted an extension of time where there have been special circumstances and there is an acceptable explanation for the period of extension requested. These can include, but are not limited to, medical or financial issues, personal issues, or natural disasters.

Example 3 of TD 2000/40 states:

6. Graeme had a commercial property compulsorily acquired by a State authority. Graeme is having a protracted legal dispute with the authority over the quantum of the compensation. On these facts, we would accept that there are special circumstances to allow further time.

On 20XX, the Owner lodged an objection in the Land and Environment Court to the amount of compensation offered, requesting compensation of $XX being more than the amount of $XX offered in the compensation notice issued on 20XX.

The court has listed the matter for a directions hearing and a joint conciliation conference has been scheduled. If the conciliation conference is unsuccessful, the case will move to trial. The Owner has been advised the trial is likely to be scheduled in 20XX, with a judgement expected to be provided within six months of trial.

The Owner has submitted that given the status of these proceedings, it is expected that the exact compensation amount may not be known until sometime in the year ended 30 June 20XX.

To date, the Owner has not acquired a replacement asset for the Property and is unlikely to acquire a replacement asset until after the completion of the litigation and the payment of the final compensation amount.

The Commissioner considers that it would be reasonable to give the Owner further time to search for a replacement asset for the Property following the court's determination, given that the quantum of compensation which will ultimately be received by the Owner, being essential to the acquisition of a suitable replacement property, will not be known prior to the determination.

Conclusion

Based on the guidelines in TD 2000/40 and upon a review of the facts in this case, it is considered that the Owner's situation falls within scope of what would be considered special circumstances which would warrant the Commissioner allowing further time under paragraph 124-75(3)(b) to 30 June 20XX.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).