Edited version of private advice

Authorisation Number: 1052122668657

Date of advice: 21 June 2023

Ruling

Subject:CGT - compulsory acquisition - rollover

Question

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

Answer

Yes

This ruling applies for the following period:

1 July 202X to 30 June 202X

The scheme commences on

1 July 200X

Relevant facts and circumstances

The Trustee for the Trust (the Trust) was incorporated in 199X and the Trust was established.

The following year the Trust purchased a commercial complex via auction.

The Trust owned and held the commercial property as an investment asset. The Trust self-managed the asset, receiving rental income from tenants.

Late 200X, a government authority announced that the site would be required for a transport development project.

The Trust received some monthly rental income until the property was compulsory acquired by the government on X date.

Just before the CGT asset was compulsorily acquired, it was used and held for an investment purpose.

Following the compulsory acquisition:

• the Trust lodged a claim for compensation with the X Government
• the Trust first received compensation as payment for the compulsory acquisition from the X Government on X date (an advance payment)
• a protracted legal dispute over the quantum of compensation took a while to resolve, following which full compensation was received

The original asset was held as an investment asset. The Trust received income by way of periodic payments from tenants.

Since receiving the final payment the Trust has been actively seeking commercial properties for replacement assets similar to the compulsorily acquired property and provided evidence of this in support of their private ruling application.

The Trust also made an offer to purchase another commercial property and is waiting for due diligence information to be released.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 section 124-75

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

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

Reasons for decision

All references are to the ITAA 1997 unless otherwise stated

Summary

The Commissioner will exercise his discretion pursuant to subsection 124-75(3) and allow an extension of time in order to meet the eligibility requirements of Subdivision 124-B.

Detailed reasoning

Roll-over relief for the compulsory acquisition of a CGT asset is available where the conditions outlined in subdivision 124-B are met. A replacement-asset rollover allows an entity, in special cases, to defer the making of a capital gain or loss from one CGT event until a later CGT event happens.

Under subsection 124-70(1) you may be able to choose a roll-over if a CGT asset is compulsorily acquired by an Australian Government agency.

If you receive money for the sale of the asset further conditions are imposed by section 124-75. Among other conditions, subsection 124-75(2) requires that the owner of the asset incur expenditure in acquiring another CGT asset. Subsection 124-75(3) requires you to incur expenditure in acquiring another CGT asset no earlier than one year before the disposal happens and no later than one year after the end of the income year in which the disposal happens, or within such further time as the Commissioner allows in special circumstances.

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? provides guidelines on when the Commissioner will extend the period in which a replacement asset can be acquired and what are special circumstances.

TD 2000/40 in paragraph 1 provides that the expression 'special circumstances' in subsection 124-75(3) by its nature is incapable of a precise or exhaustive definition, and in paragraph 3 that what are 'special circumstances' depends on the facts of each particular case. Paragraphs 5 and 6 of TD 2000/40 provide the following examples:

Example 2:

5. Gordon owned a wool processing factory which was destroyed by fire. Gordon immediately commences to negotiate to purchase a nearby factory, taking possession pending settlement. After lengthy negotiations, however, the purchase of the factory falls through. He then purchases another property but just outside the 2 year time period. On these facts, we would accept that Gordon has done what is reasonable to acquire a replacement asset and we would allow him further time.

Example 3:

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.

Conclusion

In this case the Trust had a commercial property that was compulsorily acquired in 200X and:

•         the amount of compensation was not determined for some years. Eventually this was settled, and the balance of the compensation payment received in 202X

•         since receiving the final payment, the Trust has actively searched for replacement properties similar to the compulsorily acquired property:

-       at certain stages travel and inspections to access suitable properties was restricted due to COVID-19. As the pandemic situation eased, the Trust continued to actively search for suitable replacement properties

-       there is evidence of attempts by the Trust to acquire a replacement property

-       the Trust has approached agents making offers for properties

-       the Trust also made an offer to purchase another commercial property and is waiting for due diligence information to be released

-       the Trust has been the under bidder on a few properties

The specific nature of the asset to be replaced, the substantial amount to be invested and the lengthy process in respect of such an acquisition as evidenced by the purchase attempts already made mean that delays in purchasing a replacement asset have been experienced.

The examples of circumstances where an extension of time can be accepted that are provided in TD 2000/40 did not contemplate COVID-19, however the reasoning still applies.

COVID-19 added a degree of difficulty to the acquisition of a 'similar' property, for a period. With the lifting of travel restrictions, there is no longer the same barrier to acquiring a property which can be used for the same or similar purpose as the compulsorily acquired asset.

Based on all these facts it is deemed that special circumstances do exist to warrant the Commissioner exercising his discretion to allow a further extension of time to obtain a replacement asset until 30 June 202X.

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