Edited version of private advice

Authorisation Number: 1052138432547

Date of advice: 6 July 2023

Ruling

Subject: CGT - extension of time to acquire replacement asset

Question

Will the Commissioner exercise the discretional power under paragraph 124-75(3)(b) of the Income Tax Assessment Act 1997 ('ITAA 1997') to allow a further extension of time until DD MM YYYY to acquire a replacement asset?

Answer

Yes.

This ruling applies for the following periods:

DD MM YYYY to DD MM YYYY

The Scheme commences on:

DD MM YYYY

RELEVANT FACTS AND CIRCUMSTANCES

Background Facts

1.      Trust A, Trust B, Trust C and Trust are the group of Trusts ('the Group of Trusts') in this ruling application.

2.      The Group of Trusts have the same corporate trustee, Company X. Company X was incorporated in XXX on DD MM YYYY.

3.      The sole director of Company X is Taxpayer X.

4.      The Group of Trusts are grouped for GST purposes, with Trust A being the GST Group Representative member.

Acquisition of XYZ property

5.      The Group of Trusts acquired the property ('the XYZ property') located at XYZ in YYYY as tenants in common.

6.      The XYZ property was compulsory acquired by a government agency. The property was exchanged in DD YYYY and settled on DD MM YYYY.

7.      The XYZ property was specifically developed as a hub location for specific equipment distribution, plant storage and maintenance, including wash bays, workshops, paint bays and administration.

8.      Company C also leases other properties from entities associated with Taxpayer X (the director of the common Trustee, Company X).

Steps to find a suitable replacement property

9.      The director Taxpayer X has made significant steps to find a suitable replacement property, which will accommodate the requirements of Company C. However, the eventual purchase has been hindered with some unexpected events. These steps and unexpected events are highlighted in the following timeline:

10.   Period 1 - MM YYYY to MM YYYY

•           The director Taxpayer X reviewed appropriate properties in the ZZZ area that would be suitable to purchase and lease to Company C, unaware of the risk that the XYZ property would be resumed.

•           This search included the following:

o    Scope of works forwarded to a real estate agency

o    Internal report prepared on ZZZ location

o    Unsuccessful offer made on a property located in ZZZ (Potential Property #1)

o    Investigation of property going to auction with frontage to the XYZ Highway. Various information requests to a real estate agency (Potential Property #2)

o    Inspected property located in YYY (Potential Property #3) with various requests for information to a real estate agency and consultants

o    Inspected property located at ZYX (Potential Property #4)

11.   Period 2 - MM YYYY to MM YYYY

•           On DD MM YYYY, the director Taxpayer X became aware that a government agency would compulsorily acquire the XYZ property. There were lengthy negotiations between the government agency, Company E, Company C and their respective lawyers until agreement and subsequent exchange of contracts occurred in MM YYYY.

•           MM YYYY saw the disruption and impact of the COVID-19 pandemic. On DD MM YYYY, WHO declared Covid-19 a world-wide pandemic. In mid to late MM YYYY, lockdown restrictions were progressively implemented, these continued at various times until MM YYYY.

12.   Period 3 - MM YYYY to MM YYYY

•         The director Taxpayer X and his consultants resumed property inspections and research with a focus on a replacement plant yard suitable to the requirements of Company C. There were significant delays in enquiries to vendors and difficulties in actual inspections of properties due to the COVID-19 lock downs. The economic uncertainty at that time led to very few suitable properties in the market.

13.   Period 4 - MM YYYY to MM YYYY

•           Ongoing property inspections. Due to the economic uncertainty that COVID-19 created, Company C had expressed a wait and see approach, and as a result, the equipment located at XYZ was relocated to their other sites in the metropolitan area.

•           Also, during this period, the director's father, the late Mr XX (previously a director of the trustee company) passed away on DD MM YYYY, following x months of illness. During this period, the Director spent time caring for, attending hospitals and later overseeing palliative care at his father's home, which was also impacted by YYYY-YYYY bushfire season.

14.   Period 5 - MM YYYY - MM YYYY

•           A number of properties were reviewed, but COVID created significant barriers and uncertainty with property market.

15.   Period 6 - MM YYYY - MM YYYY

•           Ongoing operations, replacement property investigations and initial estate administration

•           Ongoing discussions with Commercial Property Real Estate agents regarding suitable properties

•           Discussions with Company C (original tenant at XYZ) and other potential tenants, regarding their ongoing requirements, preferred location and general terms and conditions

•           As a rule, significant due diligence is performed on potential property acquisitions with financial costs confirmed, property research, property inspections, building and engineering reports, and legal and financial modelling performed.

Properties reviewed in Period 6

16.   A number of properties were reviewed in Period 6 (MM YYYY - MM YYYY).

17.   Period 7 - MM YYYY - Current Date

•           Ongoing operations, property research & Estate resolution to restructure

•           After Probate was granted on DD MM YYYY, the director and his siblings have been discussing whether to continue managing the wider group of entities (including substantial real estate holdings) or to divide the group amongst the beneficiaries.

•           DD MM YYYY - Family meeting (x siblings) together with specialist advisors confirms the intention to restructure the wider group of entities and the likely process required to achieve this, with both external and internal sales/transfers of real estate.

18.   It is expected that the Group of Trusts will be able to acquire a replacement property for the XYZ property. Due to negotiations between the family group, obtaining relevant advice from specialists and preparing the legal documentation required, it is unlikely that contracts will be exchanged or settled prior to DD MM YYYY.

Other material information

19.   A previous private ruling was issued on DD MM YYYY which granted the Group of Trusts an extension of time to DD MM YYYY for the acquisition of a replacement asset.

20.   As set out in that YYYY private ruling, "commercial property stock of equivalent size and specification is low and very low in the XYZ area". As a result, and post a rapid rise in price following COVID, the commercial returns have been challenging.

21.   Reserve bank has increased interest rates commencing MM YYYY from x% to MM YYYY xx% in order to reduce inflation. To date, there has been no indication that industrial property valuation has slowed, however transactions have slowed. It is expected that valuations have now plateaued and over the coming months a replacement for the XYZ property will be identified and completed on commercially acceptable returns including yield and financier security.

22.   The Director believes that there is a solution (or part solution) to purchasing a replacement property/ies from the wider group of entities, however he and his specialist advisors will require more time to work through the complex restructure and division of assets between beneficiaries.

23.   The Group of Trusts therefore request that Commissioner exercise the discretion under paragraph 124-75(3)(b) of the ITAA 1997 to allow the taxpayers an additional xx months extension to the DD MM YYYY.

Information provided

24.   You have provided a number of documents containing detailed information in relation to the Group of Trusts' application including:

•           Private Binding Ruling ('PBR') Application, dated DD MM YYYY

25.   We have referred to the relevant information within these documents in applying the relevant tests to your circumstances.

Assumption(s)

Not applicable.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 124-B

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

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

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

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

Income Tax Assessment Act 1997 Subsection 124-75(5)

Income Tax Assessment Act 1997 Subsection 124-75(6)

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

Further issues for you to consider

Not applicable.

REASONS FOR DECISION

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

SUMMARY

The Commissioner will exercise the discretion under paragraph 124-75(3)(b) of the Income Tax Assessment Act 1997 ('ITAA 1997') to allow a further extension of time until DD MM YYYY for the Group of Trusts to acquire a replacement asset.

DETAILED REASONING

26.   Roll-over relief for the compulsory acquisition of a CGT asset is available where the conditions outlined in Subdivision 124-B of the ITAA 1997 are met.

27.   Under subsection 124-70(1) of the ITAA 1997, an entity may be able to choose a replacement asset rollover if a CGT asset owned by the entity is compulsorily acquired by an Australian government agency as per paragraph 124-70(1)(a) of the ITAA 1997.

28.   A replacement-asset rollover allows you, in special cases, to defer the making of a capital gain or loss from one CGT event until a later CGT event happens.

29.   Subsection 995-1(1) of the ITAA 1997 defines an Australian government agency as a Commonwealth, a State or a Territory, or an authority of Commonwealth or of a State or Territory.

30.   A further requirement is that the owner of the original asset must receive money or another CGT asset or both, for the CGT event to be eligible for a rollover (subsection 124-70(2) of the ITAA 1997). On satisfying these conditions, section 124-75 of the ITAA 1997 provides other requirements which must be satisfied if money is received for the event happening.

31.   Subsection 124-75(2) of the ITAA 1997 requires that the owner of the asset must incur expenditure in acquiring another CGT asset.

32.   Paragraph 124-75(3)(b) of the ITAA 1997 requires you to incur expenditure in acquiring a replacement CGT asset no later than one year after the CGT event, or within such further time as the Commissioner allows in special circumstances.

33.   Subsection 124-75(4) of the ITAA 1997 requires that the replacement asset acquired must be used for the same or similar purpose as the taxpayer used the original asset. This replacement asset cannot become an item of trading stock just after the acquisition or be a depreciating asset (subsection 124-75(5) of ITAA 1997), nor become a "registered emissions unit" just after the acquisition (subsection 124-75(6) of ITAA 1997).

34.   In determining whether special circumstances exist for the Commissioner to extend the period in which to acquire a replacement asset, Taxation DeterminationTD 2000/40 "Income tax: capital gains: what are 'special circumstances' for the purposes of subsection 124-75(3) of the ITAA 1997?" ('TD 2000/40') provides guidance on interpreting subsection 124-75(3) of the ITAA 1997, in particular, what are 'special circumstances'.

35.   TD 2000/40 states that the expression 'special circumstances' by its nature is incapable of a precise or exhaustive definition. What constitutes 'special circumstances' depends on the facts of each particular case.

36.   In determining whether the discretion will be exercised, the Commissioner also considers the following factors:

•           there should be evidence of an acceptable explanation for the period of the 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;

•           account must be had of any unsettling of people, other than the Commissioner, or of established practices;

•           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.

APPLICATION TO YOUR CIRCUMSTANCES

37.   The Group of Trusts acquired the property located at XYZ ('the XYZ property') in YYYY as tenants in common.

38.   The XYZ property was compulsorily acquired by a government agency, with contracts exchanged in MM YYYY and settlement on DD MM YYYY.

39.   The Group of Trusts received $xxx in MMM YYYY for the compulsory acquisition.

40.   As early as DD MM YYYY, the director Taxpayer X became aware that a government agency would compulsorily acquire the XYZ property. There were lengthy negotiations between the government agency, Company E, Company C and their respective lawyers until agreement and subsequent exchange of contracts occurred in MM YYYY.

41.   MM YYYY saw the disruption and impact of the COVID-19 pandemic. There were significant delays in enquiries to vendors and difficulties in actual inspections of properties due to the COVID-19 lock downs.

42.   The director's activities to identify and inspect potential replacement properties which will accommodate the requirements of Company C were hindered by the following unexpected events:

•           COVID-19 restrictions and lockdowns made inspection of prospective properties difficult and there were significant delays encountered in enquiries with vendors. Due to economic uncertainty at this time, there were very few suitable properties on the market which were suitable.

•           The director's father passed away on DD MM YYYY following x months of illness, during which the director provided palliative care for his father.

•           The director was also impacted by the YYYY-YYYY bushfires.

43.   The director continued with property inspections. Due to the economic uncertainty that COVID-19 created, Company C had expressed a "wait and see" approach.

44.   The Group of Trusts expect that they will be able to acquire a replacement property for the XYZ property (the compulsorily acquired property). Due to negotiations between the family group, obtaining relevant advice from specialists and preparing the legal documentation required, it is unlikely that contracts will be exchanged or settled in the next few months.

45.   A previous private ruling was issued on DD MM YYYY which granted the Group of Trusts an extension of time to DD MM YYYY for the acquisition of a replacement asset.

46.   As set out in that YYYY private ruling, "commercial property stock of equivalent size and specification is low and very low in the XYZ area". As a result, and post a rapid rise in price following COVID, the commercial returns have been further challenging.

47.   The director believes that there is a solution to purchasing a replacement property/ies from the wider group of entities, however he and his specialist advisors will require more time to work through the complex restructure and division of assets between beneficiaries.

48.   TD 2000/40's Examples 1 and 3 provides an illustration in which a taxpayer's asset is compulsorily acquired by a State authority. Both examples outline circumstances which prevented the taxpayer from acquiring a replacement asset within the allowable timeframe. On those facts, the Commissioner accepted that the taxpayer had done what was reasonable to acquire a replacement asset and allowed them further time.

49.   We accept that the Group of Trusts did all that was reasonable to acquire a replacement asset.

50.   Based on these facts, it is deemed that special circumstances do exist to warrant the Commissioner to exercise his discretion and allow an extension of time to obtain a replacement asset, as it would be fair and equitable to do so, given that the circumstances represent an acceptable explanation for the delay.

51.   Also, by granting this extension of time to acquire replacement asset:

•           there does not appear to be any prejudice to the Commissioner or any other parties;

•           there is no unsettling of people or of established practices;

•           there does not appear to be any mischief involved in this case; and

•           the Commissioner considers it to be fair to people in like positions and the wider public interest.

52.   Therefore, the Commissioner will exercise the discretion under paragraph 124-75(3)(b) of the ITAA 1997 to allow an extension of time to obtain a replacement asset for landholdings that were compulsorily acquired by Company Y until DD MM YYYY.

CONCLUSION

The Commissioner will exercise the discretion under paragraph 124-75(3)(b) of the Income Tax Assessment Act 1997 ('ITAA 1997') to extend the one-year period for the Groups of Trusts to acquire a replacement asset until DD MM YYYY.

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