Edited version of private advice

Authorisation Number: 1052334569785

Date of advice: 21 November 2024

Ruling

Subject: Commissioner's discretion - extension of time

Question 1

Will the Commissioner exercise his discretion under paragraph 124-75(3)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow the Company to have incurred expenditure in acquiring the New Property earlier than one year before the Property was compulsorily acquired by the State Government?

Answer 1

Yes.

This ruling applies for the following period:

Income year ended 30 June 20XX

Relevant facts and circumstances

The Company was registered in 20XX and owned a property (the Property). The Property was used by a related party as a retail store.

In 20XX the State Government issued a letter to the Company to provide early notification that the Property will be required acquired as part of a Project at 'the end of 20XX', and to advise that a formal property acquisition process was not required to commence until mid-to-late 20XX.

Informal negotiations with the State Government started immediately and, contrary to what was stated in its letter, the State Government indicated that it was in a position to acquire the Property earlier than late 20XX. Formal negotiations with the State Government in relation to the Property and business valuations started in late 20XX.

In anticipation of the compulsory acquisition, the Company acquired a replacement property (the New Property) with settlement occurring in late 20XX. The Company acquired the New Property on the basis that negotiations with the State Government had already begun, and for the sole purpose of relocating the retail store.

The Company acquired the New Property when it did as it was uncertain that an alternative option would have subsequently become available for purchase given the market for similar, vacant retail properties has been tight in recent years. The Company would have preferred to stay in a city-fringe location, however the CBD was seen as a reasonable alternative in the circumstances, as opposed to closing permanently.

The New Property had a tenant in place, who had expressed an interest in exiting the lease as soon as possible. This suited the Company as it had maximum flexibility to relocate as soon as the State Government had finalised its compulsory acquisition.

Due to ongoing delays in negotiations with the State Government in relation to the market value of the retail store and the quantum which the State Government will fund for relocation and new fit out costs, the compulsory acquisition of the Property was not finalised until XX XX 20XX, the date on which the Property was Gazetted under a formal notice. Compensation for the acquisition was received by the Company a couple of months later.

The retail store continues to lease the Property from the State Government while the new fit out at the New Property continues. The Company expects to relocate to the New Property in early 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 40

Income Tax Assessment Act 1997 subsection 104-10(2)

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

Income Tax Assessment Act 1997 Subdivision 124-B

Income Tax Assessment Act 1997 section 124-70

Income Tax Assessment Act 1997 paragraph 124-70(1)(a)

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

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

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

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

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 Division 328

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

Reasons for decision

All subsequent legislative references are to the ITAA 1997

Summary

The Commissioner will exercise his discretion under paragraph 124-75(3)(a) to allow the Company to have incurred expenditure in acquiring the New Property in late 20XX, more than one year before the Property was compulsorily acquired by the State Government.

Detailed reasoning

CGT event A1 happens if you dispose of a CGT asset. Under subsection 104-10(2) you dispose of a CGT asset if a change of ownership occurs whether because of some act or event or by operation of law.

CGT event A1 is triggered as a result of the acquisition of a CGT asset by another entity under a power of compulsory acquisition.

The time that CGT event A1 happens is determined by subsection 104-10(6) which states:

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.

Subdivision 124-B contains a roll-over for assets compulsorily acquired, lost or destroyed.

Section 124-70 describes different events in respect of which a roll-over may be available. Paragraph 124-70(1)(a) allows an entity to choose a roll-over if the CGT asset that the entity owns is compulsorily acquired by an Australian government agency (defined in subsection 995-1(1) to include a State or an authority of a State).

To be eligible for a roll-over, you must receive either money or another CGT asset or both as compensation for the event happening (subsection 124-70(2)), and if you receive money you must 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) (subsection 124-75(2)).

Subsection 124-75(3) further states that 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.

For the purposes of subsection 124-75(3), Taxation Determination TD 2000/40[1] provides guidance on interpreting the expression 'special circumstances', stating 'by its nature is incapable of a precise or exhaustive definition' and 'depends on the facts of each particular case'.

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

•                     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.

A further requirement for the roll-over is that the replacement asset acquired must be used for the same or similar purpose as the original asset. The special rules in subsection 124-75(4) state:

If just before the event happened the original asset:

(a)           was used in your business; or

(b)           was installed ready for use in your business; or

(c)           was in the process of being installed ready for use in your business;

the other asset must be used in the business, or be installed ready for use in the business, for a reasonable time after you acquired it.

Otherwise, you must use the other asset (for a reasonable time after you acquired it) for the same purpose as, or for a similar purpose to, the purpose for which you used the original asset just before the event happened.

Taxation Determination TD 2000/42[2] provides some guidance as to the scope of the words 'use the other asset... for the same purpose... or for a similar purpose' in subsection 124-75(4). TD 2000/42 states that whether an asset is used for the same or a similar purpose as another asset is a question of fact and degree. If the first requirement of the subsection is satisfied, there is no need to consider the second requirement.

Taxation Determination TD 2000/44[3] discusses what constitutes a 'reasonable time' for the purposes of subsection 124-75(4). It states, in the note at paragraph 3, that:

The 'reasonable time' test in relation to use of a replacement asset after its acquisition may not be satisfied if you continue to own the asset but a change occurs in its nature or use. For example, this could happen if you decide to turn a replacement rental property into your main residence. The period of use of the new asset in the same business or for the same or similar purpose must be of sufficient duration to be regarded as a reasonable time having regard to the entire period of its ownership.

Additionally, the replacement asset:

•                     cannot become an item of trading stock just after the acquisition or be a depreciating asset whose decline in value is worked out under Division 40 or deductions for which are calculated under Division 328 (subsection 124-75(5)); and

•                     cannot become a registered emissions unit held just after acquisition (subsection 124-75(6)).

Application to the circumstances

The Property was leased by the Company to an associated entity and earned rental income. The Company received a notice from the State Government in 20XX advising that the Property would be compulsorily acquired as part of the Project and was acquired by the State Government on XX XX 20XX. CGT event A1 happened to the Company upon its disposal of the Property in the 20XX income year.

Having received notice of the compulsory acquisition (in 20XX), the Company acquired a similar commercial property (the New Property) in late 20XX. This was more than one year before the CGT event happened.

The Company has stated that:

•                     the Company incurred expenditure to purchase the New Property when it did as it was uncertain that a suitable alternative option would become available;

•                     the New Property offered the associated entity's business maximum flexibility to relocate following the acquisition by the State Government; and

•                     formal negotiations with the State Government in relation to the Property and business valuations started in late 20XX, and there were ongoing delays in the negotiation process with the State Government.

The Commissioner is satisfied, on the basis of these 'special circumstances', that it was not unreasonable for the Company to anticipate that the timing of the CGT event A1 in respect of the compulsory acquisition of the Property would be finalised within one year of having settled on (and incurred expenditure on the acquisition for) the New Property, and there is thus an acceptable explanation for the extension requested.

The Commissioner is also satisfied, under these circumstances, that the granting of the extension requested by the Company is fair and equitable, will not prejudice the Commissioner or unsettle any established practices, and that there is no evidence of mischief involved.

The Commissioner therefore exercises his discretion under paragraph 124-75(3)(a) to allow the Company to have incurred expenditure in acquiring the New Property in late 20XX.

[1] Income tax: capital gains: what are 'special circumstances' for the purposes of subsection 124-75(3) of the ITAA 1997?

[2] Income tax: capital gains: what is the scope of the words 'use the other asset ... for the same purpose ... or for a similar purpose' in subsection 124-75(4) of the Income Tax Assessment Act 1997 in relation to a replacement asset?

[3] Income tax: capital gains: what constitutes 'a reasonable time' for the purposes of subsection 124-75(4) of the Income Tax Assessment Act 1997?

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