Edited version of private advice

Authorisation Number: 1052403895836

Date of advice: 04 June 2025

Ruling

Subject: Commissioner's discretion - extension of time

Question 1

Will the Commissioner exercise his discretion to extend the period under section 124-75(3)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow the Applicants further time to incur expenditure in acquiring replacement properties as required under Subdivision 124-B of the ITAA 1997 to 30 June 20XX?

Answer 1

Yes

Question 2

Can the number of replacement properties acquired by the Applicants be equal to or more or less than the number of Properties compulsorily acquired under the Compulsory Acquisition as part of the roll-over provided for in Subdivision 124-B of the ITAA 1997?

Answer 2

Yes

Question 3

For the capital gain to be disregarded under item 3 of the table in subsection 124-85(2) of the ITAA 1997, does the expenditure need to be funded out of the money received for the compulsory acquisition?

Answer 3

No

This ruling applies for the following period:

Income year ended 30 June 20XX

The scheme commenced on:

During the income year ended 30 June 20XX

Relevant facts and circumstances

The Applicants owned X% of a number of commercial real estate properties (Properties).

All of the Properties were acquired on or after 20 September 1985 and are held as to X% each by the two Applicants.

The Applicants did not have any involvement with managing the Properties.

The investment strategy for the Applicants has been to acquire commercial and residential properties and hold these properties for their rental return. The investments properties over their holding period have been entirely managed by a real estate agent. It has been a set and forget investment strategy with no intention to sell.

All the Properties were held on capital account as investments for the sole purpose of deriving long term rental income from third party commercial tenants.

All of the Properties were zoned for commercial purposes and occupied by commercial tenants.

The Applicants do not carry on a business of real estate investment.

Compulsory acquisition

The Applicants were advised that the Properties were in an area of interest for proposed State Government capital works.

During the income year ended 30 June 20XX, the Applicants received a Notice of Intention to Acquire the Properties from the State Government Authority.

The Properties were compulsory acquired by the State Government Authority during the income year ended 30 June 20XX.

The Applicants received an Initial Offer of Compensation for the Properties.

The Applicants received the initial compensation amount under this offer during the income year ended 30 June 20XX.

The Applicants engaged legal advice and subsequently lodged a response to the Initial Offer of Compensation.

The Applicants received a Revised Offer of Compensation for a greater amount during the income year ended 30 June 20XX.

The Applicants received the received the revised compensation amount under this offer during the income year ended 30 June 20XX.

The Applicants are currently negotiating with State Government Authority for further compensation such that the final amount of compensation remains unclear.

Replacement properties

The Applicants have sought to acquire replacement assets (Replacement Properties) for the compulsorily acquired Properties. This process has involved engagement of legal counsel, barristers, valuers, investment advisors, financial advisors, accountants, property agents, planning experts and heritage consultants by the Applicants.

The Replacement Properties will be acquired for the same or similar purpose as the Properties compulsorily acquired of deriving long term rental income and will not be acquired for the purpose of carrying on a business or to hold as trading stock (or for any other purpose other than driving rental income).

You have advised that it is expected that between one and six Replacement Properties may be acquired and that the Replacement Properties may be located in any State or Territory in Australia.

As at the date of this ruling, no Replacement Properties have been acquired.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 108-5

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)(c)

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

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

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

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

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

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

Income Tax Assessment Act 1997 subsection 124-85(2)

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

Reasons for decision

Question 1

Summary

The Commissioner will exercise his discretion under paragraph 124-75(3)(b) of the ITAA 1997to allow an extension of time of 12 months (to 30 June 20XX) for the taxpayer to incur expenditure on a replacement asset (or assets).

Detailed reasoning

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.

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.

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).

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.

Subdivision 124-B- of the ITAA 1997 deals with assets compulsorily acquired, lost or destroyed. Specifically, section 124-70 outlines the events giving rise to a CGT roll-over, and relevantly states:

(1) You may be able to choose a roll-over if one of these events happens to a CGT asset (the original asset) you own:

(a) it is compulsorily acquired by an Australian government agency;...

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 provides other requirements which must be satisfied if money is received for the event happening.

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

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.

In determining whether special circumstances exist for the Commissioner to extend the period in which to acquire a replacement asset, Taxation Determination TD 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'.

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.

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

The Applicants held the Properties as capital assets, being investments for the sole purpose of deriving long-term rental income. The Properties were acquired after 20 September 1985. As such the Properties will be CGT assets pursuant to section 108-5 of the ITAA 1997.

It is accepted that the Properties were held on capital account for the following reasons:

• The Applicants held and tenanted the Properties for many years. The Applicant's' stated intent was to continue to hold the Properties, however they were compulsory acquired.
• As there is no evidence of a structured business plan or commercial purpose, the Applicant's activities in relation to the Properties do not demonstrate the regularity, commerciality, or profit motive required to constitute a business.

The Properties were compulsorily acquired by a State Government Authority during the income year ended 30 June 20XX. That is, there was a change in the beneficial ownership of the Properties that were the subject of the Compulsory Acquisition, and the Properties remained in existence immediately after the Compulsory Acquisition.

Therefore, the CGT event happened during the income year ended 30 June 20XX and in this case paragraph 124-75(3)(b) of the ITAA 1997 requires that expenditure to replace the assets must be incurred by 30 June 2025, or within such further time as the Commissioner allows in special circumstances.

The Applicants received the Initial Offer of Compensation amount during the income year ended 30 June 20XX and the additional compensation amount in accordance with a Revised Offer of Compensation during the income year ended 30 June 20XX.

The Applicants are still in negotiations on the compensation amount such that the quantum of the compensation amount remains unclear at this stage.

Having regard to the first three examples contained in TD 2000/40 facts which point to the existence of special circumstances for the Commissioner to exercise his discretion in section 124-75(3) include:

(a) a delay in receiving compensation for the compulsory acquisition;

(b) genuine steps to acquire replacement assets but where a transaction to acquire the replacement assets falls through such that the taxpayer must find an alternative replacement asset; and

(c) a legal dispute with the relevant authority in relation to the quantum of compensation.

In this case, the Applicants have encountered the following circumstances:

(a) The Applicants have had ongoing discussions with the State Government Authority in relation to the Compulsory Acquisition which required engagement of legal counsel, barristers, valuers, investment advisors, financial advisors, accountants, property agents, planning experts and heritage consultants due to the complexity of the Compulsory Acquisition which has diverted resources from identifying suitable Replacement Properties;

(b) The Applicants have been in negotiations with the State Government Authority in relation to the appropriate compensation amount since the Initial Offer of Compensation and is still in negotiations on the compensation amount such that the quantum of the compensation amount remains unclear;

(c) The Applicants have actively sought to identify appropriate Replacement Properties which has involved discussions with property agents and independent enquiries; and

(d) there is significant complexity in identifying suitable Replacement Properties and carrying out appropriate due diligence for any potential Replacement Property to be considered in depth from an investment, accounting and valuation perspective by the respective advisers.

For these reasons, it is considered fair and reasonable in the circumstances of this case for the Commissioner to allow additional time for the Applicants to commence incurring expenditure on acquiring replacement assets. 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.

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 (or assets) for the properties that were compulsorily acquired until 30 June 20XX.

Question 2

Summary

The intended acquisition of Replacement Properties will satisfy the "same" or "similar" purpose test for the purposes of subsection 124-75(4) of the ITAA 1997.

As noted in TD 2000/41, the number of the replacement assets does not need to correspond to the number of original CGT assets.

Detailed reasoning

Section 124-75(2) of the ITAA 1997 relevantly states:

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.

The requirement in section 124-75(2) of the ITAA 1997 requires that Yvonne (in her personal capacity and as trustee for the Testamentary Trust) must incur expenditure in acquiring the Replacement Properties.

In this case, the Applicants are in the process of identifying appropriate Replacement Properties to acquire with the Compensation Amount received in relation to the Compulsory Acquisition and the number of Replacement Properties is expected to be between one and six which is different to the number of Properties that were compulsorily acquired.

Replacement assets with same or similar purpose

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).

Taxation Determination TD 2000/41 "Income tax: capital gains: are the two requirements in subsection 124-75(4) of the Income Tax Assessment Act 1997 for a CGT asset acquired to replace an original asset alternative and mutually exclusive requirements?" ('TD 2000/41') states at Note 2:

There is no restriction on the number of CGT assets which may be treated as replacement assets for an original CGT asset in the replacement-asset roll-over provisions in Subdivision 124-B provided that they each satisfy the relevant requirements of that Subdivision.

Subsection 124-75(4) of the ITAA 1997 therefore requires taxpayers to use the replacement asset (for a reasonable time after it is acquired) for the same purpose as, or for a similar purpose to, the purpose for which taxpayers used the original asset just before the event under paragraph 124-70(1) happened.

The Commissioner has previously considered the application of this rule in Taxation Determination TD 2000/42 "Income tax: 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?" ('TD 2000/42'). Specifically, TD 2000/42 states that whether an asset is used for the same or similar purpose as another asset is a question of fact and degree.

TD 2000/42 illustrates that there is no requirement for the replacement asset to be a similar asset, it must merely be used for the same or a similar purpose.

Example 3 of TD 2000/42 states:

Marina owns a house near the sea which she has always rented out. The house has, for capital gains purposes, been treated as an asset separate from the land on which it is situated - the land having been acquired in 1980 - because of the operation of Subdivision 108-D. The house is destroyed by a cyclone and she has the choice of either:

(a) acquiring a city unit for rental purposes; or

(b) rebuilding the house to use as her main residence.

For the purposes of Subdivision 124-B, the use of the city unit will fall within the scope of the same or similar purpose test. The use of the new building as a main residence will not.

Based on the above example, the 'same' or 'similar' purpose test should be satisfied where one income producing asset held on capital account is compulsorily acquired, and another income producing asset that is also held on capital account is acquired as the replacement.

In contrast, the similar purpose test would not appear to be satisfied where an income producing asset was compulsorily acquired, but the taxpayer acquired an asset which became their main residence. The distinction is that in the first example, both assets would be subject to income tax upon disposal, whereas in the second example, where the replacement asset is a main residence, the subsequent sale should be tax-free (due to the CGT main residence exemption).

The purpose of the Replacement Properties is considered to be used for the 'same' or 'similar' purpose as the compulsory acquired Properties as:

•                both are investments on capital account;

•                there is the prospect of capital growth;

•                both investments are used to generate rental income

•                both assets are taxed similarly on disposal; and

•                both assets have ongoing costs.

In this case, the Replacement Properties will be acquired for the same or similar purpose as the Properties that were compulsorily acquired, being for the purpose of deriving long term rental income and they will not be acquired for the purpose of carrying on a business or to hold as trading stock (or for any other purpose other than driving rental income).

Conclusion

The intended acquisition of Replacement Properties as CGT assets will satisfy the 'same' or 'similar' purpose test for the purposes of subsection 124-75(4) and meet the requirements of acquiring another CGT asset for the purposes of the CGT replacement asset roll-over.

As noted in TD 2000/41, the number of the replacement assets does not need to correspond to the number of original CGT assets, but the total value of the replacement assets must at least equal that of the original CGT assets for the entire capital gain to be deferred.

Question 3

Summary

Provided the total amount incurred in acquiring the Replacement Properties is equal to or greater than the Compensation Amount received from the Compulsory Acquisition, the expenditure does not need to be funded out of the compensation funds received for the compulsory acquisition for the capital gain to be disregarded pursuant to item 3 of the table in subsection 124-85(2) of the ITAA 1997.

Detailed reasoning

Paragraph 124-75(2)(a) of the ITAA 1997 states that a taxpayer must "incur expenditure" in acquiring a CGT asset (i.e., the Replacement Properties in this case). Pursuant to subsection 124-85(2), where the expenditure incurred is equal to or greater than the compensation amount received by the Applicants, the capital gain arising on the compulsory acquisition of the Properties will be disregarded (assuming all the other relevant Subdivision 124-B requirements are satisfied).

Subdivision 124-B of the ITAA 1997 does not require that the Applicants spend the actual compensation received (i.e., the cash from the State Government Authority) but that the Applicants incur expenditure in acquiring the Replacement Properties.

The original assets (Properties) were all acquired on or after 20 September 1985, so the relevant legislation for post-CGT assets is subsection 124-85(2) of the ITAA 1997. Item 3 of the table in subsection 124-85(2) applies where the money received does not exceed the expenditure incurred.

In this case, should the Applicants purchase a Replacement Properties, and fund the acquisition with a mixture of cash received from the Compulsory Acquisition and cash received from a loan with a financial institution, so long as the total amount incurred in acquiring the Replacement Properties is equal to or greater than the Compensation Amount received from the Compulsory Acquisition the requirements in item 3 of the table in subsection 124-85(2) of the ITAA 1997 will be satisfied.

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