Edited version of private ruling

Authorisation Number: 1011484741963

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Ruling

Subject: Sale of investment property and roll-over of capital gain

If the trustee of the trust sells an investment property, that may be in danger of rising sea levels, is the trustee of the trust able to roll-over the capital gain to purchase a similar property away from the coast?

No.

This ruling applies for the following period:

1 July 2010 to 30 June 2011.

The scheme commences on:

1 July 2010.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

After 20 September 1985 the trustee of the trust purchased a property. The property has been used to derive income since purchase. The property is only 30 to 50 metres from the high water mark of the ocean.

For several years the government has highlighted global warming with a major concern being the rise in the sea level. This would mean that the investment property could disappear into the sea.

To avoid any drama later in your life, the trustee is considering selling the coastal property and purchasing another income producing property inland.

All of the funds (after agent's fees and bank debts) will be used to purchase the replacement property.

The trust does not buy and sell properties.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-10

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Capital gains tax (CGT)

The CGT provisions are contained in Part 3-1 and 3-3 of the ITAA 1997. CGT is the tax you pay on certain capital gains you make. You make a capital gain or a capital loss when a 'CGT event' happens (section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997)). The most common CGT event A1 happens when you dispose of the asset to another party (for example disposal of a dwelling) (section 104-10 of the ITAA 1997).

When you make a capital gain after the disposal of a CGT asset, you need to include the capital gain in your annual income tax return. However, the are some circumstances where you can reduce the capital gain. For example, you can disregard the capital gain that you make from your main residence.

Rollovers for real estate

Marriage breakdown

In some cases where an asset or a share of an asset is transferred from one spouse to another after their marriage breaks down, any CGT is automatically deferred until another CGT event happens (for example, until you sell the asset to someone else).

Loss, destruction or compulsory acquisition

In some situations where your CGT asset has been lost or destroyed or compulsorily acquired you may defer a capital gain.

The rollover may be available if one of the following events happens:

· all or part of your CGT asset is lost or destroyed

· your CGT asset is compulsorily acquired by an Australian government agency

your CGT asset is compulsorily acquired by an entity (other than by an Australian government agency or a foreign government agency) under a power of compulsory acquisition conferred by an Australian or foreign law.

Small business concessions

There are a number of concessions available to small business entities if a CGT event happens to an asset used in the small business.

Sale of an asset to purchase a similar asset

There is no roll-over or exemption for a capital gain when you sell an asset and use the proceeds to purchase an identical or similar asset.

For example, if you sell a rental property and use the proceeds to purchase another rental property, roll-over is not available.

Application to your circumstances

The trustee of the trust acquired a rental property close to the ocean. Over the last several years Federal and State Governments have discussed the issues of global warming including rising sea levels. The trustee of the trust would like to dispose of the property and purchase a similar property inland.

The trustee is not disposing of the property due to a marriage breakdown.

The property has not been destroyed or compulsorily acquired.

The trust is not in the business of buying and selling properties and the property was used to derive rent.

There are no exemptions or roll-overs available in the present situation. If the property is either compulsorily acquired or is destroyed at a later date, you may be entitled to defer the capital gain.