Edited version of private ruling

Authorisation Number: 1011658616126

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Ruling

Subject: Capital Gains

Question 1

Following a compulsory acquisition of land by a State authority on which you operated your business, will the Commissioner allow you further time to acquire a replacement CGT asset under subsection 124-75(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Can the professional fees you incurred for assessment of compensation arising from the compulsory acquisition of your land by a State authority, form part of the cost base of the asset under subsection 110-25(3) of the ITAA 1997?

Answer

Yes.

Question 3

Do you make a capital gain calculated under section 124-85 of the ITAA 1997 on the CGT asset compulsorily acquired in accordance with section 112-30 of the ITAA 1997?

Answer

Yes.

Question 4

Is the expenditure you incur to replace the CGT asset compulsorily acquired, reduced under section 124-85 of the ITAA 1997?

Answer

Yes.

Relevant facts and circumstances

You were the registered proprietor of the property that was used as a place of business.

You were notified that part of your property would be compulsorily acquired by a State Authority and were given a notice of compulsory acquisition and initial payment of compensation.

There were buildings on the property and some were demolished after the compulsory acquisition.

You have incurred the some expenditure in acquiring adjoining land and replacing various buildings.

You have chosen to apply the "replacement asset rollover relief" under Subdivision 124-B of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 124-85.

Income Tax Assessment Act 1997 Section 124-75

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

Income Tax Assessment Act 1997 Section 124-70

Income Tax Assessment Act 1997 Section 124-85

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

Income Tax Assessment Act 1997 Section 112-30

Income Tax Assessment Act 1997 Subsection 110-25(3)

Income Tax Assessment Act 1997 Section 110-35

Income Tax Assessment Act 1997 Section 104-10

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

Reasons for decision

Question 1

Summary

Due to the delays in settling and payment of the total compensation received on the land and business premises compulsory acquired by a State authority as a result of a dispute, the Commissioner will allow you further time to acquire the replacement CGT assets under subsection 124-75(3) of the ITAA 97.

Detailed reasoning

CGT event A1 (in section 104-10 of the ITAA 1997) happens if a CGT asset you own is compulsorily acquired. A capital gain from a CGT event may be disregarded if a roll-over applies. There are two roll-overs that are potentially available to the taxpayer:

The small business roll-over in Subdivision 152-E of the ITAA 1997.

The replacement asset roll-over in Subdivision 124-B of the ITAA 1997 for assets that are compulsorily acquired, lost or destroyed.

If the taxpayer satisfies the conditions for both of the roll-overs, the taxpayer can choose which of the roll-overs to apply.

In your case, as the asset was compulsorily acquired by a State authority and you received money as compensation, you have chosen the replacement asset roll-over in Subdivision 124-B of the ITAA 1997.

Section 124-75 of the ITAA 1997 details the requirements where you receive money for the event happening and you choose to obtain a roll-over. A requirement is that you must incur expenditure in acquiring another CGT asset or if part of the original asset is lost or destroyed, incur expenditure of a capital nature in repairing or restoring it. Subsection 124-75(3) of the ITAA 1997 states that at least some of the expenditure must be incurred no earlier than one year before the event happens or no later than one year after the end of the income year in which the event happens, or within such further time as the Commissioner allows in special circumstances.

Taxation Determination TD 2000/40 provides examples of special circumstances for the purposes of subsection 124-75(3) of the ITAA 1997. Example 3 parallels your particular circumstances in that you were in dispute with a State authority over the claim for compensation.

You acquired additional land and constructed new sheds on the land. Expenditure to replace the second shed was first incurred one year after of the CGT event happening, however the Commissioner will accept the delay in receiving the total compensation constitutes special circumstances warranting an extension of time.

Question 2

Summary

The professional fees you incurred for valuation services following the compulsory acquisition notice of your land by a State authority form part of the cost base of the asset under subsection 110-25(3) of the ITAA 1997.

Detailed reasoning

In calculating your cost base section 110-35 of the ITAA 1997 allows you to include "incidental costs" you have incurred to acquire an asset in relation to a CGT event. These incidental costs can include such items as services for legal advice, agent fees, valuer or other relevant professional services you incurred.

Therefore in calculating your cost base, the professional fees you incurred in respect of the disputed compensation claim from the compulsory acquisition of your property would be considered part of the "incidental costs" and form part of the cost base of the asset.

Question 3

Summary

You make a capital gain calculated under section 124-85 of the ITAA 1997 on the CGT asset compulsorily acquired in accordance with section 112-30 of the ITAA 1997.

Detailed reasoning

Subdivision 124-B of the ITAA 1997 covers replacement asset roll-overs for assets compulsorily acquired, lost or destroyed and the consequences of a roll-over being available. Subsection 124-85(2) of the ITAA 1997 applies to assets acquired on or after 30 September 1985 and the table sets out the situations in which a gain from the CGT event is reduced, not reduced or disregarded.

Item 1 of the table in subsection 124-85(2) of the ITAA 1997 applies in your circumstances as the money you received in compensation exceeds the expenditure you incurred to acquire the replacement CGT assets or to repair or restore the original assets.

The consequences outlined in this table if the gain is more than the excess are:

(a) the gain is reduced to the amount by which the money exceeds your expenditure; and

(b) that expenditure is reduced by the amount by which the gain (before it is reduced) is more than the excess.

The capital gain is worked out under section 112-30 of the ITAA 1997.

Question 4

Summary

By choosing to obtain rollover for the replacement assets the expenditure you incurred to replace the CGT asset compulsorily acquired, is reduced under section 124-85 of the ITAA 1997.

Detailed reasoning

Subdivision 124-B of the ITAA 1997 covers replacement asset roll-overs for assets compulsorily acquired, lost or destroyed and the consequences of a roll-over being available. Subsection 124-85(2) of the ITAA 1997 applies to assets acquired on or after 30 September 1985 and the table sets out the situations in which the expenditure you incur to acquire another CGT asset or to repair or restore the original asset is reduced.

Item 1 of the table in subsection 124-85(2) of the ITAA 1997 applies in your circumstances as the money you received in compensation exceeds the expenditure you incurred to acquire the replacement CGT assets or to repair or restore the original assets.

The consequences outlined in this table if the gain is more than the excess are:

(a) the gain is reduce to the amount by which the money exceeds your expenditure; and

(b) that expenditure is reduced by the amount by which the gain (before it is reduced) is more than the excess.

By applying the replacement asset roll-over the expenditure you incurred is reduced as follows:

The compensation received exceeds the replacement costs.

The result is your gain is reduced and the total amount you have spent on replacement assets is reduced.