Edited version of private ruling

Authorisation Number: 1011719655547

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Ruling

Subject: Capital Gains Tax - extension of time to obtain a replacement asset following compulsory acquisition

Question

Will the Commissioner exercise the discretion available under paragraph 124-75(3)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) to provide you with an extension of time to acquire a replacement asset following the compulsory acquisition of property?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 2008

Year ending 30 June 2009

Year ending 30 June 2010

Year ending 30 June 2011

The scheme commences on:

1 July 2007

Relevant facts and circumstances

The taxpayer owned a commercial rental property which was compulsorily acquired by the state government. It was originally intended that the compulsory acquisition occur at a particular time however there was a dispute over the valuation of the property and the compulsory acquisition did not occur until some time later.

As soon as the taxpayer became aware of the compulsory acquisition, the decision was made to utilise the replacement asset rollover provisions under Division 124 of ITAA 1997. The taxpayer signed an Offer and Acceptance to purchase another asset. A deposit was paid on signing the offer. A commercial building was to be constructed on the lot, which would then be rented out.

The taxpayer was unable to complete the purchase of the replacement asset as the vendor sought to terminate the purchase contract. The taxpayer denied that the vendor was able to terminate the purchase contract and a protracted legal dispute resulted.

Ultimately, the legal dispute was resolved. The taxpayer was unsuccessful and the purchase contract was terminated. The deposit was refunded by the vendor.

The taxpayer would like to purchase a replacement property. He has considered a number of properties.

Relevant legislative provisions

Income Tax Assessment Act 1997 124-70,

Income Tax Assessment Act 1997 124-75 and

Income Tax Assessment Act 1997 124-85.

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 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 of the ITAA 1936 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 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

Unless otherwise stated, all references in the following Reasons for Decision are to the ITAA 1997.

Summary

Having considered the relevant facts, the Commissioner will exercise his discretion under subsection 124-75(3) to extend the period within which the expenditure must be incurred.

Detailed reasoning

Under subsection 124-70(1) you may be able to choose a roll-over if a Capital Gains Tax (CGT) asset is:

(a)      compulsorily acquired by an Australian Government agency; or

(c)      disposed of to an Australian government agency after the agency has served a notice on you:

a)      inviting you to negotiate with the agency with a view to the agency acquiring the asset by agreement; and

b)      informing you that if negotiations are unsuccessful, it will be compulsorily acquired by the agency under a power of compulsory acquisition conferred by law.

If you receive money for the sale of the asset then further conditions are imposed by section 124-75.

Under subsection 124-75(3) you must incur expenditure in acquiring another CGT asset no earlier than one year before the disposal happens and no later than one year after the end of the income year in which the disposal happens, or within such further time as the Commissioner allows in special circumstances.

Special circumstances

In determining whether special circumstances exist that will allow the Commissioner to extend the period for you to acquire a replacement asset regard must be had to Taxation Determination TD 2000/40. TD 2000/40 provides guidelines for interpreting subsection 124-75(3) of the ITAA 1997, in particular what constitute special circumstances.

In determining if the discretion would be exercised the Commissioner has considered the following factors:

· there should be evidence of an acceptable explanation for the period of 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

You disposed of your commercial rental property to the state government. Applying the provisions of section 124-75 of the ITAA 1997, you would ordinarily have until a certain date to acquire a replacement asset.

You have sought an extension of time to acquire a replacement asset. The consequences of granting the extension of time are that you will be eligible for roll-over concessions, and thus the capital gain that would have arisen will be disregarded to the extent set out in subsection 124-5(2). The purpose of subdivision 124-B of the ITAA 1997 is to allow rollover concessions in special cases, to defer the making of a capital gain from one CGT event until a later CGT event happens.

In determining whether special circumstances exist in your case which warrant the granting of an extension of time we have considered the facts underlying your request and concluded that special circumstances do exist. You have explained that you have been delayed in the acquisition of a suitable replacement because of a series of legal disputes, initially with the state government regarding the valuation of the property then subsequently with the owner of a replacement asset which you had sought to purchase. The second dispute in particular was quite protracted.

In your particular circumstances, these are considered acceptable explanations for the delay in acquiring a replacement asset and we would regard it as fair and equitable to provide you with an extension of time to acquire a suitable replacement. There appears to be no prejudice to the Commissioner or any other parties in granting this request and there does not appear to be any mischief involved.

After considering these circumstances, the Commissioner will exercise the discretion under subsection 124-75(3). The existing time limit that would require the replacement asset to be purchased no later than a particular date will be extended. Please note that, due to the passage of time since the original asset was compulsorily acquired, it is unlikely that further extensions would be granted.