Edited version of private ruling

Authorisation Number: 1011730284960

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Ruling

Subject: CGT - property - compensation

Question

Are you eligible to apply replacement asset roll-over under Subdivision 124-B of the Income Tax Assessment Act 1997 (ITAA 1997) to a gain arising as a result of the involuntary disposal of the property?

Answer

Yes

This ruling applies for the following period:

1 July 2009 - 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

The applicant inherited a retail shop some time after 1985 from a relative.

The applicant was subject to fraud in that they were induced to sign mortgage documents, allowing swindlers to borrow funds from various mortgagees, using the retail shop and their residence as securities. Some mortgage documents were forged and certified by a writing expert.

The retail shop, without the applicant's knowledge, was sold mortgagee in possession.

After NSW Supreme Court proceedings and an application to the NSW Registrar General (Land and Property Management Authority), the applicant received compensation for the retail shop through Torrens Assurance Fund.

The sum of the compensation funds was used to clear the applicant's mortgage on the residence. The remainder has been invested in a fixed term deposit.

The applicant's representative is a registered tax agent and financial manager for the NSW Trustee and Guardian (formerly the Office of the Protective Commissioner) capable of being appointed under a financial management order from a court.

At the time of the application the applicant's representative was arranging valuations. It is uncertain whether a capital gain or loss will arise as a result of the sale of the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 102-25(1)

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 104-20

Income Tax Assessment Act 1997 Subsection 104-20(2)

Income Tax Assessment Act 1997 Subsection 104-20(3)

Income Tax Assessment Act 1997 Section 124-75

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 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

Loss of asset - CGT event C1

CGT event C1 happens if a CGT asset you own is lost or destroyed (subsection 104-20(1) of the ITAA 1997).

Paragraph 2 of Taxation Determination TD 1999/79 states that:

The word 'lost' in its context in subsection 104-20(1) does not contemplate voluntary actions. The Macquarie Dictionary , 3rd ed, defines 'lost' as '1. past tense and past participle of lose' and defines ' lose ' as '1. to come to be without, by some chance, and not know the whereabouts of: to lose a ring '. The word in its context in CGT event C1 suggests an involuntary rather than a voluntary act.

The time of CGT event C1 is when compensation is first received for the loss. If no compensation is received, the time of the event is when the loss is discovered (subsection 104-20(2) of the ITAA 1997). You make a capital gain if the capital proceeds from the loss are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base (subsection 104-20(3) of the ITAA 1997).

CGT roll-over relief

A taxpayer may be able to obtain replacement asset roll-over under Subdivision 124-B of the ITAA 1997 if a CGT asset they own is lost or destroyed. If a taxpayer receives money as a result of the loss of the CGT asset they must satisfy the requirements in section 124-75 of the ITAA 1997 for roll-over to be available. That section states that the taxpayer must incur expenditure in acquiring another asset or repair or restore the original asset no later than one year after the end of the income year in which the money is received or until such time as the Commissioner allows in special circumstances. That replacement asset must be used for the same or similar purpose as the original asset.

If the replacement asset is not acquired, a capital gain or capital loss must be declared in the income year in which the insurance payment is received.

Application to your situation

The applicant was subject to fraud in that they were induced to sign mortgage documents, allowing swindlers to borrow funds from various mortgagees, using the retail shop and their residence as securities. The shop, without the applicant's knowledge, was sold mortgagee in possession.

After NSW Supreme Court proceedings and an application to the NSW Registrar General (Land and Property Management Authority), the applicant received compensation for the shop through Torrens Assurance Fund.

The property was sold to a third party without the taxpayer's consent. The taxpayer was involuntarily and permanently deprived of ownership of the property as a result of the fraudulent activity. The fraudulent activity led to a mortgagee sale to a third party bona fide purchaser without notice of the taxpayer's lack of consent to the mortgaging of the property. In all the circumstances, the property was 'lost' within the meaning of section 104-20 of the ITAA 1997. Therefore, CGT event C1 happened to the property.

CGT event A1 also happened on the sale of the property to a third party (disposal of a CGT asset - section 104-10 of the ITAA 1997). Under subsection 102-25(1) of the ITAA 1997, if more than one CGT event can happen to your situation, you use the one that is the most specific to your situation. In the circumstances, the most specific CGT event is CGT event C1.

As a result the applicant would be able to apply roll-over under Subdivision 124-B of the ITAA 1997 to any gain arising from the loss of the property. Under the roll-over conditions, as the applicant received money as compensation for the loss of their property they must incur expenditure in acquiring another asset no later than 1 July 2012 or until such time as the Commissioner allows in special circumstances. The replacement asset must be used for the same or similar purpose as the original asset. The funds used to clear the applicant's mortgage on the residence would not qualify as an eligible replacement asset.