Edited version of private ruling

Authorisation Number: 1011746188755

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: CGT rollover

Question 1

Will the fact that you still own the land associated with the dwelling (the destroyed dwelling) prohibit you from accessing the replacement asset rollover provisions under subdivision 124-B of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

If a slight reduction in rental usage happens in relation to the replacement dwelling, as compared with the destroyed dwelling, will it still satisfy the 'same or similar purpose' requirement under subsection 124-75(4) of the ITAA 1997?

Answer

Yes.

Question 3

Are you eligible for the capital gains tax (CGT) rollover relief under subdivision 124-B of the ITAA 1997 in relation to the insurance proceeds received for the destroyed dwelling?
Answer

Yes.

Question 4

If this ruling is unfavourable, in which year will the capital gain be included and will the client incur interest for late payment on the amount payable or any other charge?

Answer

Not applicable as you are entitled to the subdivision 124-B rollover relief.

Question 5

For the purposes of calculating the appropriate capital gain to which the rollover relief relates, will the cost base of the destroyed dwelling be calculated in accordance with the apportionment rules in section 112-30?

Answer

Yes.

Question 6

Will the cost base of the replacement asset be reduced by the amount of the capital gain which was rolled over?

Answer

Yes.

Question 7

With reference to the circumstances of your case can any capital gain arising in relation to the eventual disposal of the replacement asset be waived?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2009

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

Relevant facts and circumstances

You currently own a vacant block of land. The building on the block was completely destroyed.

You lodged with the Australian Taxation Office (ATO) a private ruling application relating to the property in order to obtain additional time to acquire a replacement asset and were subsequently granted an extension of time.

You seek a further private ruling in relation to the destroyed property concerning your eligibility for the CGT rollover under Division 124 of ITAA 1997.

The destroyed property was mostly used as a rental property as well as occasionally your holiday house. With the total destruction of the property, you received an insurance payout in relation to the building only.

You took advantage of an opportunity to purchase a replacement asset within the extended time frame and nominate the newly purchased property as the replacement asset with respect to your application for rollover relief.

Your intention is to use the new property in the same manner as the destroyed property, that is, as a rental property for tourist accommodation with occasional private use by you. Although, during a subsequent telephone conversation we were advised that the private usage of the replacement asset would be slightly greater. You still own the remaining land associated with the destroyed property.

You provided relevant descriptions of both assets to help determine whether the new asset can be classified as a 'replacement asset" and whether you can take advantage of the CGT rollover under Subdivision 124-B of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 40

Income Tax Assessment Act 1997 section 103-25

Income Tax Assessment Act 1997 section 104-20

Income Tax Assessment Act 1997 section 108-50

Income Tax Assessment Act 1997 section 112-30

Income Tax Assessment Act 1997 subdivision 124-B

Income Tax Assessment Act 1997 paragraph 124-70(1)(b)

Income Tax Assessment Act 1997 subsection 124-70(2)

Income Tax Assessment Act 1997 subsection 124-75(1)

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

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

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

Income Tax Assessment Act 1997 subsection 124-75(5)

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

Income Tax Assessment Act 1997 Division 328

Reasons for decision

Note, all subsequent legislative references are to the ITAA 1997 unless otherwise stated.

CGT event C1

In terms of section 104-20, CGT event C1 happens if a CGT asset you own is lost or destroyed. The timing of the event is when you first receive compensation for the loss or destruction. An insurance payout would constitute compensation. You make a capital gain if the compensation is more than the asset's cost base.

In your case a C1 CGT event happened when you received an insurance payout in relation to the destruction of your destroyed asset.

Subdivision 124-B rollover

Under paragraph 124-70(1)(b) you may choose a rollover if the asset, or part of it, is lost or destroyed. In terms of subsection 124-70(2), if you receive money you must received it as compensation, or under an insurance policy. You met both these requirements.

Requirements if you receive money

In terms of subsection 124-75(1) you must receive money for the event happening. Under subsection 124-77(2) expenditure must be incurred in relation to a replacement asset, and under subsection 124-75(3) that expenditure must happen 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 that the Commissioner allows in special circumstances.

Where the replacement asset is not used for business purposes subsection 124-75(4) contains a special rule that you must use it (for a reasonable time after acquiring it) for the same purpose as, or similar purpose to, the purpose for which you used the original asset just before the event happened. Taxation Determination TD 2000/42 provides guidance on the scope of the phrases 'same' and 'similar' purpose. It states that it is a question of fact and degree.

Subsection 124-75(5) also requires that the replacement asset cannot become an item of your trading stock just after you acquire it, nor can it be a depreciating asset whose decline in value is worked out under Division 40 or deductions for which are calculated under Division 328.

From the information provided you will satisfy the requirements in section 124-75 because:

(1) you received money in the form of insurance proceeds for the destruction of the destroyed asset;

(2) you incurred expenditure in acquiring another CGT asset (the replacement asset);

(3) we note that in your case the Commissioner has already granted an extension to satisfy this requirement. As the replacement asset was within this period it meets this condition;

(4) although there will be a slight increase in private usage, you have confirmed that the replacement asset will be used for the same purpose as, or similar purpose to your original property; and

(5) the replacement asset did not become an item of trading stock just after the you acquired it, and neither Division 40 nor Division 328 have any application for the purposes of this subsection.

Therefore, you satisfy the requirements for rollover relief under subdivision 124-B in relation to the destroyed dwelling.

Land & Buildings one asset?

At law, where a building is built upon land, the building becomes part of the land. Similarly, capital improvements to assets do not normally have a separate legal existence from the asset itself. However, for capital gains tax (CGT) purposes the building or capital improvement may be treated as a separate asset.

A building or structure on land acquired on or after 20 September 1985 (post-CGT) is treated as a separate CGT asset from the land if a balancing adjustment can apply to the building or structure under the depreciation, mining, research and development (R&D), timber mill building or timber access road provisions under section 108-55. Buildings and structures for which only a capital works deduction is available are not treated as separate assets from post-CGT land.

Where the aforementioned circumstances do not apply, the legal principle will apply such that any building or other improvement made to the land becomes part of the land and thereafter the composite asset is treated as a single asset under section 108-50.

Therefore, as you were not entitled to a balancing adjustment under the depreciation, mining, R&D, timber mill building or timber access road provisions and you were not entitled to a capital works deduction, the legal principle stated above will apply so that the destroyed dwelling and the land on which it was built will constitute a single asset for capital gains tax purposes.

Apportionment of cost base
Where there is a partial destruction of a CGT asset, such as a building on land, there is no requirement that the remaining land be disposed of in order that the rollover provisions be accessed in relation to the building. There will, however be cost base implications.

Cost base of destroyed dwelling

Under section 112-30, when there is only a partial disposal (or in this case, destruction) of a CGT asset, then the cost base needs to be apportioned between the part that has been destroyed and the part that remains. In order to calculate that portion of the cost base that relates to the part of the asset that was destroyed, the following calculation is used:

Cost base of whole asset X Capital proceeds for the CGT event happening to the part

Those capital proceeds plus the market value of the remainder of the asset

This is the part of your original cost base that relates to the dwelling that was destroyed by the fire. You would use this amount to establish whether you have made a capital gain from the proceeds received from the insurance claim.

Market valuation of remaining asset (land)

In order to determine the cost base for the destroyed dwelling, you must determine the market value of the remaining portion of the original asset (i.e. the land) at the time that the dwelling was destroyed by fire. Where the market value of an asset needs to be determined, you can choose to:

i) obtain a detailed valuation from a qualified valuer; or,

ii) compute your own valuation based on reasonably objective and supportable data (refer Capital Gains Tax Determination TD 10).

Once the cost base of the destroyed dwelling and land together has been established, the cost base for the destroyed dwelling alone can be determined and the exact amount of the capital gain relating to the destruction of the dwelling can then be calculated.

Cost base of remaining land

The remainder of the cost base (that is, the cost base of the whole asset (destroyed dwelling & land) less the cost base of the destroyed dwelling) is the amount attributable to that part of the asset that was not affected by the event, in your case the land.

Effect on cost base of replacement asset

If the money received from the C1 CGT event (the insurance proceeds) is not more than the expenditure incurred to acquire the replacement asset, then in accordance with item 3 of the table in subsection 124-85(2) any capital gain from the CGT event will be disregarded and the first element of the cost base for the replacement asset will be reduced by the amount of that capital gain.

Sale of the replacement asset

Upon disposal of the replacement asset an A1 CGT event will happen. From this a capital gain may be calculated by deducting the first element of the cost base (as reduced by the above rolled over capital gain from the C1 CGT event) together with any of the other remaining cost base elements.

If the asset has been held for at least 12 months the CGT 50% discount may apply. Unless any other specific CGT discounts or concessions apply this capital gain will be returned in the year in which the disposal takes place.

Sale of remaining land

On the subsequent sale of the vacant land CGT event A1 will happen. You will make a capital gain if your proceeds exceed the cost base of the land as calculated in accordance with the above methodology. You will make a capital loss if the reduced cost base of the land is greater than the proceeds.

Election

If you choose the replacement-asset rollover in relation to this capital gain, you do not need to lodge a written election stating your choice. In accordance with section 103-25, the way you prepare your return is indicative of your choice to apply the roll-over.

Hardship

There are no provisions contained within the ITAA 1997 that allow the Commissioner to waive capital gains due to circumstances of hardship.

Calculations

By determining the relevant variables and inserting them into the above calculation methodology you will be able to determine your tax position.