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Ruling

Subject: Compulsory acquisition - replacement asset roll-over

Question 1:

Will the 'used in your business' test or 'same or similar purpose' test in subsection 124-75(4) of the Income Tax Assessment Act 1997 (ITAA 1997) be satisfied if a commercial premises is purchased to replace your vacant land that you had intended to develop?

Answer: No.

This ruling applies for the following periods:

1 July 2011 to 30 June 2012.

The scheme commences on:

1 July 2011.

Relevant facts and circumstances

You acquired land several years ago with the intention to develop the property. Preliminary works had been done to prepare the site.

You were approached by a government authority who indicated their willingness to purchase the site.

The land was compulsorily acquired.

You have sought to acquire a replacement asset of a similar kind in the surrounding areas. You have had difficulty locating a similar parcel of land and are considering purchasing commercial premises.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 124-70

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 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

Asset compulsorily acquired

Under the provisions of Subdivision 124-B, an entity may be able to choose to roll-over a capital gain that results from a compulsory acquisition of a capital gains tax (CGT) asset they own.

One of the circumstances in which a taxpayer can make this choice is if the asset is compulsorily acquired by an Australian government agency (paragraph 124-70(1)(a)). 'Australian government agency' is defined in subsection 995-1(1) as the Commonwealth, a State or Territory, or an authority of one of them.

Another circumstance where the choice can be made is where you dispose of an asset to an entity in the circumstances meeting all of the following conditions:

· the disposal takes place after a notice was served on you by or on behalf of the entity

· the notice invited you to negotiate with the entity with a view to the entity acquiring the asset by agreement

· the notice informed you that if the negotiations were unsuccessful, the asset would be compulsorily acquired by the entity

· the compulsory acquisition would have been under a power of compulsory acquisition conferred by an Australian law (paragraph 124-70(1)(c)).

Expenditure of monies

In cases where an entity receives money as a result of the event, the entity must satisfy the requirements of section 124-75 for the roll-over to be available. This means that:

· the entity must incur expenditure to acquire another CGT asset

· at least some of the expenditure to acquire the new CGT asset must be incurred by the entity no earlier than one year before the event happens or no later than 12 months after the end of the income year in which the event happened.

There are two further requirements in subsection 124-75(4), either of which can be satisfied.

Same or similar purpose

The first requirement is satisfied if, just before the event giving rise to a roll-over under Subdivision 124-B happened, the original asset:

· was used in your business

· was installed ready for use in your business, or

· was in the process of being installed ready for use in your business;

and the other asset is used in the same business, or is installed ready for use in the same business, for a reasonable time after it is acquired.

The second requirement is satisfied if you use the other asset for a reasonable time after you acquired it and your use of that asset is for the same purpose as, or for a similar purpose to, the purpose for which you used the original asset just before the event giving rise to a roll-over under Subdivision 124-B happened.

The second requirement can be satisfied by using another CGT asset for the required purpose even if you are not, nor have never been, carrying on a business.

Taxation Determination TD 2000/42 provides some guidance on the application of the 'same or similar purpose test' required by subsection 124-75(4) and notes that:

· the words 'use the other asset ... for the same purpose ... or for a similar purpose' should be read in their context in subsection 124-75(4); and

· whether a CGT asset is used for the same or a similar purpose as another asset is a question of fact and degree.

Application to your facts

You owned land. The intention was always to develop the property. It is not considered that you are carrying on a business.

Therefore the first requirement can not be satisfied.

To satisfy the second requirement the replacement asset will need to be used for the same or similar purpose as the asset that was compulsorily acquired.

You are in the process of acquiring a commercial premises as a replacement asset.

It is not considered that the commercial premises will qualify for the replacement asset roll-over as:

· the land produced only limited assessable income

· no buildings were constructed on the land

· the commercial premises is established with buildings, and

· you expect to earn income by leasing the commercial premises.

Therefore the second requirement is not satisfied and the commercial premises will not be considered as a replacement asset as being used for the same or similar purpose.