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Ruling

Subject: Capital gains tax: replacement asset roll-over

Question

Will you be able to choose the replacement asset roll-over under Subdivision 124-B of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the compulsory acquisition of part of your land?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You purchased a property a number of years ago.

The property comprised your family home and farm land.

The property was used for farming for several years, when the ongoing drought forced you to cease this activity.

An Australian government agency then informed you that they were going to compulsorily acquire part of the land.

There were ongoing discussions regarding the valuation of the land until recently when a payment was made to you for the land compulsorily acquired.

You created a family trust for asset protection purposes, and injected the payment into this trust. The trust then used the money to purchase several commercial properties as an investment.

The commercial properties were acquired by the family trust within 12 months of the compulsory acquisition.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 124-75

Income Tax Assessment Act 1997 Subsection 995-1(1)

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 of the ITAA 1936 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

Under Subdivision 124-B of the ITAA 1997, you may be able to choose to roll-over a capital gain or loss that results from a compulsory acquisition of a capital gains tax (CGT) asset that you own.

One of the circumstances in which you can make this choice is if the asset is compulsorily acquired by an Australian government agency. This requirement is satisfied in your case.

You will therefore be able to choose the roll-over under Subdivision 124-B of the ITAA 1997 in your particular circumstances if you satisfy the following requirements in section 124-75 of the ITAA 1997:

o you must incur expenditure to acquire another CGT asset

o at least some of the expenditure to acquire the new CGT asset must be incurred by you no later than 12 months after the end of the year of income in which the original CGT asset was compulsorily acquired and

o you must use the other asset for a reasonable time after you acquired it for the same purpose as, or for a similar purpose to, the purpose for which you used the original asset just before the event happened.

In your case, the above conditions have not been satisfied. The expenditure incurred to acquire another CGT asset was by the family trust and not by you, and the assets were not used for the same or similar purpose. The replacement assets consisting of several commercial properties were acquired for investment purposes, that is, to earn rental income, while the former farm land compulsorily acquired was not being used to earn rental income. There is a significant difference in degree of use of the replacement assets.

As you do not satisfy the relevant conditions in section 124-75 of the ITAA 1997, you will not be able to choose the replacement asset roll-over under Subdivision 124-B of the ITAA 1997 in relation to the compulsory acquisition of part of your land.

Note

There are no other replacement asset roll-overs under Division 124 of the ITAA 1997 which would apply in your circumstances. Division 152 of the ITAA 1997 contains small business CGT concessions which may apply in your circumstances. Further information in relation to these concessions can be obtained from our website at www.ato.gov.au. You can also apply for another private ruling if you require a determination of your eligibility for the concessions.