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Ruling

Subject: Capital Gains Tax - Compulsory acquisition

Question 1

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 for Capital Gains Tax (CGT) purposes following the compulsory acquisition of property?

Answer

Yes

Question 2

Are multiple applications for extension of time necessary if the consideration in respect of the original asset is received in multiple payments?

Answer

No.

Question 3

Is it necessary that the number of replacement assets acquired matches the number of assets disposed of?

Answer

No.

Question 4

If the original asset was commercial rental property will a residential rental property qualify as a complying rollover asset under s124-75(3) to use "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"?

Answer

Yes.

Question 5

If the taxpayer receives multiple disbursements, are they required to spend the total amount in acquiring replacement assets?

Answer

Yes. In order to fully defer the making of a capital gain from a CGT event, replacement assets must be purchased which are equivalent to all of the amounts received in compensation for the original assets.

This ruling applies for the following periods:

Year ending 30 June 2010

Year ending 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

The scheme commences on:

1 July 2009

Relevant facts and circumstances

The taxpayer owns several commercial and residential rental properties. Several properties were compulsorily acquired by a government authority.

The taxpayer negotiated a leaseback in order to keep the operation of the properties going while he discussed compensation and to keep the businesses on those properties during the changeover. The negotiations were slow and held up by the government.

The government authority transferred a certain sum for the properties. The taxpayer believes the amount to be insufficient for the value of the land and has been advised by his lawyer to take legal action. He plans to demand further compensation.

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.

Reasons for decision

Unless otherwise stated, all references in the following Reasons for Decision are to the Income Tax Assessment Act 1997 (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. During that period, at least some expenditure must be incurred on acquiring replacement assets. The number of the replacement assets does not need to correspond to the number of original assets but the total value of the replacements must at least equal that of the original assets for the entire capital gain to be deferred.

Detailed reasoning

A taxpayer may be able to obtain a roll-over under Subdivision 124-B if a CGT asset they own is compulsorily acquired under the conditions specified in section 124-70. Section 124-70 extends to compulsory acquisitions by local government bodies.

If a taxpayer receives money as a result of the compulsory acquisition of their asset they must satisfy the further conditions imposed by section 124-75 for roll-over to be available. Subsection 124-75(2) requires that the taxpayer incur expenditure in acquiring another CGT asset.

Also, subsection 124-75(4) states that where the original asset was not in any way connected to a business being carried on by the taxpayer, the replacement asset must be used (for a reasonable period after it is acquired) for the same purpose, or for a similar purpose, to the purpose for which the original asset was used just before the event happened.

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.

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

Generally, in determining if an available discretion should be exercised, including the discretion contained in subsection 124-75(3), the Commissioner considers 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 properties. Applying the provisions of section 124-75, you would ordinarily have until a certain date to acquire a replacement asset.

You have sought an extension of time to acquire a replacement. 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 section 124-85(2). The purpose of subdivision 124-B is to allow rollover concessions in special cases which will 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 would 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 legal dispute with the council regarding the amount of compensation. Such circumstances are consistent with those described in Example 3 of TD 2000/40 in which the Commissioner states that he would accept that special circumstances exist.

The explanation for the delay in acquiring a replacement asset is considered acceptable 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) and extend the existing time limit.

Taxation Determination TD 2000/42 provides some guidance as to the scope of the words 'use the other asset... for the same purpose... or for a similar purpose' in subsection 124-75(4). The Determination states that whether an asset is used for the same or a similar purpose as another asset is a question of fact and degree. Where an original asset was used to earn commercial rental income and a replacement asset is used to earn residential rental income, those uses would fall within the scope of the same or similar purpose test to satisfy the purposes of the legislation.

At least some of the expenditure in acquiring a replacement asset should be incurred no later the time limit set under sub-section 124-75(3). The exercising of the Commissioner's discretion to allow further time to make such expenditure in special circumstances simply extends the time period in which that expenditure must be incurred. It is unaffected by the amount of the compensation and the number of instalments in which it is paid. Consequently, if the Commissioner has allowed an extension it is unnecessary to seek a further extension in respect of additional payments unless an additional extension of time is required.

The initial expenditure must be incurred within that time regardless of whether further compensation will be received subsequently. As stated in TD 94/77, there is no restriction on the number of assets that can be acquired in replacement of an original asset. In order to fully defer the making of a capital gain from a CGT event, replacement assets must be purchased which are at least equivalent to all of the amounts received in compensation for the original assets.