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Ruling

Subject: Capital Gains Tax - destruction of a CGT asset

Question

Will the Commissioner exercise the discretion available under section 124-75 of the Income Tax Assessment Act 1997 (ITAA 1997) to provide an extension of time to incur some expenditure in acquiring a replacement for Capital Gains Tax (CGT) purposes following the destruction of an asset?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

Year ending 30 June 2015

The scheme commences on:

1 July 2011

Relevant facts and circumstances

A company owned an asset which was held on leased land. The asset was used as part of the business. The asset was acquired after 20 September 1985.

The asset was destroyed. The lease of the land was cancelled. Insurance payments were subsequently received.

The company intends to replace the asset on another block of land. The replacement asset will be used for the same purpose as the original. The replacement asset will not cost less than the value of the insurance payment.

It is envisaged that the company will not be in a financial position to replace the asset within the relevant time period for various reasons.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 124-70 and

Income Tax Assessment Act 1997 Section 124-75

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 some expenditure must be incurred.

Detailed reasoning

Under subsection 124-70(1), you may be able to choose a roll-over in respect of a CGT asset if, amongst other things, it or part of it, is lost or destroyed.

If you receive money for the sale of the asset then further conditions are imposed by section 124-75. 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.

Special circumstances

In determining whether special circumstances exist that will allow the Commissioner to extend the period for you to incur expenditure in acquiring a replacement asset regard must be had to Taxation Determination TD 2000/40. TD 2000/40 provides guidelines for interpreting subsection 124-75(3) of the ITAA 1997, in particular what constitutes special circumstances.

In determining if the discretion would be exercised 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

Applying the provisions of section 124-75, you would ordinarily have until a particular date to incur expenditure in acquiring a replacement asset. You have sought an extension of time to do so.

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 of the ITAA 1997 is to allow rollover concessions in special cases, to defer the making of a capital gain from one CGT event until a later CGT event happens.

In determining whether special circumstances which warrant the granting of an extension of time exist in your case we have considered the facts underlying your request and concluded that special circumstances do exist. There are acceptable explanations for the delay in incurring expenditure in acquiring a replacement asset and we would regard it as fair and equitable to provide you with an extension of time to do so. 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). The existing time limit that would require the expenditure to be incurred no later than a particular date is extended.