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Ruling

Subject: CGT compulsory acquisition rollover relief

Question

Will the same or similar purpose test contained in subsection 124-75(4) of the Income Tax Assessment Act 1997 (ITAA 1997) be satisfied if you purchase a residential investment property?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 2013

The scheme commenced on:

1 July 2012

Relevant facts and circumstances

You do not operate a business.

You own a property that is going to be compulsorily acquired by an entity

The entity served notice to you inviting negotiations in relation to the sale of the property and informing that if negotiations were unsuccessful, the property would be compulsorily acquired under a statutory power.

You are currently negotiating the sale of the property.

The property is a non-residential property that was leased to tenants to derive income.

You intend to utilise the rollover provisions under subdivision 124-B of the ITAA 1997 to reduce any capital gain made on the sale of the property.

You intend to purchase a residential property within 12 months of the disposal of the property. The residential property will be used to produce rental income.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 124-B

Income Tax Assessment Act 1997 Section 124-70

Income Tax Assessment Act 1997 Section 124-75

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

Reasons for decision

Asset compulsorily acquired

Under the provisions of Subdivision 124-B of the ITAA 1997, 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.

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; and

· the compulsory acquisition would have been under a power of compulsory acquisition conferred by an Australian law.

Rollover requirements

In cases where an entity receives money as a result of the event, the entity must satisfy the requirements of section 124-75 of the ITAA 1997 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) of the ITAA 1997, either of which can be satisfied.

The requirement that applies to this case is the same or similar purpose test. This test is satisfied if you use the other asset for a reasonable time after you acquire 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 of the ITAA 1997 happened.

The second requirement can be satisfied by using another CGT asset for the required purpose even if you are not, or 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) of the ITAA 1997 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) of the ITAA 1997; 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 circumstances

In this case, an entity will compulsorily acquire a non-residential investment property from you that was used to derive rental income. You intend to roll over the capital gain made from the disposal of this property by purchasing a residential investment property; this property will also be used to derive rental income. The same or similar purpose test contained in subsection 124-75(4) of the ITAA 1997 will be satisfied where the replacement asset is used to derive rental income, irrespective of whether the replacement property is commercial or residential.

Accordingly, the same or similar purpose test will be satisfied if the trust purchases a residential investment property that is used to derive rental income within 12 months after the end of the income year in which the CGT event occurs.