Edited version of your private ruling

Authorisation Number: 1012457892001

Ruling

Subject: Income Tax - Extension of time to acquire asset

Question 1

Will the Commissioner exercise his discretion under paragraph 124-75(3)(b) of the ITAA 1997 to allow the Taxpayer an extension to obtain a replacement asset for an asset that was compulsorily acquired by a government body?

Summary

Yes. The Commissioner will exercise his discretion under paragraph 124-75(3)(b) of the ITAA 1997 to allow an extension until 30 June 20XX to obtain a replacement asset for an asset that was compulsorily acquired by a government body.

This ruling applies for the following periods:

Year ending 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2013

Year ending 30 June 2014

Year ending 30 June 2015

Year ending 30 June 2016

Year ending 30 June 2017

The scheme commences on:

During the 2012 income year

Relevant facts and circumstances

The Taxpayer is part of a group of entities. The Taxpayer is in the business of constructing buildings.

In 20YY, an Australian government agency compulsorily acquired vacant land from the Taxpayer, which was designated for future expansion. The change in legal ownership of the land resulted in a CGT event A1 occurring during the relevant income year.

The Australian government agency made an offer of compensation for the land pursuant to the relevant legislation, and the amount was paid to the Taxpayer in the relevant year.

The Taxpayer has disputed the amount offered as proceeds for the disposal of the land and has commenced legal proceedings in this respect. As a result of the commencement of these legal proceedings, the Taxpayer has been delayed in purchasing a replacement asset.

The Taxpayer asserts that there are several steps in the compensation process and that these steps are likely to be further delayed due to the complexity of the case. The Taxpayer further asserts that as the final consideration for the disposal of land will not be certain until the legal dispute is resolved. It is difficult for it to commence searching for an appropriate replacement asset. This is because the Taxpayer does not currently know the total value of the asset that it will need to acquire and whether additional funding (or surplus cash) will result from the acquisition.

Given that the replacement asset must be used for the same or similar purpose for which the Taxpayer used the Land, the Taxpayer asserts that it will be required to acquire a very specific asset at a substantial value in order to qualify for the rollover. As such, the Taxpayer asserts that the market for finding such a replacement asset will be restricted, therefore making it difficult to find a suitable asset in a short time period.

The Taxpayer states that the amount to be invested is substantial and it is more likely than not that a due diligence process would be required in identifying a suitable replacement asset - therefore adding further time to the process of acquiring a replacement asset.

The Taxpayer has engaged legal representation for the dispute, who has estimated that the proceedings could be settled any time between 20ZZ and 20XX, depending on whether the Australian government agency accepts the claim made by the Taxpayer.

The Taxpayer states that should the matter be resolved before 30 June 20VV, it will still take some time to find a suitable replacement asset of such a substantial and specific nature. The Taxpayer asserts that it would be fair and equitable for the Commissioner to allow an extension of time to the end of the following income year to find a suitable replacement asset (i.e. to 30 June 20XX).

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 124-70(1),

Income Tax Assessment Act 1997 Subsection 124-75(2) and

Income Tax Assessment Act 1997 Subsection 124-75(3).

Reasons for decision

Question 1

Will the Commissioner exercise his discretion under paragraph 124-75(3)(b) of the ITAA 1997 to allow the Taxpayer an extension to obtain a replacement asset for an asset that was compulsorily acquired by a government body?

Summary

Yes. The Commissioner will exercise his discretion under paragraph 124-75(3)(b) of the ITAA 1997 to allow an extension until 30 June 20XX to obtain a replacement asset for an asset that was compulsorily acquired by a government body.

Detailed reasoning

Under subsection 124-70(1) of the ITAA 1997, an entity may be able to choose a replacement asset rollover if a CGT asset is compulsorily acquired by an Australian government agency. A replacement-asset rollover allows an entity, in special cases, to defer the making of a capital gain or loss from one CGT event until a later CGT event happens.

Subsection 124-75(2) of the ITAA 1997 requires that the owner of the asset must incur expenditure in acquiring another CGT asset. Paragraph 124-75(3)(b) of the ITAA 1997 requires the entity to incur at least some of the expenditure in acquiring this replacement CGT asset no later than one year, or within such further time as the Commissioner allows in special circumstances, after the end of the income year in which the event happens.

In determining whether special circumstances exist for the Commissioner to extend the period in which to acquire a replacement asset, regard must be had to Taxation Determination TD 2000/40 (TD 2000/40) which provides guidance on interpreting subsection 124-75(3) of the ITAA 1997, in particular what are 'special circumstances'.

TD 2000/40 states that the expression 'special circumstances' by its nature is incapable of a precise or exhaustive definition. What constitute 'special circumstances' depends on the facts of each particular case.

Relevantly, Example 3 in TD 2000/40 provides an illustration in which a taxpayer's asset is compulsorily acquired by a State authority. The taxpayer is then involved in a protracted legal dispute with the authority over the quantum of the compensation. In this instance, the Commissioner accepts that there are special circumstances to allow further time for the taxpayer.

In determining if his discretion will be exercised, the Commissioner also 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.

Applying paragraph 124-75(3)(b) of the ITAA 1997 to the present case, the Taxpayer would ordinarily have until 30 June 2013 to incur at least some of the expenditure in acquiring a replacement asset. However, the Taxpayer has sought the Commissioner's discretion to allow an extension of time due to special circumstances.

According to the information provided, the Taxpayer disputed the amount offered by the Australian government agency as proceeds for the land compulsorily acquired, and has commenced proceedings to claim a greater amount. As such, purchasing a replacement asset has been delayed.

Should the dispute proceed to litigation, it is estimated that any compensation awarded by the court would not be paid until mid-20VV. The lack of certainty as to the amount and timing of the compensation the Taxpayer will receive will also impede the Taxpayer's ability to commence searching for a replacement asset. Furthermore, the specific nature of the asset to be replaced, the substantial amount to be invested, and the possibility of a due diligence process in respect of such an acquisition means that further delays in purchasing a replacement asset may be experienced.

Based on these facts, it is deemed that special circumstances exist to warrant the Commissioner to exercise his discretion and allow an extension until 30 June 20XX to obtain a replacement asset, as it would be fair and equitable to do so given that the circumstances represent an acceptable explanation for the delay.

By granting this additional time, there does not appear to be any prejudice to the Commissioner or any other parties, nor does there appear to be any mischief involved in this case.

Conclusion

The Commissioner will exercise his discretion under paragraph 124-75(3)(b) of the ITAA 1997 to allow an extension until 30 June 20XX to obtain a replacement asset for an asset that was compulsorily acquired by a government body.