Edited version of your private ruling

Authorisation Number: 1012506430335

Ruling

Subject: Capital gains tax

Questions and answers

1. Will the purchase of a property satisfy the conditions of a replacement capital gains tax (CGT) asset?

Yes.

2. Will the Commissioner exercise his discretion and extend the time for obtaining a replacement asset until 30 June XXXX?

Yes.

This ruling applies for the following periods:

Year ending 30 June 2014

Year ending 30 June 2015

The scheme commenced on:

1 July 2013

Relevant facts and circumstances

You acquired a share in the asset after 19 September 1985.

This land is held as tenants in common with the other share holders.

The land was leased to an unrelated party.

The land derived income from the tenant for a number of years.

You became aware that the land was designated for compulsory acquisition.

You and the other owners agreed to let the tenant use the land rent free until the land was compulsorily acquired.

The property was compulsorily acquired by a government department.

A proposed compensation payment has been offered to you and the other owners.

You are seeking advice in relation to the compensation payment and are still negotiating with the department in relation to the amount.

You intend to purchase a residential property with a lease and tenants, or a vacant property with the intention of renting it out with your compensation proceeds.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 124-70.

Income Tax Assessment Act 1997 Section 124-75.

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

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

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

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

Reasons for decision

Section 124-70 of the Income Tax Assessment Act 1997 (ITAA 1997) allows capital gains tax roll-over relief if an asset owned by the taxpayer is compulsorily acquired by an Australian government agency. A further requirement is that the owner of the original asset must receive money or another CGT asset or both for the CGT event to be eligible for roll-over. On satisfying these conditions section 124-75 of the ITAA 1997 provides other requirements which must be satisfied if money is received for the event happening. 

Under subsection 124-75(2) of the ITAA 1997, the owner of the asset must incur expenditure in acquiring another CGT asset. In accordance with paragraph 124-75 (3) (a) of the ITAA 1997 at least some of the expenditure must be incurred no earlier than one year before the event happens or under paragraph 124-75(3) (b) of the ITAA 1997 no later than one year after the end of the income year in which the event happens, or within such time as the Commissioner allows in special circumstances.

Where the original asset was not in any way connected to a business being carried on by you, the replacement asset must be used (for a reasonable period after it is acquired) for the same purpose, or a similar purpose, to the purpose for which the original asset was used just before the event happened.

Your property was acquired by a government department.

Taxation Determination TD 2000/42 provides some guidance as to the scope of the words 'for the same purpose… or for a similar purpose' that are used in subsection 124-75(4) of the ITAA 1997.

When establishing whether or not the purchase of a residential rental property with an existing lease and tenants or a vacant residential property with the intention to lease it out will satisfy the requirements under subsection 124-75(4) of the ITAA 1997, consideration must be given as to whether the assets would be 'for the same purpose… or for a similar purpose' as that of your original asset.

In your case the original asset you owned was land which was leased out. The replacement asset you wish to purchase will either be a residential property with an existing lease and tenants, or a residential property you can rent out. The original asset was leased out and you derived income from the property which had the purpose of benefiting from rental income and capital growth from real property value.

An investment in a residential property with an existing lease and tenants, or a vacant residential property you can rent out, can be said to be used for the purpose of benefiting from rental income and capital growth from real property value, and can reasonably be viewed as being used for the same purpose or at least a similar purpose.

Therefore the purchase of a residential property with an existing lease and tenants or a vacant residential property with the intention of renting it out will satisfy the requirements under subsection 124-75(4) of the ITAA 1997.

To meet the requirements of paragraph 124-75(3) (b) of the ITAA 1997 the new asset must be acquired on or before 30 June XXXY or within such time as the Commissioner allows in special circumstances.

You are seeking an extension to 30 June XXXX.

When considering what factors are taken into consideration when allowing an extension of time to purchase a replacement asset, Taxation Determination TD 2000/40 is used to give guidance on what factors the Commissioner will take into consideration when exercising the discretion.

Example 3 of TD 2000/40 looks at the compulsory acquisition of a property. It reads:

Graeme had a commercial property compulsorily acquired by a State authority. Graeme is having a protracted legal dispute with the authority over the quantum of the compensation. On these facts, we would accept that there are special circumstances to allow further time.

In your circumstances, you have been delayed in purchasing a replacement asset due to negotiations in relation to the payment offered to you by the government department which have not yet concluded. You have been made an offer but have not accepted this offer. This is similar to the circumstances outlined in example 3 above.

Accordingly, the Commissioner will extend the time period for you to obtain a replacement asset to 30 June XXXX as a delay in receiving your payment from the government department is a reasonable explanation for granting an extension of time.