Edited version of your written advice

Authorisation Number: 1012937925876

Date of advice: 20 January 2016

Ruling

Subject: CGT - compulsory acquisition

Question 1

Will you be able to fully disregard any capital gain made on the disposal of vacant land, being the rear of your main residence under section 118-250 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

This ruling applies for the following periods:

Income year ending 30 June 20XX

The scheme commences on

1 July 20XX

Relevant facts and circumstances

You purchased the property ('the property') in after 20 September 1985 and have lived there continuously from that date.

The property comprised of land and a residential dwelling. The front portion, ('Residential') on which the house stands, and the rear portion ('Reserved County Open Space), on which no construction was permitted.

A few years ago, you received a letter from your local council informing you that your property was being rezoned. This letter also stated that your property was within a proposed land acquisition area.

The council Local Environmental Plan Land reservation acquisition map confirmed that the rear section of the property and several adjoining properties along your street were earmarked for acquisition. This acquisition was confirmed to you as the longer term plan of the government during a telephone call to the council.

You subsequently contacted an officer at the relevant body, who invited you to offer your property to be included in the next tranche of acquisitions for the department to assess at their next yearly meeting.

In the belief the acquisition was inevitable; you decided to proceed down this course.

In the 20XX-XX income year, you received a letter from an officer at the relevant Department, confirming your request for the acquisition of the rear of your property, and detailing how the acquisition would proceed.

You rejected an initial offer in late 20XX.

Prior to the 20XX-XX income year an agreement was reached as you accepted an improved offer.

You signed the sale contract and settlement on the sale of the rear portion of the property occurred in the 20XX-XX income year.

Subsequent to the settlement of the land, the officer at the Department confirmed that had the acquisition by negotiation of the rear of the property not occurred, the acquisition would have proceeded by compulsory acquisition.

As part of your ruling application you sent an email to the ATO setting out circumstances that may amount to 'hardship' surrounding the acquisition. These circumstances were as follows:

• Management at an aged care centre had informed you of a possible need for your spouse's parent to be relocated to a high care section;

• such a relocation would involve additional cost of several hundred thousand dollars;

• you were currently reserving funds from the compulsory acquisition towards this eventuality; and

• the need for the relocation (and so the need for the funds) had yet to arise.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 118-120

Income Tax Assessment Act 1997 Section 118-250

Land Acquisition (Just Terms Compensation) Act 1991 NSW Sections 21 - 25

Reasons for decision

Summary

Generally, a taxpayer will be entitled to a full main residence exemption if they had resided in the dwelling for their entire ownership period.

This exemption applies to a dwelling's adjacent land if the same capital gains tax (CGT) event happens to that land and your ownership interest in it as if it were a dwelling. In your situation, the same event has not occurred, as your dwelling was not sold, so this exemption does not apply.

Acquisitions of adjacent land may be CGT exempt where they are deemed compulsory acquisitions. However, the circumstances of the acquisition of your land do not meet definition for compulsory acquisition. Instead, the acquisition was by agreement. Therefore, the disposal event does not fall under this exemption.

Compulsory acquisitions of adjacent land may also be CGT exempt where you receive notices that meet specified requirements. The notices you received do not meet those requirements, and so the disposal of your adjacent land is not CGT exempt.

Detailed reasoning

Capital gains tax

A capital gain or capital loss is made when a capital gains tax (CGT) event happens to a CGT asset you own.

The most common event is CGT event A1 which happens when a person disposes of a CGT asset to someone else.

A capital gain is made if the amount received (called capital proceeds) from the disposal exceeds the cost base (the cost of the asset and certain other costs associated with acquiring, holding and disposing of the asset) of the CGT asset.

Full Main Residence Exemption:

Generally, you can ignore a capital gain or capital loss from a CGT event that happens to a dwelling that is your main residence: (Section 118-110 ITAA 1997)

However, in order to obtain a full exemption from CGT, the dwelling must have been:

• your main residence for the entire period you owned it

• must not have been used to produce assessable income ; and

• any land on which the dwelling is situated should not be more than two hectares.

Furthermore, for this exemption to apply it must be established that a property is your main residence or home. Whether a dwelling is an individual's principle residence depends on the facts of each case. The factors to be taken into account include the length of time the individual lives in the dwelling, the connection of services, mailing address, and whether the individual has moved their personal belongings into the dwelling.

Extension of Exemption to Adjacent Land

The main residence exemption applies to a dwelling's adjacent land (under Section 118-120 ITAA 1997) where:

• the same CGT event happens to that land as if it were a dwelling;

• the adjacent land was used for private or domestic purposes in association with the dwelling; and

• the maximum area of adjacent land covered by the exemption for the CGT event is 2 hectares, less the land immediately under the dwelling.

Compulsory Acquisitions of Adjacent Land

Under section 118-250(1) ITAA 1997, the Main Residence exemption applies to a CGT event and the exempt land if the CGT event involves:

(a) the compulsory acquisition of the exempt land by

(i) an Australian government agency;

Application to your situation

On the facts, the property has been your main residence for almost 30 years. The main residence exemption applies to the land where both the dwelling itself and the adjacent land are subject to the same CGT event (in this case, disposal by sale).

In your situation, as only adjacent land was subject to the CGT event, and not the dwelling itself, the exemption specified in section 118-120(1) does not apply.

However, the main residence exemption may still apply where only the adjacent land is disposed of in a CGT event, under the section of the legislation dealing with compulsory acquisitions of adjacent land, i.e. section 118-250 ITAA 1997.

You have suggested your situation falls under sub-section 118-250(1)(a) of this section, under which the exemption applies where there is a compulsory acquisition of exempt land by an Australian government agency.

If there were a compulsory acquisition, this sub-section would be met and CGT would not need to be paid on the disposal of the exempted land.

The facts indicate the disposal of land was owner-initiated, which you suggest falls under division 3 of the Land Acquisitions (Just Terms Compensation) Act 1991 NSW (JTA), entitled Owner-initiated acquisition in cases of hardship. You further cite section 25 JTA, which deems certain types of owner-initiated acquisition as 'acquired by compulsory process'.

Section 25: Method of acquisition under this Division

(1) Land required to be acquired under this Division is to be acquired by compulsory process.

(2) However, nothing in this Division prevents the land concerned from being acquired by agreement instead of compulsory process within the period required by this Division.

(3) Division 1 (Pre-acquisition procedures) does not apply to an acquisition of land under this Division.

Section 25(1) deems 'land required to be acquired' as being acquired by compulsory process.

The question therefore becomes, what is 'land required to be acquired'?

For clarification, we turn to sections 23 and 24 of the JTA.

Section 23(1) provides that 'The owner of land…may require an authority…to acquire that land …if:

(a) The land is designated for acquisition by that authority…and

(b) The owner considers that he or she will suffer hardship if there is any delay in acquisition of that land…

Therefore, 'land required to be acquired' must be both:

• designated for acquisition (met on your facts), and

• acquired in this manner due to hardship on your part.

Section 24(1) supports this interpretation, providing that 'an authority of the State is not required to acquire land ….unless …the owner will suffer hardship'.

Thus, 'land required to be acquired' involves the presence of 'hardship', and where there is no hardship, the land is not required to be acquired.

Clearly, 'hardship' is an essential element of 'land required to be acquired'.

Respectfully, and for these reasons, we disagree with your assertion that 'under section 25 of division 3 JTA, the acquisition by the authority is defined as a compulsory process'.

Our view is that your owner-initiated acquisition falls under section 25(2), which provides '…nothing in this Division prevents the land concerned from being acquired by agreement instead of compulsory process…' [emphasis added]. That is, because in your case, hardship was not involved, the acquisition was by agreement, and such an agreement is outside the definition of compulsory process.

Did you suffer hardship?

In a later document added to your submission, you have set out circumstances which may amount to hardship. 'Hardship' is defined in section 24 of the JTA:

Section 24 Hardship

(2) An owner of land suffers hardship if:

(a) The owner is unable to sell the land, or is unable to sell the land at its market value, because of the designation of the land for acquisition for a public purpose, and

(b) It has become necessary for the owner to sell all or any part of the land without delay:

(i) for pressing personal, domestic or social reasons, or

(ii) in order to avoid the loss of (or a substantial reduction in) the owner's income

Your submission regarding 'hardship' set out the following facts:

• Management at an aged care centre had informed you of a possible need for your spouse's parent, to be relocated to a high care section;

• such a relocation would cost an additional several hundred thousand dollars.

• you were reserving funds from the compulsory acquisition towards this eventuality; and

• the need for your spouse's parent's relocation (and so the need for the funds) has yet to arise.

From these facts, we note the following:

• Since the sale, you have reserved the proceeds from the acquisition to pay for your spouse's parent's higher level of care, but these funds were not required at the time of sale, nor are they, as yet, required for this purpose;

• There was no mention of 'hardship' or other similar expressions, or of circumstances that suggested hardship, in your correspondence with the purchaser;

• There was a significant time gap between the initial offer made by the purchaser and the date of contract. This may indicate an absence of urgency in finalising the sale and so securing the proceeds for a 'pressing reason'.

For these reasons, our view is that you were not required to sell 'without delay' for a 'pressing' need. Therefore, your circumstances fall short of the definition of hardship under the legislation.

As a result, the exemption under section 118-250(1)(a) does not apply because the acquisition of the land is not a deemed 'compulsory acquisition' under section 25 of the JTA.

For completeness, we also consider below whether your transaction may be CGT exempt under section 118-250(1)(b), that is, on the basis of the notices you received.

Notices received by you from the relevant authorities

Section 118-250(1)(b) applies to the CGT event and the exempt land if the CGT event involves:

(b.) you disposing of the exempt land to an entity in circumstances meeting all of these conditions:

(i) the disposal takes place after a notice was served on you by or on behalf of the entity;

(ii) the notice invited you to negotiate with the entity with a view to the entity acquiring the exempt land by agreement;

(iii) the notice informed you that if negotiations were unsuccessful; the exempt land would be compulsorily acquired by the entity; and

(iv) the compulsory acquisition would have been under a power of the compulsory acquisition conferred by Australian law.

We note section 118-250(1)(b)(iii) provides that a notice received by you must inform that if negotiations are unsuccessful, the exempt land would be compulsorily acquired.

Our view is that correspondence received by you before disposal of the land in the middle of 20XX from the council and the Department does not establish that the acquisition was to be compulsory.

Conversely, we note the email to you from the officer at the Department office subsequent to the sale and settlement of the land expressly states that had a 'mutually acceptable amount of compensation' not been agreed upon, acquisition would have proceeded by compulsory acquisition.

However, this email does not meet the requirement of section 118-250(1)(b)(i), that the disposal takes place after a notice was served on you by or on behalf of the entity.

We distinguish these circumstances from instances where the legislation is silent on the issue of timing of notices - in those instances, there may be scope to disregard such formalities and instead focus on the substance of the documentation. Here, however, section 118-250(1)(b)(i) makes clear that the Parliament has both turned its mind to the issue of timing of notices and passed legislation stipulating that the notice must precede disposal.

It is therefore beyond the powers of the ATO to exercise any discretion on this issue.

Our conclusion is that your situation does not meet the requirements of section 118-250(1)(b), and therefore the transaction is not exempt from CGT.