Edited version of your written advice

Authorisation Number: 1013125248329

Date of advice: 22 November 2016

Ruling

Subject: Capital gains tax

Question

Is a replacement asset rollover available under section 124-70 of the Income Tax Assessment Act 1997 (ITAA 1997) on the disposal of your rental property to a Government agency?

Answer

Yes

This ruling applies for the following period

Year ending 30 June 20YY

The scheme commences on

1 July 20XX

Relevant facts and circumstances

You are the owner of a rental property (the Property). The Property is a post-CGT asset.

You have received a notice from an Australian government agency advising you that they wish to acquire the Property. The authority proposed a negotiation to acquire the property, and if the negotiation was not successful, they would have proceeded to compulsorily acquire the Property.

You have accepted an offer from the Government agency for the sale of the Property.

You intend to use the proceeds of sale to purchase another rental property within one year after the end of the income year in which the sale happened.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 124-70

Income Tax Assessment Act 1997 Section 124-75

Income Tax Assessment Act 1997 Section 124-85

Reasons for decision

A capital gain or capital loss is made as a result of a capital gains tax (CGT) event happening to a CGT asset (section 102-20 of the ITAA 1997). The most common event is CGT event A1. CGT event A1 happens when you dispose of an asset to someone else, for example you sell your dwelling. The disposal of your rental property constitutes CGT event A1 (section 104-10 of the ITAA 1997).

You make a capital gain if your capital proceeds from the disposal are more than the asset's cost base. You make a capital loss if your capital proceeds are less than the asset's reduced cost base.

A replacement asset rollover is available if an involuntary disposal happens because an asset owned by a taxpayer is compulsorily acquired by an Australian government agency (section 124-70 of the ITAA 1997). 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 rollover. Paragraph 124-70(1)(c) of the ITAA 1997 provides that a rollover is also available for an asset where:

(c) you dispose of it to an Australian government agency after a notice was served on you by or on behalf of the agency:

(i) inviting you to negotiate with the agency with a view to the agency acquiring it by agreement; and

(ii) informing you that if the negotiations are unsuccessful, it will be compulsorily acquired by the agency;

On satisfying these conditions, section 124-75 of the ITAA 1997 provides other requirements which must be satisfied if money is received in respect of the compulsory acquisition of the asset. One of these requirements is that the owner of the asset must incur expenditure in acquiring another CGT asset (subsection 124-75(2) of the ITAA 1997). The asset purchased to replace the original asset must be purchased no earlier than one year before the event happens or, within one year after the end of the income year in which the event happens (subsection 124-75(3) of the ITAA 1997) and must be used for the same purpose as the original asset (subsection 124-75(4) of the ITAA 1997).

In your case, your rental property was the subject of an acquisition notice by a Government agency. The agency advised that if you did not negotiate a sale they would proceed with compulsory acquisition. You will receive money for the sale of the property. You intend to purchase another rental property within one year after the end of the income year in which the disposal occurs. You are entitled to choose a replacement asset rollover under section 124-70 of the ITAA 1997.