Edited version of your written advice

Authorisation Number: 1051406607080

Date of advice: 30 July 2018

Ruling

Subject: Replacement-asset roll-over

Question 1

Is the replacement-asset roll-over provided for in subdivision 124-B of the Income Tax Assessment Act 1997 (‘ITAA 1997’) available in relation to the compulsory acquisition of the property owned by you?

Answer

Yes.

Question 2

Will the Commissioner allow you further time until 30 June 2019, pursuant to paragraph 124-75(3)(b) of the ITAA 1997, to incur expenditure in acquiring another asset?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 2019

The scheme commences on:

A day during the year ended 30 June 2016

Relevant facts and circumstances

You are an Australian resident for tax purposes. You are in the business of property management and deriving rental income from real estate in Australia.

The Property

You acquired property and land (‘the Property’) some years prior to the day the scheme commenced.

During the year ended 30 June 2016, a statutory authority of a relevant government informed you that the Property was required for a project they were undertaking. The statutory authority informed you that they have powers to acquired land by a compulsory process.

During the year ended 30 June 2016, the statutory authority compulsorily acquired the Property.

It was later determined that you should receive an amount of compensation for the Property. This amount was deposited into your bank account some months after the Property was compulsorily acquired.

You have calculated that the disposal of the Property gives rise to a capital gain.

Prior to its compulsory acquisition, the Property was used in your business of property management and deriving rental income from real estate.

Replacement asset

Since the disposal of the Property, your intention has been to avail yourself of the replacement-asset roll-over provisions, contained within subdivision 124-B of the ITAA 1997 (‘the Roll-over Provisions’), to defer your liability to pay tax on the capital gain. To this end, since the Property was disposed of, you have been seeking to acquire properties that suit your business objectives.

In the income year after the Property was compulsorily acquired, you acquired at least one property. You derive rental income from this property.

You will choose to avail yourself of the Rollover Provisions with respect to the acquisition of this property.

Your current position

You have been unable to acquire any properties in addition to that mentioned above, despite actively searching during the period since the Property was compulsorily acquired. You state this is because of the circumstances in your case.

You remain active in the property market and maintain the want to identify and acquire a suitable replacement asset.

Relevant legislative provisions

Section 100-20 of the Income Tax Assessment Act 1997

Section 100-33 of the Income Tax Assessment Act 1997

Section 104-10 of the Income Tax Assessment Act 1997

Subdivision 124-B of the Income Tax Assessment Act 1997

Reasons for decision

Question 1

Capital gains and losses

Section 100-20 of the ITAA 1997 states that you can make a capital gain or loss only if a CGT event happens.

This section also makes it clear that the specific time of when the CGT event happens is important, particularly for working out in which income year a capital gain or loss occurred.

In specific situations, you may be able to defer or disregard a capital gain or loss from a CGT event by availing yourself of a roll-over.

Section 100-33 of the ITAA 1997 provides that there are two types of roll-overs:

n replacement-asset roll-over, which allows you to defer a gain or loss from one CGT event until a later CGT event where an asset is replaced with another asset

n same-asset roll-over, which allows you to disregard a gain or loss from a CGT event where the same asset is involved.

CGT event A1

Section 104-10 of the ITAA 1997 states that CGT event A1 occurs if you dispose of an asset, whether because of some act or event or by operation of law. The capital gain or loss is made at the time of the event.

Did CGT event A1 occur?

You involuntarily disposed of the property you owned because it was compulsorily acquired by a statutory authority.

Subsection 104-10(6) provides that if an asset was acquired from you by an entity under a compulsory acquisition power conferred by Australian law, the time of the event is the earliest of:

● when you received compensation for the acquisition

● when the entity became the owner of the asset

● when the entity entered the asset under the relevant power

● when the entity took possession under that power.

Consequently, CGT event A1 occurred in respect of the Property when it was compulsorily acquired.

Replacement-asset roll-overs

Division 124 of the ITAA 1997 contains the replacement-asset roll-overs that allow you, in special cases, to defer the making of a capital gain or loss from one CGT event until a later CGT event.

A replacement-asset roll-over may be available when you give up, surrender, or relinquish an asset you own, or your ownership ends in some other way, and as part of the same circumstances you receive another asset to replace the original asset.

When a roll-over is available

Subdivision 124-B of the ITAA 1997 contains a roll-over for when assets are compulsory acquired, lost or destroyed. Section 124-70 of the ITAA 1997 sets out the circumstances in which the roll-over relief may be available. You must make a positive choice to avail yourself of the roll-over under section 124-70.

Paragraph 124-70(1)(a) provides that you may be able to choose a roll-over if a CGT asset you own is compulsorily acquired by an Australian government agency.

Paragraph 124-70(2)(a) provides that the roll-over is only available if you receive either money or another CGT asset, or both, as compensation for the original asset being compulsorily acquired.

If you received money as compensation for the involuntary disposal of a CGT asset, you must incur expenditure to acquire another CGT asset (but not certain depreciating assets) to avail yourself of the roll-over. Generally, the expenditure must be incurred within a period starting one year before the compulsory acquisition event and ending one year after the end of the income year in which the event occurred.

If the original asset was used in your business immediately prior to its compulsory acquisition, the newly acquired asset or assets must be used in that business for a reasonable time after you acquire it. Otherwise, you must use the other asset for the same purpose, or for a similar purpose to, the purpose for which you used the original asset just before it was compulsorily acquired.¹

Was the Property acquired by an Australian government agency?

For the purposes of subdivision 124-B, “Australian government agency” takes its meaning from subsection 995-1(1) of the ITAA 1997:

(a) the Commonwealth, a state or a territory, or

(b) an authority of the Commonwealth or of a state or territory.

In FC of T v Bank of WA Ltd, FC of T v State Bank of NSW Ltd, Hill J listed some of the relevant issues with determining whether an entity is a public authority. Hill J stated that for an entity to be an authority of a state or the Commonwealth, the entity must be an agency or instrument of government set up to exercise control or execute a function in the public interest. It must exist to achieve a government purpose. Hill J also stated the entity must perform a traditional or inalienable function of government and have governmental authority for doing so.

The relevant entity was a statutory authority of a state government, and constituted by state legislation.

As the statutorily authority is constituted by an Act and it executes a function in the public interest and to achieve government purposes, we consider that it is an Australian government agency.

Consequently, the Property was compulsorily acquired by an Australian government agency.

Did you incur expenditure to acquire another CGT asset?

You received money as compensation for the compulsory acquisition of the Property. Consequently, you must have incurred expenditure to acquire another asset to avail yourself of the roll-over provided for in subdivision 124-B.

As immediately prior to its compulsory acquisition the Property was used in your business, any new asset you acquire as a replacement asset must also be used in your business.

Following the compulsory acquisition of the Property, you incurred expenditure in acquiring at least one property. The property you acquired as a replacement asset are used in your business of property management and deriving rental income from real estate.

Is the replacement-asset roll-over available to you?

In the year ended 30 June 2016, CGT event A1 happened in respect of the Property as it was compulsorily acquired by the statutory authority. This event gave rise to a capital gain.

Capital gains or losses can be deferred or disregarded in specific situations by availing yourself of a roll-over.

Subdivision 124-B of the ITAA 1997 sets out the requirements for roll-over relief when an asset is compulsorily acquired. There are specific requirements for when you receive money as compensation.

As you incurred expenditure to acquire at least one replacement CGT asset, this newly acquired asset is used in your business, and the expenditure was incurred within one year after the end of the income year in which the compulsory acquisition occurred, the replacement-asset roll-over provided for in subdivision 124-B is available to you in relation to the compulsory acquisition of the Property.

You can choose to avail yourself of this roll-over to defer your capital gain until a later CGT event.

Question 2

Timing of the expenditure to acquire a new CGT asset

As discussed in Question 1, subsection 124-75(3) of the ITAA 1997 requires that for you to avail yourself of the replacement-asset roll-over provided for in subdivision 124-B of the ITAA 1997, you must incur expenditure in acquiring another CGT asset within a period starting one year before the compulsory acquisition and ending one year after the end of the income year in which the compulsory acquisition occurred.

However, in special circumstances, paragraph 124-75(3)(b) gives the Commissioner the discretion to allow further time after the end of the income year in which the compulsory acquisition occurred for the expenditure to be incurred.

What are special circumstances?

Taxation Determination TD 2000/40 Income tax: capital gains: what are 'special circumstances' for the purposes of subsection 124-75(3) of the Income Tax Assessment Act 1997 sets out the Commissioner’s views on what special circumstances are for the purposes of the replacement-asset roll-over in subdivision 124-B.

TD 2000/40 provides that the expression ‘special circumstances’, by its nature, is incapable of a precise or exhaustive definition, and that what constitutes ‘special circumstances’ depends on the facts of each particular case.

Are there special circumstances in your case?

Since the Property was compulsorily acquired, you have been actively searching for replacement assets.

Considering the unique circumstances of your situation, it is reasonable to conclude there are special circumstances in your case.

Will the Commissioner allow further time?

Where there are special circumstances, the Commissioner can allow further time for expenditure to be incurred in acquiring another CGT asset.

Because of the special circumstances in your case, the Commissioner will allow further time until 30 June 2019, pursuant to paragraph 124-75(3)(b) of the ITAA 1997, for you to incur expenditure in acquiring another CGT asset.