Edited version of your written advice

Authorisation Number: 1051479847165

Date of advice: 11 February 2019

Ruling

Subject: Administrative discretion per subsection 124-75(3)(b) Income Tax Assessment Act 1997 (ITAA 1997)

Question

Will the Commissioner exercise his discretion under subsection 124-75(3)(b) of the ITAA 1997 to allow the Rulee an additional 2 years to acquire a replacement asset?

Answer

Yes

This ruling applies for the following periods:

30 June 2020

30 June 2021

The scheme commences on:

1 July 2019

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The land was owned by the Taxpayer and was compulsorily acquired in the year ended 30 June 20XX by a State authority.

Business operations are conducted from the land.

The Taxpayer wishes to acquire a replacement asset from the compensation received. However, due to the substantial cost and specialised nature of a replacement asset, the Taxpayer has not yet identified a suitable replacement asset.

The Taxpayer is also reluctant to purpose a replacement asset until the compensation for the compulsory acquisition has been finalised.

The CGT event occurred in the income tax year ended 30 June 20XX. The requirements under subsection 124-75(3) of the ITAA 1997 require a replacement asset to be purchased no later than one year after the end of the income year in which the CGT event happens. The Taxpayer wishes to be granted an extension of the time period in which the replacement asset is to be acquired under Subdivision 124-B of the ITAA 1997.

Compulsory acquisition

The State authority advised the Taxpayer that the land will be compulsorily acquired by them.

The State authority wrote an opening letter to the owners of the land regarding the compulsory acquisition process.

The State authority made an offer of compensation to the owner which was rejected.

A proposed acquisition notice was issued to the owners of the land.

An Australian Taxation Office clearance certificate was obtained with respect to the owners of the land.

The owners of the land lodged a compensation claim under section 39 of the Land Acquisition (Just Terms Compensation) Act 1991.

The acquisition notice was published in the State Government Gazette. The State authority becomes the owner of the land.

No agreement has been reached in relation to the amount of compensation to be received from the compulsory acquisition by the State authority.

The owners of the land lodged an application to appeal the compensation.

The State authority transferred to the owners of the land a percentage of the compensation (as determined by the Valuer-General).

An advance of compensation has been paid to the Taxpayer.

The amount is in dispute.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 104-10(6)

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

Income Tax Assessment Act 1997 Subsection 124-70(2)

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

Income Tax Assessment Act 1997 Subsection 124-75(4)

Income Tax Assessment Act 1997 Subsection 124-75(5)

Income Tax Assessment Act 1997 Subsection 124-75(6)

Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for Decision

Summary

The Commissioner will exercise his discretion pursuant to subsection 124-75(3) of the ITAA 1997 and allow an extension of time following the compulsory acquisition of the land in order to meet the eligibility requirements for a Subdivision 124-B of the ITAA 1997 roll-over.

Detailed reasoning

If a change of ownership triggers Capital Gains Tax (CGT) event A1 as a result of acquisition of a CGT asset by another entity under a power of compulsory acquisition, subsection 104-10(6) of the ITAA 1997 provides that the time of the event is the earliest of when compensation is received or when the change of ownership occurs.

Roll-over relief for the compulsory acquisition of a CGT asset is available where the conditions outlined in Subdivision 124-B of the ITAA 1997 are met.

Under subsection 124-70(1) of the ITAA 1997, an entity may be able to choose a replacement asset rollover if a CGT asset owned by the entity 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 995-1(1) of the ITAA 1997 defines an Australian government agency as a Commonwealth, a State or a Territory, or an authority of Commonwealth or of a State or Territory.

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 a rollover (subsection 124-70(2) of the ITAA 1997). 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

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.

Subsection 124-75(4) of the ITAA 1997 requires that the replacement asset acquired must be used for the same or similar purpose as the taxpayer used the original asset. This replacement asset cannot become trading stock just after the acquisition or be a depreciating asset (subsection 124-75(5) of ITAA 1997), nor become a “registered emissions unit” just after the acquisition (subsection 124-75(6) of ITAA 1997).

In determining whether special circumstances exist for the Commissioner to extend the period in which to acquire a replacement asset, Taxation Determination TD 2000/40 Income tax: capital gains: what are 'special circumstances' for the purposes of subsection 124-75(3) of the ITAA 1997? (TD 2000/40) provides guidance on interpreting subsection 124-75(3), 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.

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 whether the 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.

For this case, Subdivision 124-B allows the Taxpayer to choose rollover relief for the land (CGT assets) compulsorily acquired by the State authority, as they received money from the State authority as part compensation. The compulsory acquisition by the State authority of the Taxpayer’s land satisfies the conditions in subsection 124-70(1) of the ITAA 1997. The receipt of monetary compensation as advance payment for compulsory acquisition of the land also meets the conditions of subsection 124-70(2) of the ITAA 1997.

Under subsection 104-10(6) of the ITAA 1997, CGT event A1 occurred when the State authority took possession of the land when it was gazetted and the change of ownership of the asset occurred. Under paragraph 124-75(3)(b) of the ITAA 1997 the Taxpayer would need to acquire a replacement asset no later than one year after the end of the income year in which the gazettal took place.

However, due to special circumstances of the Taxpayer, mainly because of its ongoing dispute with the State authority, it was not feasible for the Taxpayer to acquire a suitable replacement asset by the required time. Accordingly, the Taxpayer requests the Commissioner’s discretion to allow an extension of time in accordance with paragraph 124-75(3)(b) of the ITAA 1997 to acquire a replacement asset.

The Taxpayer has objected to the amount offered by the State authority as compensation for the land compulsorily acquired, and has commenced proceedings to claim a greater amount. As such, purchasing a replacement asset has been delayed.

The lack of certainty as to the amount and timing of the compensation it will receive has also delayed the Taxpayers’ ability to search and acquire an appropriate replacement asset. Furthermore, the specific nature of the asset to be replaced, the substantial amount to be invested, and the possibility of a lengthy process in respect of such an acquisition would mean 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 of time 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.

Also by granting this extension of time to acquire replacement asset:

● there does not appear to be any prejudice to the Commissioner or any other parties;

● there is no unsettling of people or of established practices;

● there does not appear to be any mischief involved in this case; and

● the Commissioner considers it to be fair to people in like positions and the wider public interest.

Therefore, the Commissioner will exercise his discretion under paragraph 124-75(3)(b) of the ITAA 1997 to allow an extension to obtain a replacement asset for landholdings that were compulsorily acquired by the State Authority.