Edited version of private advice

Authorisation Number: 1051588376346

Date of advice: 2 October 2019

Ruling

Subject: Capital gains tax - disposal - vacant land

Question:

Can you disregard the capital gain made on the forced disposal of the vacant lot of land?

Answer:

No

This ruling applies for the following period:

Income year ending 30 June 2018

The scheme commences on:

1 July 2017

Relevant facts and circumstances

You, being Persons A and B jointly purchased a vacant block of land (the Property) after 20 September 1985.

Person A entered into a Loan Deed (Loan A) under which Company A advanced an amount to fund their investment in a managed investment scheme (MIS X).

Around the same time Person B entered into a Loan Deed (Loan C) under which Company A advanced an amount to fund their investment in their investment in MIS X.

During the following year, Person A entered into another Loan Deed (Loan B) under which Company A advance an amount to fund their investment in MIS Y.

After a number of months, Person B and Company B entered into another Loan Deed (Loan D) under which they advanced an amount to fund Person B's investment in MIS Z.

The rights under the Loan Deeds were assigned and/or transferred as follows:

·         Company A assigned all of its rights under Loans A and C to another company who then assigned all of its rights to another company;

·         Company B assigned all of its rights under Loan D to another company who then assigned all of its rights to another company; and

·         Company A assigned all of its rights under Loan B to another company.

You failed to make repayments on the loans and were in default under the Loan Deeds.

During the following year court proceedings were filed on behalf of the investors in MIS's X and Z whose investments were funded by loans from Company A. You were members of these proceedings.

During the following year court proceedings were filed on behalf of the investors in MIS Y whose investments were funded by loans from Company A. Person A was a member of these proceedings.

After a number of year a settlement deed (the Settlement Deed) was approved which settled the proceedings, acknowledging the validity and enforceability of the Loan Deeds. The Settlement Deed is binding on borrowers in respect of Loans A, B and C.

After an extended period of time notices of demand were served on you by the companies (the Lenders) who had been assigned the rights under the Loan Deeds for the loan balances owing on Loans A, B, C and D. None of the notices of demand were satisfied.

You entered into a Deed of Settlement and Release (the Deed of Release) with the Lenders to resolve the dispute which included the following information:

·         you must execute an unconditional contract of sale of the Property by a specified date with the settlement to occur within 60 days of the execution of the contract; and

·         you agreed to pay the Lenders the net sale proceeds in reduction of the debt under Loans A, B, C and D.

You sold the Property and made a capital gain on the disposal of your ownership interests in the Property.

Relevant legislative provisions

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3

Reasons for decision

Summary

There are no exemptions under the capital gain tax provisions that would enable you to disregard the capital gain made on the sale of the Property.

Detailed reasoning

A capital gain or capital loss may arise if a CGT event happens to a CGT asset. The most common CGT event is CGT event A1 which occurs when your ownership interest in a CGT asset is transferred to another entity, such as the disposal of a dwelling.

Any capital gain made on the disposal of a pre-CGT asset, being an asset acquired prior to 20 September 1985, can be disregarded.

If the vacant land was not purchased prior to 20 September 1985, any capital gains made on the sale of vacant land cannot be disregarded unless one of the following exemptions under the CGT provisions applies:

Main residence exemption

Generally, you can ignore a capital gain or capital loss you make from a CGT event that happens to a dwelling that is your main residence.

The main residence exemption can include land adjacent to the dwelling to the extent that it is used primarily for private or domestic purposes in association with the dwelling. The maximum area of land that is covered by the main residence exemption, including the area under the dwelling, must not exceed two hectares.

If you dispose of adjacent land to the same person at the same time as you dispose of your main residence, the exemption extends to the adjacent land. However, if you dispose of adjacent land at a different time than you dispose of your main residence, the exemption does not apply to the adjacent land.

Destruction of dwelling and sale of land

If your main residence is accidentally destroyed and you then dispose of the vacant land on which it was built, you can choose to apply the main residence exemption as if the dwelling had not been destroyed and continued to be your main residence.

Application to your situation

You borrowed funds to invest in various MISs and defaulted on the loans by failing to make repayments.

You entered into the Deed of Release to pay off the debts you owed in relation to the borrowed funds which included the condition that you sell the Property.

In accordance with the Deed of Release the Property was sold, being the sale of a vacant block of land.

As outlined above, the main residence exemption will only apply if the vacant land is sold with a main residence, or if a main residence located on the vacant land had been destroyed. Based on the information provided, neither of these exemptions is applicable in your situation.

You state that you consider that the disposal of the Property was an 'involuntarily disposal' which we have considered as follows:

Involuntary disposal

Under the CGT provisions you can make the choice to defer your liability to pay tax on any capital gain in some cases where a CGT asset has been lost, or destroyed, or is compulsorily acquired until a later CGT event occurs to the replacement asset.

This concession is known as a replacement asset rollover which may be available if one of the following events occurs:

·         it is compulsorily acquired by an Australian government agency

·         all or part of your CGT asset is lost or destroyed

·         it is acquired by an entity (other than an Australian government agency, or a foreign government agency) under a power of compulsory acquisition conferred by an Australian law, other than Chapter 6A of the Corporations Act 2001, or a foreign law, other an a foreign law corresponding with Chapter 6A of the Corporations Act 2001

·         you dispose of your CGT asset to an entity (other than a foreign government agency) after a notice is served on you inviting you to negotiate a sale agreement. You must have been informed that, if the negotiations are unsuccessful, the asset will be compulsorily acquired under a power of compulsory acquisition conferred by an Australian or foreign law

·         you dispose of land to an entity (other than a foreign government agency) where a mining lease was compulsorily granted over the land, the lease significantly affected your use of the land, the lease was in force immediately before the disposal and the entity to which you disposed of the land was the lessee

·         you dispose of land to an entity (other than a foreign government agency) where a mining lease would have been compulsorily granted over the land, the lease would have significantly affected your use of the land, and the entity to which you disposed of the land would have been the lessee

·         a lease that had been granted to you by an Australian government agency under a Commonwealth, state or territory law expires and is not renewed.

For the rollover to be available, the entity acquiring the asset must be the Commonwealth, a state, a territory or an authority and not merely an entity which is given authority under a Commonwealth, state or territory Act to acquire the asset.

Application to your situation

You entered into a Deed of Settlement with a number of Lenders (the Lenders) to repay the outstanding loans. The Deed of Settlement contained the condition that you sold the Property within a specified time with the proceeds from the sale of the Property to be paid to the Lenders to finalise your debt.

While we can appreciate that you had not wanted to sell the Property, and had done so only to pay out your debts, it is not viewed that the sale of the Property was an involuntary disposal of the Property for CGT purposes as you do not meet any of the conditions listed above for the CGT replacement rollover to apply as follows:

·         the Property was not lost or destroyed, but was sold to enable you to pay out your outstanding loans;

·         the Property was not compulsorily acquired by an Australian government agency or foreign government agency. Additionally, there was no intention of any of these agencies to compulsorily acquire the Property;

·         there was no mining lease/lease involved with the Property;

·         you entered into the Deed of Release which included the condition that the Property be sold so that the Lenders would be repaid the amounts owing to them. No evidence has been provided to support that any of the Lenders could have compulsorily acquired the Property themselves; and

·         the Property was sold on the open market and was not purchased by any agency that would enable you to meet any of the relevant conditions.

Based on the information provided, it is not viewed that you had involuntarily disposed of your Property for CGT purposes, but that it had been sold to pay back the borrowed funds owing on your MIS investments.

You referred to our web page Quick Code QC 17204 which was updated on 28 June 2019. Please refer to the attachment which provides the original web page prior to 28 June 2019 with the proposed changes made to the web page on 28 June 2019.

After reviewing the information and examples provided in both the original web page, and the current web page as a result of the changes made on 28 June 2019, it is viewed that this rollover is not available to you based on the facts of your situation.

We are not aware of any exemption and/or rollover under the CGT provisions that would enable you to disregard the capital gain made on the sale of your ownership interests in the Property, or to rollover the capital gain until a future CGT event occurs based on the facts of your situation. Therefore, the capital gain made on the disposal of your ownership interest was reportable in the income year in which the Property was sold.