Edited version of private advice

Authorisation Number: 1051678525075

Date of advice: 13 May 2020

Ruling

Subject: Subdivision 124B - replacement asset roll-over relief

Question 1

Will the Commissioner exercise his discretion under section 124-75(3)(b) of the Income Tax Assessment Act 1997 to allow the company an additional 12 months within which to acquire a replacement asset?

Answer

Yes

This ruling applies for the following periods:

1 July 20XX to 30 June 20XX

Relevant facts and circumstances

The company is an Australian tax resident.

The company previously obtained a Private Binding Ruling in which the Commissioner agreed to exercise his discretion under section 124-75(3)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow the company a 2 year extension after the date on which the company was to incur expenditure to acquire another CGT asset under section 124-75(2) of the ITAA 1997. This extension granted the company the acquisition of a replacement asset until 30 June 20XX.

The company was the owner of a property that was compulsorily acquired. A substantial capital gain was realised on the sale.

The company has been actively seeking to reinvest the proceeds from the compulsory acquisition. However, as this was a substantial acquisition, it is not possible to identify a suitable property, undertake due diligence and complete an acquisition within one year of the end of the year in which the event occurred.

Therefore, the company previously sought and received a Private Binding Ruling where the Commissioner exercised his discretion to extend the time to acquire a replacement asset due to special circumstances to 30 June 20XX.

The company has engaged in substantial efforts in identifying and acquiring a suitable replacement property. Numerous properties have been considered over the last two years.

The company has identified a property as a suitable replacement asset and submitted an expression of interest to acquire this property. The company was ultimately unsuccessful.

The company has identified a further two properties that it is actively negotiating to purchase. Both properties are "off-market" transactions. It is currently in negotiation with the owners however, this is expected to be a lengthier process than usual given the current global environment.

The company is seeking a further extension of time of 12 months or such time as the Commissioner considers appropriate in which a replacement asset can be acquired and the rollover under Subdivision 124B applied to enable sufficient time to complete the negotiation of the purchase of the properties.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 124-B

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 124-70

Income Tax Assessment Act 1997 Section 124-75

Reasons for decision

Question 1

Summary

The Commissioner will exercise his discretion under section 124-75(3)(b) of the Income Tax Assessment Act 1997 to allow the Company until 30 June 20XX after the Original Extension Date to incur expenditure to acquire another CGT asset under section 124-75(2) of the Income Tax Assessment Act 1997.

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 of an asset 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.

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 replacement asset roll-over allows you, in special cases, to defer the making of a capital gain or loss from one CGT event until a later CGT event happens.

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). Should the owner of the original asset receive money, section 124-75 of the ITAA 1997 then provides further requirements which must be satisfied if only 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.

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) of the ITAA 1997, in particular what could be considered '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.

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 the 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.

Subdivision 124-B of the ITAA 1997 allows the company to choose rollover relief for the compulsorily acquired property, as it received money by an Australian government agency. This compulsory acquisition of the property which the company owned satisfies the conditions in subsection 124-70(1) of the ITAA 1997. The receipt of monetary compensation as payment for compulsory acquisition of the building also meets the conditions of subsection 124-70(2) of the ITAA 1997.

Under paragraph 124-75(3)(b) of the ITAA 1997, the company 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 company, mainly because its failure to win bids on suitable properties and because of the current global market, it was not feasible for the company to acquire a suitable replacement asset by the required time. Accordingly, the company requested 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 should it not find a suitable replacement asset in time. This was done by an application for a private ruling. This ruling was favourable to the company and an extension of time was granted.

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 further delays in purchasing a replacement asset was anticipated.

To date, the company has considered numerous properties to become the replacement asset and may need to consider further opportunities if current negotiations prove unsuccessful.

Based on these facts, it is concluded that special circumstances exist to warrant the Commissioner to exercise his discretion and allow an extension of time to obtain a replacement asset. 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 in the wider public interest.

Therefore, the Commissioner will exercise his discretion under paragraph 124-75(3)(b) of the ITAA 1997 to allow the company an extension to obtain a replacement asset for property that was compulsorily acquired by an Australian government agency until June 20XX.