Edited version of private advice

Authorisation Number: 1051738358503

Date of advice: 14 August 2020

Ruling

Subject: Capital gains tax - compulsorily acquired - replacement asset rollover

Question:

Will the Commissioner exercise his discretion under paragraph 124-75(3)(b) of the Income Tax Assessment Act 1997 to allow an extension of time for you to acquire a replacement asset?

Answer:

Yes.

This ruling applies for the following period

Income year ending 30 June 20XX

Income year ending 30 June 20XX

The scheme commences on

1 July 20XX.

Relevant facts and circumstances

You, being Company A, owned the land and building located (the Property).

Persons A and B are your directors.

A Government department (Department A) sent a letter to Persons A and B advising that it intended expanding the a Government owned property which involved the acquisition of additional properties, including the Property, and that they intended instructing the relevant Government Department to commence the process for the acquisition of the identified properties and related interests.

Department A sent a further letter in relation to the negotiations that had been occurring in relation to you selling the Property which outlined that failing a final agreement it was their intention to utilise the compulsory acquisition provisions contained within the Acquisition of Land Act 1967.

Further negotiations occurred in relation to the compulsory acquisition of the Property.

Activities commenced in relation to searching for a replacement property for the Property when it became apparent that its acquisition by the State Government was inevitable.

A contract of sale of the Property was entered with the State Government represented by Department A for $X,XXX,XXX with the title of the Property being transferred to the State Government.

Settlement on the sale of the Property occurred after a short period, and proceeds from the sale of the Property were received, with a capital gain being made on its disposal.

The services of several real estate agents were engaged to make enquiries about potential properties and provide advice in relation to any appropriate listings, resulting in numerous properties being referred to review and consider as a replacement property/ies. However, the demand for quality industrial properties has been high with the market being tight.

A potential property was identified as being a suitable replacement property (Property X) which is a commercial building. Negotiations were conducted in relation to the purchase of this property with the vendor, and a draft contract was prepared more than 12 months after settlement on the sale of the Property occurred.

It became known just prior to the preparation of the draft contract that while the vendor of Property X was agreeable to the terms of the draft contract of sale, the vendor was in the process of resolving an internal legal matter which prevented it from taking the potential sale of Property X any further at that point.

A time limit was not imposed on proceeding with the purchase of Property X and enquiries continued to be made in relation to acquiring an alternative property in case the purchase of Property X does not proceed and/or a suitable alternative property is acquired.

A contract to purchase another property, being Property Z, for $X,XXX,XXX was entered into, with settlement occurring a number of months after the draft contract for Property X was prepared.

It is anticipated that you will use Property Z and Property X, or whichever suitable alternative property you obtain, as a replacement for the Property.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Subdivision 124-B

Income Tax Assessment Act 1997 Section 124-70

Income Tax Assessment Act 1997 Section 124-75

Reasons for decision

Summary

The Commissioner will exercise his discretion under paragraph 124-75(3)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to incur expenditure to acquire another capital gains tax (CGT) asset under subsection 127-75(2) of the ITAA 1997.

Detailed reasoning

Involuntary disposal of a capital gains tax asset

If a change of ownership triggers 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 you may be able to choose a roll-over if a CGT asset is compulsorily acquired by an Australian Government agency.

Subsection 995-1(1) defines an Australian government agency as a Commonwealth, a State or a Territory or an authority of Commonwealth or of a State or Territory.

If you receive money in relation to the involuntary disposal of your asset subsection 124-75(3) of the ITAA 1997 requires you to incur expenditure in acquiring another CGT asset no earlier than one year before the disposal happens and no later than one year after the end of the income year in which the disposal happens, or within such further time as the Commissioner allows in 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? provides guidelines as to when the Commissioner will extend the period in which a replacement asset can be acquired.

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 case.

In addition, in determining if the discretion would be exercised, the Commissioner will consider 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.

Application to your circumstances

The Property was compulsorily acquired by a Government Department representing a State Government. You received a payment of compensation from the disposal of the Property and made a capital gain.

You made the choice to apply the rollover relief contained in Subdivision 124-B of the ITAA 1997 to the capital gain made on the disposal of the Property.

When making our decision we have taken into consideration:

·         the Property was compulsorily acquired by a state Government

·         the services of several real estate agents were engaged to assist with the search for a replacement property, with numerous properties being referred to you for consideration during the period after the settlement on the sale of the Property, however it has been hard to find quality investment properties

·         a potential property was found with a draft contract of sale being prepared, however there has been a delay in the purchase of Property X due to the vendor having legal issues, which are outside of your control

·         you have continued to look at alternative properties and have purchased Property Z, which you may use as a replacement for the Property in conjunction with Property X, or another suitable alternative property you may obtain as a replacement for the Property.

Based on the information provided it is considered that an acceptable explanation for the period of extension being requested has been provided. Accordingly, based on the principles contained in TD 2000/40 it has been determined that the Commissioner will exercise his discretion to extend the time until 30 June 20XX.