Edited version of private advice

Authorisation Number: 1051775755639

Date of advice: 27 November 2020

Ruling

Subject: Capital gains tax - compulsory acquisition

Question 1:

Is any capital gain or capital loss you make from the sale of Interest A in Property 2 disregarded?

Answer 1:

No

Question 2:

Is the first element of the cost base of Interest B in Property 2 equal to its market value calculated as at the date your spouse passed away?

Answer 2:

No

This ruling applies for the following period:

Year ending 30 June 20XX

Year ending 30 June 20XX

Relevant facts and circumstances

Summary of facts

This private ruling concerns the sale of Property 2 on XXXX for $XX which settled on XXXX. At the time of sale, you held two interests in this property:

Interest A is the interest in this property that you bought (as joint tenants with your spouse) on XXXX.

Interest B is the interest in this property that you acquired by survivorship when your spouse passed away on XXXX. Your late spouse had bought this interest (as joint tenants with you) on XXXX.

Detailed facts

You and your late spouse purchased XX acres at Property 1 on XXXX.

You and your spouse were in a family partnership

You and your spouse lived in the house on that property, as your main residence.

That property was used solely for primary production activities - market gardening and farming.

That property was compulsorily acquired by ABC on XXXX for $XX.

You received two payments for the compulsory acquisition of Property 1.

As part of the settlement, you entered into a lease with ABC that enabled you to continue to live at your main residence on Property 1. You leased that property from XXXX until approximately XXXX.

Due to the size of Property 1, it was challenging for you to locate properties of similar size, with the correct attributes and within the right proximity to carry on your primary production activities.

Using the proceeds received for the compulsory acquisition you bought four other properties:

In late XXXX you and your spouse moved into Property 3.

The four properties were acquired with an existing residential residence on each:

You acquired these properties after considering the location and land suitability including consideration for irrigation and their land size with the intention of continuing your primary production activities.

Your late spouse passed away in XXXX.

Due to the lapse of time since the compulsory acquisition and the passing of your spouse you have had difficulty retrieving records and evidence to confirm that all four properties were used for market gardening and farming activities immediately after they were bought.

You provided a sample of XX invoices for expenses relating to your farming and market gardening activities.

-        XX of these invoices were addressed to Property 1.

-        XX of these invoices do not contain addresses so those particular invoices do not identify which properties the expenses relate to.

-        XX of these invoices were addressed to Property 4. However, these invoices are dated XXXX. They do not show that this property was used for the purpose of farming and market gardening following its acquisition in XXX.

-        One invoice relates to insurance for the Property 2. However, the insurance document only shows the farm dwelling was insured (not farming property or plant). It does not show that this property was insured for farming or market gardening activities around the same time it was acquired in XXXX.

-        One invoice relates to insurance insured for Property 4. However, the insurance document only shows the farm dwellings were insured (not farming property or plant). It does not show that this property was for farming or market gardening activities around the same time it was acquired in XXXX.

Your solicitor asked if the ATO could retrieve your historical tax return records in an attempt to verify income relating to the original use of the four properties. The ATO was able to retrieve historical tax records dating back to XXXX. We are unable to retrieve historical records prior to XXXX. These historical income tax records show that rental income commenced around the same time as the first three properties were bought.

No rental income was reported in the XXXX partnership income tax return. Rental income first appears in the XXXX tax return. The net rental income reported in the XXXX partnership tax return was $XX. You also provided end of financial year profit and loss statements that show that the net rental income was $XX. The XXXX tax return shows a primary production loss of $XX.

The net rental income reported in the XXXX partnership tax return was $XX. You also provided end of financial year profit and loss statements that show that the net rental income was $XX. The XXXX tax return shows a primary production loss of $XX.

A Rental Statement Summary dated XXXX indicates that Property 2 received rental income during the XXXX financial year.

On XXXX you sold Property 2 for $XX.

On XXXX settlement occurred.

The remaining three properties were previously owned by you as joint tenants with your late spouse. This means that all the properties will now be owned by you as the survivor.

There is no intention to carry out any planned development or improvements on the remaining properties.

You provided an estimate value of between $XX-$XY per acre for the remaining properties.

Based on the information provided and for the purposes of this private ruling, the Commissioner accepts that you while electing the rollover under section 160ZZK of the Income Tax Assessment Act 1936, did not satisfy the criteria.

At present, there are no impending sales or transactions affecting the other three properties.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 160ZZK

Income Tax Assessment Act 1997 subsection 104-10(5)

Income Tax Assessment Act 1997 subsection 109-5(2)

Income Tax Assessment Act 1997 section 128-50

Reasons for decision

Summary

Interest A and Interest B:

Although the Commissioner has accepted that you made the election to utilise the roll-over, based on the information and evidence available it cannot be concluded that you satisfy all of the criteria provided by subsection 160ZZK(7) of the ITAA 1936. Therefore, the roll-over relief under section 160ZZK of the ITAA 1936 is not available to you.

You are not taken to have acquired Property 2 before 20 September 1985.

Your disposal of Property 2 on XXXX is subject to the capital gains tax provisions provided by Part 3-1 of the ITAA 1997.

Detailed reasoning

Interest A - Property 2 (the purchased interest):

CGT event A1 happened when you sold Interest A. Subsection 104-10(5) of the ITAA 1997 states that any capital gain or capital loss you make from CGT event A1 is disregarded if you acquired the asset before 20 September 1985.

You generally acquire a CGT asset for CGT purposes at about the time you buy it. Subsection 109-5(2) of the ITAA 1997 states that you acquire a CGT asset at the time you enter into the contract for its purchase if CGT event A1 happens for the vendor.

However, the acquisition date is adjusted to a date before 20 September 1985 if a replacement asset roll-over is obtained and the CGT asset is acquired to replace another asset that was acquired before 20 September 1985.

You are seeking to treat Interest A as a pre-CGT asset on the basis that the conditions in former section 160ZZK of the ITAA 1936 are satisfied and it was acquired to replace another asset that you had acquired in 1981.

Are the conditions in former section 160ZZK of the ITAA 1936 satisfied?

Section 160ZZK of the ITAA 1936 provides that a taxpayer may be entitled to rollover relief if an asset they own (the original asset) is compulsorily acquired and an amount of monetary compensation is received.

For the purposes of the roll-over relief provided by section 160ZZK of the ITAA 1936 the term 'replacement asset' is defined by subparagraph 160ZZK(7)(a)(ii). An asset acquired by a taxpayer will be considered a 'replacement asset' where it is used for a reasonable time after its acquisition by the taxpayer for the same or similar purpose as the original asset that was disposed of.

The term 'compulsory acquisition' in the context of section 160ZZK is defined by subsection 160ZZK(7C) of the ITAA 1936 to be the compulsory acquisition of an asset by the Commonwealth, a state or territory; or an authority of the Commonwealth, a state or territory.

To be entitled to rollover relief you must satisfy the requirements of subsection 160ZZK(7) of the ITAA 1936.

For the purposes of this section -

(a)  an asset shall be deemed to have been acquired by a taxpayer in replacement of an asset disposed of by the taxpayer if -

(i)    the asset disposed of was, immediately before the disposal took place, used in a business carried on by the taxpayer and the asset acquired is, for a reasonable time after its acquisition, used by the taxpayer in that business; or

(ii)   the asset acquired is, for a reasonable time after its acquisition, used by the taxpayer for the same purpose as, or for a similar purpose to, the purpose for which the asset disposed of was used by the taxpayer immediately before the disposal took place; and

(b)  an asset shall be deemed to have been used in a particular business or for a particular purpose immediately before its disposal if, immediately before its disposal, it was being installed for use, or was installed ready for use, in that business or for that purpose, as the case may be.

In your case, you jointly acquired Property 1 with your spouse in XXXX. You and your spouse lived in the house on the property, as your main residence and the property was used solely for market gardening and farming.

Based on the information provided, The Commissioner has accepted that you and your late spouse elected to apply the rollover relief under section 160ZZK of the ITAA1936.

However, to be entitled to rollover relief you must also satisfy the requirements of subsection 160ZZK(7) of the ITAA 1936.

Due to the lapse of time since the compulsory acquisition and the passing of your spouse you have had difficulty retrieving records and evidence to confirm that all four properties were used for market gardening and farming activities immediately after they were bought.

The invoices, insurance, financial information and other documentation do not show any detail that verifies that Property 2 and the other three properties were used for the same or similar purpose of farming and market gardening (around the same time as the four properties were bought).

The retrieved historical income tax returns (partnership and individual) show that rental income greatly exceeded income from primary production around the time they were acquired.

Based on the evidence available the replacement properties were used to earn rent (immediately after their acquisition) and were not used for primary production purposes.

Conclusion

You do not satisfy all of the criteria provided by subsection 160ZZK(7) of the ITAA 1936 that must be satisfied in order for the roll-over relief under section 160ZZK of the ITAA 1936 to be available to you. Your disposal of property 2 on XXXX is subject to the capital gains tax provisions provided by Part 3-1 of the ITAA 1997.

Interest B (the survivorship interest):

CGT event A1 happened when you sold Interest B.

Subsection 128-50(2) of the ITAA 1997 states that you acquired your ownership of Interest B on the date that your spouse passed away.

Subsection 128-50(3) of the ITAA 1997 states that your cost base is worked out from your late spouse's cost base if they acquired it on or after 20 September 1985. However, Subsection 128-50(4) of the ITAA 1997 states that your cost base will be the market value (calculated as at the date of your late spouse's death) if they acquired it before 20 September 1985.

Generally, your late spouse would be considered to have acquired Interest B for CGT purposes at about the time he bought it. Subsection 109-5(2) of the ITAA 1997 states that you acquire a CGT asset at the time you enter into the contract for its purchase if CGT event A1 happens for the vendor.

However, the acquisition date is adjusted to a date before 20 September 1985 if a replacement asset roll-over is obtained and the CGT asset is acquired to replace another asset that was acquired before 20 September 1985.

You are seeking to have Interest B treated as a pre-CGT asset in your late spouse's hands on the basis that the conditions in former section 160ZZK of the ITAA 1936 are satisfied and it was acquired to replace another asset that he had acquired in 1981.

Are the conditions in former section 160ZZK of the ITAA 1936 satisfied?

The events surrounding the compulsory acquisition of your spouse's interest in Property 1 and their purchase of Interest B in Property 2 are exactly the same as those that applied to your interests in Property 1 and Property 2.

For the reasons outlined above in respect of Interest A, your late spouse has not used Interest B for the same or a similar purpose as they had used their interest in Property 1. Consequently, it did not qualify for the rollover in section 160ZZK of the ITAA 1936.

Therefore, your late spouse is considered to have acquired Interest B for CGT purposes at the time they bought it (which is after 20 September 1985).

The effect for you is that you cannot use the market value of Interest B (calculated as at the date of your late spouse's death) as its cost base because they did not hold it as a pre-CGT asset. Instead, you must use their cost base of Interest B in your capital gains calculation in respect of its sale.

Conclusion

You do not satisfy all of the criteria provided by subsection 160ZZK(7) of the ITAA 1936 that must be satisfied in order for the roll-over relief under section 160ZZK of the ITAA 1936 to be available to you. Your disposal of Property 2 on XXXX is subject to the capital gains tax provisions provided by Part 3-1 of the ITAA 1997.