Edited version of private advice

Authorisation Number: 1051806492923

Date of advice: 19 February 2021

Ruling

Subject: CGT roll-over

Question 1

Will Company H be entitled to apply the CGT roll-over contained in Subdivision 124-B of the ITAA1997 to the capital gain arising from the compulsory acquisition of part of Site A in respect to the expenditure it will incur in acquiring Option 1?

Answer

Yes.

Question 2

Will Company H be entitled to apply the CGT roll-over contained in Subdivision 124-B of the ITAA1997 to the capital gain arising from the compulsory acquisition of part of Site A in respect to the expenditure it will incur in acquiring Option 2?

Answer

Yes.

This ruling applies for the following periods:

1 September 20XX to 31 August 20XX

1 September 20XX to 31 August 20XX

1 September 20XX to 31 August 20XX

The scheme commences on:

10 July 20XX

Relevant facts and circumstances

Background

Company H & K Division

Company H is a manufacturer and is made up of different business divisions which includes the K business division (K).

K owns and operates manufacturing facilities.

Various functions and operations are conducted by the K business division of Company H.

Overview of Processes

Various processes are conducted at the various operations.

Similarities and Differences between Operations:

The various operations use similar items but are not exactly the same due to customisation, location and technologies at time of construction.

There are differences in the equipment is due to differences in process.

Some processes and machinery are unique to the various operations.

Various inputs in the operations are sourced from the same suppliers.

Similarities and Differences between management and markets:

The goodwill and customers of the various operations overlap.

The operations have some management and support staff in common.

The operations do not have operational staff or distribution/storage centres in common.

Site A

Various operations take place at Site A.

A State Government compulsorily acquired part of Site A.

Compulsory acquisition of part of Site A

The State Government issued K a Notice of Intention to Resume and took possession of part of Site A.

The State Government will not take possession of the movable assets/infrastructure on the site, only taking possession of the land and buildings located on the site. The State Government will not acquire depreciating assets with the exception of air conditioning units affixed to the buildings.

The State Government will compensate Company H for resumption of part of Site A. The State Government have agreed to a compensation payment.

Company H will be realising a capital gain for the resumption of part of Site A.

Company H will be relocating the infrastructure/movable assets on the Site A to another area on the existing Site.

Acquisition of new capital assets

Company H is wanting to use the compensation payment to acquire either Option 1 or Option 2.

Option 1

Option 1 will be acquired no earlier xxx or no later than xxx.

Option 1 is being acquired to expand Site A to allow for an improved traffic management system.

Company H will be relocating the functions of part of Site A onto the remaining Site A so that they can operate as normal. This will be achieved by relocating moveable assets/infrastructure currently on the site and construction of building on the site.

Option 2

Option 2 is being acquired to construct and operate an operation by relocating and upgrading an existing operation within K.

Relocation is necessary to mitigate issues that deal with size restraints for planned expansion and community complaints to traffic.

Company H acquired Option 2.

No new market is being created as a result of acquiring Option 2. Company H will be expanding production and customers within the existing market that the company currently operates in.

Relationship between the new capital assets

The acquisition of Option 1 and Option 2 will not include the acquisition of:

Assets (typically buildings) which Company H claimed or will be entitled to claim deductions for capital works deduction under Division 43

a.            Depreciating assets which Company H claimed or will be entitled to claim deductions for capital allowances under Division 40, and/or

b.            Assets which concessional deduction are instead calculated under Division 328.

Company H will not be ceasing or reducing operations carried out at Site A, despite the acquisition of Option 2.

Acquisition of Option 2 will not change the steps Company H intends to undertake as part of the reconfiguration of Site A.

Company H intends to acquire Option 1 in due course and Option 2 has now been acquired. Both Options will be used to conduct Company H's business in the K division.

The business being carried on Site A after the acquisition of Option 1 will be the same business as carried out before the compulsory acquisition.

The business being carried out on Option 2 after the acquisition Option 2 will be the same business as previously carried out on the site, just on a larger scale and with more modern technology.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 43

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

Income Tax Assessment Act 1997 Subdivision 124-B

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

Income Tax Assessment Act 1997 paragraph 124-70(1)(a)

Income Tax Assessment Act 1997 paragraph 124-70(2)(a)

Income Tax Assessment Act 1997 subsection 124-75(1)

Income Tax Assessment Act 1997 subsection 124-75(2)

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

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

Income Tax Assessment Act 1997 section 124-85

Income Tax Assessment Act 1997 subsection 124-85(2)

Reasons for decision

Question 1

Summary

Question 1: Pursuant to Subdivision 124-B, Company H is be entitled to apply the CGT roll-over if it incurs expenditure in acquiring Option 1.

Question 2: Pursuant to Subdivision 124-B, Company H is entitled to apply the CGT roll-over if it incurs expenditure in acquiring Option 2.

Detailed reasoning

Pursuant to subsection 104-10(6), a capital gains tax (CGT) event A1 occurred on the resumption of part of Site A by the State Government. Company H is entitled to choose the CGT roll-over relief under Subdivision 124-B if the relevant conditions are met.

Paragraphs 124-70(1)(a) and 124-70(2)(a) state that you may choose to obtain a roll-over if a CGT asset that you own is compulsorily acquired by an Australian government agency and you receive money or another CGT asset (except a car, motor cycle or a similar vehicle) or both as compensation for the event happening.

Company H satisfies both paragraph 124-70(1)(a) and 124-70(2)(a) as Company H owned part of Site A that have been compulsorily acquired by an Australian government agency as defined in subsection 955-1(1) and Company H will receive cash compensation.

Subsection 124-75(1) and paragraph 124-75(2)(a) state that if you receive money for the event happening you can choose to obtain a roll-over if you incur expenditure in acquiring another CGT asset (except a depreciating asset whose decline in value is worked out under Division 40 or deductions which are calculated under Division 328).

Company H is proposing to use the compensation payment to acquire a CGT asset by purchasing land under either Option 1 or Option 2.

Acquisition of Option 1 or Option 2 will not include the acquisition of:

a.            Assets (typically buildings) which Company H claimed or will be entitled to claim deductions for capital works deduction under Division 43

b.            Depreciating assets which Company H claimed or will be entitled to claim deductions for capital allowances under Division 40, and/or

c.            Assets which concessional deduction are instead calculated under Division 328.

Subsection 124-75(3) states that at least some of the expenditure must be incurred:

(a)          no earlier than one year before the event happens, or

(b)          no later than one year after the end of the income year in which the event happens.

Where Company H incurs expenditure in acquiring Option 1 no earlier than xxx or before xxx, subsection 124-75(3) will be satisfied.

In respect to Option 2, given that Company H has already incurred the entire purchase price, it will satisfy the timing condition under subsection 124-75(3).

There is a further requirement in subsection 124-75(4) that must be satisfied. This requirement relates to the use of the other asset that is acquired. You must either use the other asset in the business or have it installed ready for use in the business or you must use of the other asset for the same or similar purpose to the purpose for which you used the original asset just before the event happened. Taxation Determination TD 2000/41 Income tax: capital gains: are the two requirements in subsection 124-75(4) of the Income Tax Assessment Act 1997 for a CGT asset acquired to replace an original asset alternative and mutually exclusive requirements? (TD 2000/41)provides that either of the two elements in subsection 124-75(4) can be satisfied.

Taxation Determination TD 2000/42 Income tax: capital gains: what is the scope of the words 'use the other asset... for the same purpose... or for a similar purpose' in subsection 124-75(4) of the Income Tax Assessment Act 1997 in relation to a replacement asset? (TD 2000/42) provides that whether a CGT asset is used for the same or similar purpose as another asset is a question of fact and degree.

The 'use' requirement is satisfied if, just before the event giving rise to a roll-over under Subdivision 124-B happened, the original asset:

•         was used in your business; or

•         was installed ready for use in your business; or

•         was in the process of being installed ready for use in your business

and the other asset is then used in the business, or be installed ready for use in the business, for a reasonable time after you acquired it.

The acquisition of the Option 1 will be used to expand Site A to allow for an improved traffic management system in respect of the business conducted at that site. Hence, Company H will satisfy the first element in subsection 124-75(4) in respect of its use of Option 1.

In contrast, Option 2, will be used to construct and operate an operation by relocating and upgrading an existing operation. The function of various operations falls under the K business division of Company H. The manufacturing processes for various operations are linked.

The extent to which the operations are similar and are not exactly the same is due to customisation, location and technologies at the time of construction and improved processes.

For the purposes of Subdivision 124-B, the acquisition of Option 2 would satisfy the second element of the use requirement; that is, Option 2 will be used for a similar purpose as Site A was used in conducting the business of the K division of Company H. The facts demonstrate that the Option 2 will be used for a similar purpose that Site A was used for, that being a site on which K division of Company H is conducted.

TD 2000/41 supports this conclusion in respect of the same or similar purpose test. Example 1 of TD 2000/41 provides that the test can be satisfied where the replacement CGT asset is used in a different type of business to the original business. Furthermore, Example 3 of TD 2000/42 provides that the replacement asset does not need to be in the same location as the original asset.

Therefore, Company H will satisfy the first element of the use requirement in subsection 124-75(4) in acquiring Option 1 and will satisfy the second element of the use requirement in subsection 124-75(4) in acquiring Option 2. It follows that Company H will be entitled to choose a capital gain roll-over pursuant to Subdivision 124-B in respect of expenditure it incurs in acquiring either the Option 1 or Option 2.

The consequences of choosing to obtain a roll-over are set out in section 124-85.