Edited version of private advice

Authorisation Number: 1051854773808

Date of advice: 25 June 2021

Ruling

Subject: Extension of time to acquire a replacement asset

Question

Will the Commissioner of Taxation exercise his discretion to allow the taxpayer an extension of time to 30 June 2022 under subsection 124-75(3) of the Income Tax Assessment Act 1997?

Answer

Yes

This ruling applies for the following period:

30 June 2022

The scheme commences on:

1 July 2017

Relevant facts and circumstances

The taxpayer is the trustee of an Australian discretionary trust.

The taxpayer acquired a property (the property) which was leased to third parties and from which rental income was derived.

The property was compulsorily acquired by a State authority, the Road and Maritime Services ('RMS').

The taxpayer's primary decision maker took steps soon after disposal of the property to find and negotiate to purchase a replacement asset. However, due to the fact that this individual had numerous health concerns and recurring medical treatments over an extended period of time, the taxpayer had difficulties acquiring a replacement asset.

Due to the emergence and continuance of the COVID- 19 pandemic since early March 2020, there has been an enormous detrimental impact on the NSW property market and the taxpayer's ability to acquire a replacement asset.

Previously, the taxpayer was granted extensions of time to acquire a replacement asset for a further total period of approximately two years. During this time, the taxpayer has engaged external advisors and implemented succession planning to assist the primary decision maker in acquiring a suitable replacement asset. To date, approximately 45% of the capital proceeds had been spent on the acquisition of eligible replacement properties. The taxpayer will continue to search for suitable properties during the 2021 calendar year.

Due to their compromised health and immunity, the primary decision maker's ability to inspect and attend property inspections and auctions have been limited during the course of the COVID-19 pandemic. In addition, due to medical advice received, the primary decision maker would require serious surgery within the next few months and that this will render them unable to perform any significant work duties for many months.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision

Involuntary disposal of a CGT asset

Section 124-70 describes different events in which a roll-over is available to an entity if that event happens to the Capital Gains Tax (CGT) asset of that entity. According to subparagraph 124-70(1)(a), an entity is able to choose a roll-over if the CGT asset that the entity owns is compulsorily acquired by an Australian government agency. Subparagraph 124-70(2)(a) states that to be eligible for a roll-over, the entity must receive money or another CGT asset (except a car, motorcycle or similar vehicle) or both as compensation for the event happening.

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. In this case, the property was compulsorily acquired by the RMS, a state agency, in the 2018 income year. The taxpayer received full payment for the acquisition two months later.

Therefore, the taxpayer is able to choose a roll-over in relation to the capital gain that it received from the compulsory acquisition, provided other requirements as stated in section 124-75 are met.

According to section 124-75:

124-75(1) If you receive money for the event happening, you can choose to obtain a roll-over only if

these other requirements are satisfied.

124-75(2) You must:

(c) incur expenditure in acquiring another CGT asset (except a depreciating asset whose

decline in value is worked out under Division 40 or deductions for which are calculated

under Division 328) or;

(d) if part of the original asset is lost or destroyed - incur expenditure of a capital nature in

repairing or restoring it.

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

(c) no earlier than one year, or within such further time as the Commissioner allows in

special circumstances, before the event happens; or

(d) 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 this case, the taxpayer's original asset, namely the Property, is not lost or destroyed. Therefore, the relevant provision for the taxpayer is paragraph 124-75(2)(a) whereby the taxpayer is required to incur expenditure to acquire another CGT asset.

Subsection 124-75(3) requires you to incur some of the expenditure either one year before or one year after the end of the income year in which the event happens or within such further time as the Commissioner allows in special circumstances.

The time of the event is determined by subsection 104-10(6). The time of the event will be the

earliest of:

•         when you received full compensation from the entity; or

•         when the entity becomes the asset's owner; or

•         when the entity entered it under that power, or

•         when the entity took possession under that power.

The taxpayer did not acquire a replacement CGT asset prior to the disposal of the Property and therefore, to satisfy subsection 124-75(3), a replacement CGT asset had to be acquired no later than 30 June 2019, being one year after the end of the income year in which the event happened, or within such further time as the Commissioner allowed in special circumstances (paragraph 124-75(3)(b)).

The taxpayer requested

that the Commissioner exercise his discretion under subparagraph 124-75(3)(a). Subsequently, the taxpayer was given a ruling that the Commissioner would exercise his discretion to allow the taxpayer an extension of time to 30 June 2021 to acquire a replacement asset.

Special circumstances

There are no legislative provisions which provide guidance as to what may constitute special circumstances for the purposes of subsection 124-75(3). What constitutes special circumstances depends on the facts of each particular case.

In determining whether special circumstances exist that will allow the Commissioner to extend the period for the taxpayer to acquire a replacement asset, regard must be had to 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? (TD 2000/40).

TD 2000/40 provides guidelines for interpreting the expression 'special circumstances' in subsection 124-75(3), providing some examples of situations in which the Commissioner would, or would not, accept that special circumstances exist. Although the TD 2000/40 has not included a stated example concerning the consideration of illness as "special circumstances", it can be a factor to be considered as part of the facts of a particular case.

In determining if the discretion would be exercised, the following considerations are relevant to the Commissioner's determination:

•         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;

•         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.

Although the Property was compulsorily acquired, and the taxpayer received the payment after two months, to date the taxpayer has been unable to acquire replacement assets to the full extent of the sale proceeds from the compulsory acquisition, and - it is submitted - will be unlikely to do so by 30 June 2021.

On a consideration of the Trustee's submissions, the Commissioner agrees to grant the Trustee a further extension of time to 30 June 2022 for the acquisition of a replacement asset pursuant to subsection 124-75(3) of the ITAA 1997. This decision is based on the following considerations:

•         The primary decision maker of the taxpayer continues to be affected by their medical condition. In this regard, it is acknowledged that their heath has worsened since the issue of the second extension of time.

•         It is also acknowledged that, as per medical advice, the primary decision maker requires serious surgeries within the next few months; and that these will render them unable to perform any significant work duties for many months.

•         While the primary decision maker's delegate has undertaken a more prominent role in the business, they are not currently in a position to source prospective replacement properties and negotiate purchases independently of the primary decision maker.

Due to the primary decision maker's worsening health conditions since January 2020, the primary decision maker's delegate has had to become more involved in the management of the existing properties of the private group, rather than being able to focus on helping the primary decision maker locate appropriate eligible replacement assets.

•         It is however also noted that as the primary decision maker's delegate's business experience continues to increase, it is expected that they will be able to devote more time to locate appropriate eligible replacement assets.

•         It is acknowledged that in the meantime the taxpayer has been actively pursuing the search and acquisition of replacement assets, as evidenced by its purchases of replacement properties in 2020 and 2021 respectively.

Conclusion

On the basis if the guidelines in TD 2000/40, it is considered that the taxpayer's situation falls within the scope of what would be considered special circumstances which would warrant the Commissioner allowing further time under paragraph 124-75(3)(b) for an additional 12 months to 30 June 2022.