Edited version of private advice

Authorisation Number: 1051885157661

Date of advice: 12 August 2021

Ruling

Subject: Roll-over for the loss or destruction of a CGT asset

Question 1

If the taxpayer has a replacement dwelling built and installed on the property, will the deposit paid to the XXXX Builder meet the requirement, imposed by subsection 124-75(3), for the taxpayer to incur 'at least some' of the expenditure within the relevant period?

Answer

Yes

Question 2

Do the taxpayer's circumstances constitute 'special circumstances' which would cause the Commissioner to allow further time, being an additional two years until 30 June 20XX, for the taxpayer to incur 'at least some' of the relevant expenditure in subsection 124-75(3)?

Answer

No

This ruling applies for the following period(s)

1 July 20XX to 30 June 20XX

The scheme commences on

1 July 20XX

Relevant facts and circumstances

The taxpayerowns a residential rental property ('the property'). The property is in a remote area on the outskirts of Town A, in Region B of the relevant Australian state.

The taxpayer purchased the property after 20 September 1985.

The original dwelling on the property was destroyed by fire during the 20XX income year. The property was under lease at that time.

The taxpayer received compensation in insurance proceeds for the complete destruction of the original dwelling in May 20XX.

The taxpayer intended to rebuild a residential dwelling on the property with the insurance proceeds, and elected to apply roll-over relief under section 124-70, to disregard a capital gain for the 20XX income year.

Over the past 12 months the taxpayer has been actively trying to secure a replacement dwelling for the property.

However, the extremely remote location of the property, and State and Federal Government border and movement restrictions in the area during COVID-19 lock-downs, have made it extremely difficult to engage reliable contractors to visit the area for purposes of quotation and job planning for the replacement asset.

The current shortage of building materials and available contractors is also impeding the taxpayer's ability to have the replacement dwelling built.

Town A and surrounding areas in the relevant Australian state were locked down for extended periods during 20XX and 20XX because of State Government imposed COVID-19 restrictions which had the effect of isolating it from the rest of the country.

The property contains asbestos. The relevant local authority requires that during demolition:

•         contaminated materials must be disposed of in a metal box

•         the top layer of contaminated soil must be removed and disposed of

•         the taxpayer prepare and submit a Bush Fire Analysis.

There are limited demolition contractors who are available to work in the Town A area and have appropriate licenses to carry out demolition work involving asbestos.

The taxpayer engaged a contractor ('the demolition contractor') in July 20XX to demolish the house.

The demolition contractor has been unable to demolish the original dwelling so far, because:

•         it operates only part of the year in Town A and surrounding areas

•         is experiencing mass staff shortages

•         it is difficult to demolish a building with asbestos in a remote location.

The taxpayer has already arranged for containers to be delivered to the demolition site to allow for the contaminated material to be buried at a site designated by the relevant local authority.

Two builders (the 'first' and 'second' builders)have attended the site and given quotes:

•         the first builder attended at the end of December 20XX, but advised they would be unable to commence any build for at least two years, with a start date of approximately January 20XX

•         the taxpayer had hoped to construct the replacement dwelling before January 20XX, so the taxpayer contacted a second builder in January 20XX

•         the second builder attended the site in March 20XX, as they indicated they would not travel until after the peak of the wet season had passed

•         the second builder's quote was expensive, and exceeded the insurance proceeds received to build the replacement house.

After receiving the quotes from the first and second builders, the taxpayer decided to approach three XXXX Home Builders. The taxpayer viewed display houses, obtained pricing, and decided to engage one of the XXXX Home Builders ('the XXXX Builder') in approximately May 20XX, to construct the XXXX Home which is intended to become the replacement dwelling. We refer to the construction of the XXXX Home as 'the Build'.

The taxpayer paid a $X non-refundable deposit, under an Invoice, to the XXXX Builder in June 20XX.

The XXXX Builder has provided preliminary plans to the taxpayer for approval. Once finalised these plans will need to be submitted to the relevant local authority for approval.

After that, the taxpayer expects to sign a contract with the XXXX Builder for the Build.

The taxpayer expects to be required to make a further payment of approximately X% of the contract price by the end of August 20XX. The deposit of $X will deducted from the next instalment due to the XXXX Builder in August 20XX.

The XXXX Builder has advised that:

•         they expect to commence the Build in September 20XX

•         it may take between 4-6 months to complete the Build

•         the estimated completion for the Build is January 20XX

•         however, there are material shortages which may delay the completion time.

After the Build is complete, the taxpayer will take possession of the XXXX Home at the XXXX Builder's premises in City C, and arrange for it to be transported to Town A for installation at the property.

Ownership of the XXXX Home will pass to the taxpayer when it takes possession.

The Region B wet season runs from November to April, with a 'peak' wet season usually running from December to February or March. Roads in Region B can become difficult to access during the peak of the wet season, especially for trucks with heavy loads.

The taxpayer will need to engage local tradespeople to complete the installation of the XXXX Home at the property. The taxpayer has advised that there are long delays in Town A to secure tradespeople to carry out work.

The taxpayer is a discretionary trust.

The taxpayer's trustee is a company incorporated in Australia.

Relevant legislative provisions

Section 104-20 of the Income Tax Assessment Act 1997

Section 108-5 of the Income Tax Assessment Act 1997

Section 108-55 of the Income Tax Assessment Act 1997

Section 124-70 of the Income Tax Assessment Act 1997

Section 124-75 of the Income Tax Assessment Act 1997

Reasons for decision

All references are to the Income Tax Assessment Act 1997, except where another Act is mentioned.

Question 1

If the taxpayer has a replacement dwelling built and installed on the property, will the deposit paid to the XXXX Builder meet the requirement, imposed by subsection 124-75(3), for the taxpayer to incur 'at least some' of the expenditure within the relevant period?

Summary

Yes. If the taxpayer has a replacement dwelling built and installed on the property, in the manner proposed in this private ruling, the payment of $X paid to the XXXX Builder will meet the requirement to incur 'at least some' of the expenditure within the relevant period.

Please note that if the XXXX Home is not installed as proposed, and the restoration is completed in a different manner, it is possible that the $X payment would not meet the requirement.

Detailed reasoning

General requirements for the 124-B roll-over

Broadly, subdivision 124-B allows taxpayers who have had a CGT asset lost, destroyed, or compulsorily acquired to choose roll-over relief from the CGT consequences that would normally flow from that event.[1]

Subsection 124-70(1) says you may choose a roll-over if any of the listed events happens to a CGT asset you own (referred to as the original asset). The third item in the list is when 'it, or part of it' is lost or destroyed: see paragraph 124-70(1)(b).

Subsection 124-70(2) says:

You must receive money or another *CGT asset (except a *car, motor cycle or similar vehicle), or both:

(a) as compensation for the event happening; or

(b) under an insurance policy against the risk of loss or destruction of the original asset.

The broad effect of subsections 124-70(3) and 124-70(4) is that if you are a foreign resident, or a trustee of a foreign trust for CGT purposes, at relevant testing times, both the original asset and the 'other' asset must be taxable Australian property.[2]

Subsection 108-5(1) says a CGT asset includes any kind of property. The effect of paragraph 108-5(2)(a) is that part of, or an interest in, a CGT asset is itself a CGT asset. Note 1 to section 108-5 lists examples of CGT assets: the first bullet point reads 'land and buildings.'

At common law, what is fixed to the land is presumed to become part of the land.[3] Therefore, both land, and a building upon that land, would usually be treated as the same CGT asset. Broadly, section 108-55 treats a building as a separate CGT asset when either:

•         you build a post-CGT building or structure on pre-CGT land, or

•         a balancing adjustment (under Divisions 40 or 355) happens to a building or structure on post-CGT land.

Here, the residential rental dwelling on the property was destroyed in a fire in December 2019, which is the relevant 'event' under section 124-70. Clearly, both the dwelling, and the land, are property. The land is post-CGT, and there's no suggestion that the residential dwelling was treated as a depreciating asset. Therefore, the land and building will be treated as the same CGT asset under the common law presumption. While the whole asset hasn't been destroyed, the building is part of the asset. Paragraph 124-70(1)(b) is met.

The trust received compensation as insurance proceeds for the destruction of the building. This is 'money' under an insurance property against the risk of loss or destruction of the original asset: subsection 124-70(2) is met.

Section 995-1 says that:

•         a 'foreign trust for CGT purposes' means a trust that is not a resident trust for CGT purposes

•         a trust that is not a unit trust is a 'resident trust for CGT purposes if, at any time during the income year, a trustee is an Australian resident or the central management and control of the trust is in Australia.

Section 6(1) of the Income Tax Assessment Act 1936 relevantly says that a resident of Australia includes:

"a company which is incorporated in Australia, or which, not being incorporated in Australia, carries on business in Australia, and has either its central management and control in Australia, or its voting power controlled by shareholders who are residents of Australia."

Here, the taxpayer is a discretionary trust, not a unit trust. The trustee was incorporated in Australia, so it is an Australian resident. Since the trustee is an Australian resident, the taxpayer will be a 'resident trust for CGT purposes' and therefore, not a 'foreign resident for CGT purposes. Even if it was a foreign resident, the original asset, being land in Australia, would be taxable Australian property, so this requirement would still be met.[4]

Extra requirements if you receive money

Subsection 124-75 applies extra conditions if you receive money for the qualifying event.

Subsection 124-75(2) says you must:

(a)  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

(b)  if part of the original asset is lost or destroyed - incur expenditure of a capital nature in repairing or restoring it.

The trust intends to purchase a demountable building and install it on the land, to replace the original dwelling. The XXXX Home, before installation, would be property (in the sense of a detached chattel), and could be regarded as a CGT asset before it was installed on the land. Since title in the XXXX Home will pass to the taxpayer when it takes possession, it might be 'another CGT asset' for the purposes of paragraph 124-75(2)(a).

However, there may be limited point to applying the roll-over to the acquisition of the detached XXXX Home, rather than its installation on the property, because the XXXX Home would most likely cease to exist as a separate CGT asset when it was installed. It is more appropriate to consider eligibility under paragraph 124-75(2)(b), that is, incurring expenditure of a capital nature in repairing or restoring the original asset.

Subsection 124-75(2)(b) will be met if the taxpayer:

•         incurs expenditure

•         that expenditure is 'of a capital nature'

•         that expenditure is incurred 'in' repairing or restoring the relevant CGT asset.

Was expenditure incurred?

Subsection 124-75(2) relevantly requires that you incur expenditure of a capital nature in repairing or restoring the property.

The phrase 'incur expenditure' is not defined. The Macquarie Dictionary[5] says meanings of:

•         'incur' include 'to become liable or subject to through one's own action; bring upon oneself'

•         'expenditure' includes 'that which is expended; expenses'

•         'expense' includes a 'cost or charge'.

The Commissioner's view, in Taxation Determination 2000/39 Income tax: capital gains: what does the word 'incur' in subsection 124-75(2) of the Income Tax Assessment Act 1997 mean? ('TD 2000/39'), is that the word 'incur' has the same meaning as under the general deduction provision in subsection 8-1(1). In other words, it means that you outlay expenditure, or have definitively committed or subjected yourself to a presently existing liability to outlay the expenditure.

Taxation Ruling TR 97/7: Income tax: section 8-1 - meaning of 'incurred' - timing of deductions ('TR 97/7') gives more guidance about the Commissioner's view on the meaning of 'incurred' under the general deduction provision. Paragraph 6 of TR 97/7 summarises some 'general rules' taken from case law, relevant to determining whether and when an outgoing has been incurred, including:

•         a taxpayer need not have actually paid any money provided they are definitively committed, or completely subjected to paying it

•         a taxpayer may have a presently existing liability, even though that may be defeasible, or it cannot be precisely ascertained

•         whether there is a presently existing liability is a legal question in each case, considering the circumstances, including the terms of the relevant contract or arrangement

•         for payments made in the absence of a presently existing liability, the expense is incurred when the money is paid, and ceases to the taxpayer's funds.

Whether a deposit has been 'incurred' for the purposes of either a general deduction, or capital expenditure under subdivision 124-B, would depend on the terms of the payment and any related agreement. Some payments described as 'deposits' are held by the recipient as security to ensure that the payer performs some connected obligation, and may be refunded. In those circumstances, the money remains the payer's property, but is held by the recipient, with rights to take security under an agreement. It is possible that a security deposit payment would not have been 'incurred,' because the money remains the payer's property, and will have it returned to them subject to the performance of certain obligations.

Here, the taxpayer was issued with an invoice requiring it to make a non-refundable payment of $X, described as a 'deposit', to the XXXX Builder, in exchange for the XXXX Builder preparing plans and costings for the XXXX Home under the Build. The deposit will be applied against the first instalment under the contract for the Build if the taxpayer enters that contract. The taxpayer paid the $X deposit to the XXXX Builder in June 20XX.

While the payment is described as a deposit, and may be applied against future amounts owing under the contract for the Build, the payment has been made under a separate transaction, preliminary to the Build. The taxpayer has been issued with an invoice for services, and has made a payment under that invoice. Therefore, the taxpayer had a presently existing liability when it received the invoice, which it met by making the payment to meet the liability in June 20XX. The money does not remain the taxpayer's property.

The deposit payment would be an expense in the ordinary meaning. Therefore, it is 'expenditure', which had been 'incurred' by 30 June 20XX.

Is the expenditure of a capital nature?

The word 'capital' and the phrase 'capital nature' are not explained in taxation provisions.

Taxation Ruling TR 2011/6 Income tax: business related capital expenditure - section 40-880 of the Income Tax Assessment Act 1997 core issues ('TR 2011/6')summarises some principles, derived from caselaw, relevant to determining whether expenditure is capital in nature, at paragraphs 64 to 68. To paraphrase these principles:

•         whether capital expenditure is capital in nature is determined on the facts of each case

•         Dixon J in Sun Newspapers Ltd. and Associated Newspapers Ltd. v. Federal Commissioner of Taxation [1938] HCA 73 (1938) 61 CLR 337 at 363 ('Sun Newspapers') said it is necessary to consider:

­   the character of the advantage sought (lasting qualities may be relevant)

­   the manner in which it is to be used, relied upon and enjoyed (recurrence may be relevant)

­   the means adopted to obtain it (such as by providing a periodical reward or outlay)

•         the character of the advantage sought provides the best guidance as to the nature of the expenditure

•         if expenditure produces some asset or advantage of lasting character for the benefit of the business it will be capital expenditure (it need not acquire an actual asset, it may be a benefit which endures).

To apply Dixon J's test from Sun Newspapers:

•         the character of the advantage sought: is to effect an enduring 'structural' change to the property - restoring vacant land to property available for habitation through installing the XXXX Home

•         the manner in which that advantage is to be used, relied upon and enjoyed: would be ongoing - the residential property would be expected to be used or available for use for a substantial time

•         the means adopted to obtain it: is to complete acquire the XXXX Home, and arrange for the delivery and installation - while this may involve separate contracts with multiple third parties, it is best characterised as a once-off overall project from the taxpayer's perspective.

We conclude that the cost of building, transporting and installing the XXXX Home would be 'capital expenditure'. That expenditure will be incurred in repairing or restoring the original asset (that is, restoring the property to its original state of having a residential dwelling). That cost would include any amount paid to the XXXX Builder under the contract.

The payment of $X to the XXXX Builder (described as a 'deposit') will secure plans and costings for the XXXX Home. Those plans and costings are a key step in the project or plan to acquire and install a residential dwelling on the property. This will be capital expenditure for the same reasons.

While it is possible that the contract for the Build may fall through, not be entered, or not be performed for other reasons, this would not affect the character of the payment of $X as capital expenditure. The taxpayer incurred the expenditure with the purpose of obtaining a permanent, structural advantage which is intended to be enjoyed for a substantial period: payments made towards that objective would not lose that character simply because the project failed or did not eventuate.

Is the (capital) expenditure incurred in repairing or restoring the original asset?

The expenditure needs to be incurred either in:

•         acquiring another CGT asset (except a depreciating asset), or

•         in repairing or restoring the original asset (if part of it was lost or destroyed).

Here, the expenditure is part of a project to repair or restore the property to its original state of having a residential dwelling. Paying the $X deposit for the plans and costings will therefore be incurred 'in' restoring the property, if the XXXX Home is built and installed as proposed.

Of course, the taxpayer would have to actually repair or restore the original asset in order to claim the subdivision 124-B roll-over. Also, the taxpayer might not be eligible if the future repair or restoration is completed in a different manner to that proposed (for example, if the Build is not completed or performed, and the taxpayer decides to enter another contract with another builder to restore the property). In that case, it could be suggested that the $X payment for plans and costings would be too remote to qualify as expenditure 'in' restoring the asset, because the plans and costings may have had no relevance or connection to how the asset was eventually restored. Whether the potentially 'wasted' deposit payment would qualify could depend on the manner and circumstances in which the property was eventually restored, and the extent of any remaining link with the plans and costings.

Subsection 124-75(3) says:

At least some of the expenditure must be incurred:

(a) no earlier than one year, or within such further time as the Commissioner allows in special circumstances, before the event happens; or

(b) 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.

Here, the relevant 'event' is the destruction of the former residential dwelling on the property in December 20XX, during the 20XX income year. The time 'no later than one year' after the end of the 2020 income year' will be 30 June 20XX.

Since the $X payment to the XXXX Builder (in June 20XX) was made before 30 June 20XX, it will have been incurred within the relevant period.

Is the expenditure 'some' for the purposes of subsection 124-75(3)?

The phrase 'at least some' is not explained. The Macquarie Dictionary[6] says meanings of 'some' include:

•         'of a certain unspecified number, amount, degree, etc.: some variation.'

•         'unspecified but considerable in number, amount, degree, etc.: he was here some weeks.'

•         'an unspecified number, amount, etc., as distinguished from the rest.'

In context, we think that the phrase 'at least some' means an amount, which is more than nil, but does not necessarily have to encompass 'all' expenditure incurred on repairing or restoring the relevant asset.

The Explanatory Memorandum to the Tax Law Improvement Bill (No. 1) 1998, which introduced subdivision 124-B, said that the words 'at least some' were introduced to clarify the previous law:

The 1936 Act requires expenditure on acquiring a new asset, or on the repair or restoration of the original asset to be incurred within a specified time of the disposal of the original asset. It is unclear whether it is the total expenditure, or only a part of it, that must be incurred within this period. The rewritten provision adopts current administrative practice that only some of the expenditure must be incurred within the specified time.

The payment of $X to the XXXX Builder is 'some' expenditure because it is an amount greater than nil. It does not matter that it is less than 'all' or the 'total' expenditure.

Conclusion

The payment of $X to the XXXX Builder in June 20XX will qualify as incurring 'some' expenditure within the relevant period, if the taxpayer restores the property by acquiring and installing the XXXX Home on the property in the manner proposed. However, this payment may not qualify if the property is not restored, or if it is restored in a different manner to that proposed, such that the $X payment can no longer be said to be incurred 'in' restoring the property.

Question 2

Do the taxpayer's circumstances constitute 'special circumstances' which would cause the Commissioner to allow further time, being an additional two years until 30 June 2023, for the taxpayer to incur 'at least some' of the relevant expenditure in subsection 124-75(3)?

Summary

No. While the taxpayer's circumstances are 'special,' it would not be appropriate for the Commissioner to allow further time to incur 'at least some' of the relevant expenditure. If the XXXX Home is built and installed as proposed in the relevant period, the taxpayer will have incurred at least some expenditure within the relevant period by having paid $X to the XXXX Builder in June 20XX. In that event, there will be no need to allow further time.

It is possible that the taxpayer may fail to meet the timing requirement if the XXXX Home is not built and installed as proposed, but that possibility seems unlikely from the information supplied. If it so fails, it isn't clear that this failure will be caused by the 'special circumstances' disclosed in this ruling application. It is not appropriate for the Commissioner to allow further time at this point, just on the off-chance. However, the taxpayer could ask the Commissioner to allow further time later if this becomes necessary.

Detailed reasoning

The Commissioner's power to allow further time 'in special circumstances'

Paragraph 124-75(3)(b) says that at least some of the expenditure must be incurred '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.'

As explained at paragraph 35, the relevant event happened in December 20XX. The payment to the XXXX Builder in June 20XX will have taken place before the end of the income year in which the event happened. The requirement of incurring 'some' expenditure will be met if the XXXX Home is acquired and installed in the manner proposed.

It would only be necessary for the Commissioner to allow further time if the XXXX Home was not acquired and installed in the manner proposed, such that the deposit payment to the XXXX Builder could no longer be said to be incurred 'in' restoring the property.

The Explanatory Memorandum to the Tax Law Improvement Bill (No. 1) 1998, which introduced section 124-75, does not explain or reference the Commissioner's power to allow more time for the taxpayer to incur the relevant expenditure.

In our view, the phrase 'if the Commissioner allows further time in special circumstances' implies two requirements:

•         'special circumstances'

•         the Commissioner must think it appropriate to allow further time.

Are there 'special circumstances?'

'Special circumstances' is not defined. The Macquarie Dictionary[7] says meanings of:

•         'special' include 'extraordinary; exceptional...' or 'distinguished or different from what is ordinary or usual'

•         'circumstance' includes 'a condition, with respect to time, place, manner, agent, etc., which accompanies, determines, or modifies a fact or event;' or 'the existing condition or state of affairs surrounding and affecting an agent'.[8]

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') says that 'special circumstances' in subsection 124-75(3) "by its nature is incapable of a precise or exhaustive definition." It suggests what are 'special circumstances' depends on the facts of each case, and is best explained by example. It gives four examples:

•         In Example 1, land is compulsorily acquired. The owner does not receive, compensation until one month before the period ends. TD 2000/40 concludes this is likely to be special circumstances which warrant extending time.

•         Example 2 is a factory is destroyed by fire. The owner immediately commenced negotiations to purchase a replacement factory, but the purchase falls through. The taxpayer purchases another property just outside the relevant period. TD 2000/40 concludes this is likely to be special circumstances which warrant extending time.

•         Example 3 is another compulsory acquisition of land. The owner has a protracted legal dispute with the state authority about the quantum of compensation. TD 2000/40 concludes this is likely to be special circumstances which warrant extending time.

•         Example 4 is a compulsory acquisition of a rental property. The owners failed to acquire a replacement asset because they didn't know there was a timeframe. TD 2000/40 concludes this is not special circumstances, and the Commissioner would not allow further time.

The meaning of 'special circumstances' was also discussed in Taxation Ruling TR 2007/6 Income tax: non-commercial business losses: Commissioner's discretion ('TR 2007/6'). At paragraphs 42-52, this ruling cited statements from case law to the general effect that 'special circumstances' defies prescriptive definition, and must be read in context, but would normally be something unusual, different, uncommon, exceptional, or out of the ordinary or normal course.

Relevant considerations here include:

•         the property is very remote[9]

•         remote communities in the relevant Australian state have been subject to COVID-19 restrictions

•         the taxpayer only received the insurance proceeds in May 20XX, X months after the event, and XX months before the allowed period expired

•         the taxpayer has already had significant delays in arranging for a demolition contractor to demolish the house

•         it is difficult to travel and/or complete building work in Region B during the wet season - contractors from outside would be reluctant/unable to attend, which would cause delays.

Neither remoteness, COVID-19 restrictions, or receiving insurance proceeds 6 months after the event, in themselves, would necessarily be 'special circumstances.' However, considered in combination, these are circumstances which take the taxpayer's situation well out of the ordinary, and provide a reasonable explanation for why it didn't complete the project to restore the property in the period from December 20XX to June 20XX, and may not complete the build even by 30 June 20XX. For example:

•         it is clearly difficult to find appropriate contractors in the Town A area given the small population and isolation

•         the taxpayer has already had significant delays in arranging for a demolition - it seems reasonable to expect similar delays into the future

•         due to distance, and COVID-19 restrictions, and the effect of the wet-season, builders and other

•         relevant contractors have been, and may continue to be, unable, or unwilling, to visit the site.

We conclude that the taxpayer's circumstances are 'special circumstances'.

Is it appropriate for the Commissioner to allow further time?

In our view, the 'special circumstances' need to explain why more time should be allowed 'to incur' the relevant expenditure. It isn't enough to have 'special circumstances' alone if those circumstances aren't relevant to the delay or why the taxpayer needs more time. The 'special circumstances' should explain why more time is both necessary and reasonable.

An administrative power to allow further time (which might loosely be described as a 'discretion') should be exercised reasonably and consistently, in light of the consequences for the taxpayer, the community, and tax administration more generally. ATO Interpretive Decision ATO ID 2003/102 Capital Gains Tax: Extension of time to choose the small business roll-over ('ATO ID 2003/102')(now withdrawn because it involves the exercise of a discretion) gave an illustration of the sorts of factors which might be relevant to exercising a power to allow further time, albeit in the context of the small business roll-over in subdivision 328-G. Despite the different statutory context and withdrawal of ATO ID 2003/102, we consider that these factors are also relevant to decisions to allow further time under subdivision 124-B.

To paraphrase ATO ID 2003/102, these factors are:

•         evidence of an acceptable explanation for the period of the extension requested

•         whether it would be fair and equitable in the circumstances to provide such an extension

•         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)

•         of any unsettling of people, other than the Commissioner, or of established practices

•         fairness to people in like positions and the wider public interest

•         whether there is any mischief involved

•         a consideration of the consequences.

The relevant period expired 30 June 20XX. The taxpayer has already incurred expenditure in June 20XX. The taxpayer has a plan to acquire a XXXX Home and install it on the property. That will qualify, assuming the XXXX Home goes ahead at some time.

In that case, there is no need for the taxpayer to have an extension for another X years as the taxpayer will be eligible.

As discussed at paragraph 61, it is possible that the expenditure will not be incurred as capital expenditure 'in' repairing or restoring the original asset if the XXXX Home is not installed on the property. For example, the expense is incurred, but the taxpayer doesn't complete the contract and arranges another XXXX Home to be built by another builder (or decides to have another house built on the property). In those or similar circumstances, arguably the $X deposit wouldn't have been incurred on repairing or restoring the asset.

Here, while some delay is expected, and it may take longer than one year from now to fully install the house, there seems no reason to conclude that the plan to install the XXXX Home will fail altogether. If it did, the taxpayer may need more time to arrange alternatives and incur expenditure.

However, we do not think it is appropriate to grant further time based on a hypothetical about what might happen, given the taxpayer's circumstances. At this stage, we don't have any grounds to think that the possibility of the XXXX Home build falling through altogether is likely or a reasonable possibility.

Also, if the plan to acquire and install the XXXX Home falls through altogether, we do not know if it will be caused by the special circumstances outlined in this ruling application. For example, we don't know if it will fall through because of the property remoteness, the wet-season, COVID-19 restrictions, delay for the XXXX Builder in getting building materials, and difficulty of getting contractors to the property. Rather, it might fall through for other reasons (such as default on payment or a decision not to enter, or exit the contract for other reasons) which might be within the taxpayer's control and/or not caused by special circumstances.

On the facts presented, the taxpayer will most likely be eligible for the roll-over and does not require more time. It would not be appropriate to allow further time just to give the taxpayer insurance for what might happen in the future, just on the off-chance. This would involve speculation rather than reasonable expectation. Of course, if the plan does fall through in circumstances which might cause the deposit payment not to qualify as capital expenditure for the purposes of subsection 124-70(3), the taxpayer could request the Commissioner to allow further time at that point.

Conclusion

The Commissioner will not apply further time for the taxpayer to incur expenditure. From the facts presented, the taxpayer has already incurred expenditure. This expenditure will qualify as 'some' capital expenditure in restoring the relevant asset, unless the property is not restored under the proposed arrangement. There is no need to allow further time unless the property is not restored as proposed. It is not appropriate to allow further time as insurance against this possibility, because:

•         based on the available information, we think that the property will most likely be restored at proposed at some time, and

•         if the property is not restored as proposed, that may occur for reasons unrelated to the 'special circumstances' identified in this ruling application.

The taxpayer could request the Commissioner to allow further time later, in the unlikely event that this becomes necessary.

[1] For the destruction of a building through fire, CGT Event C1 would most likely occur. Section 104-20 says that CGT event C1 happens if a CGT asset you own is lost or destroyed. If you receive compensation, the time of the event is when you receive that compensation. The note to subsection 104-20(1) says that the event can apply to part of a CGT asset, referring to section 108-5. Here, CGT Event C1 would have happened because part of the asset (the original dwelling) has been lost or destroyed. The time of the event would be when the insurance proceeds were received in May 2020.

[2] For completeness, in context, it appears that the reference to the 'other asset' in subsection 124-70(4) refers to the 'another CGT asset' received directly as compensation or under an insurance policy for the purposes of subsection 124-70(2). No CGT asset has been received as compensation or under an insurance policy, so this requirement is only relevant for the original asset.

[3] See generally Carter J (2015) Halsbury's Laws of Australia, LexisNexis Australia at [355-2365] 'Fixtures - Real Property', accessed online 28 July 2021 at https://advance.lexis.com. See also, for example, Commissioner of Main Roads v North Shore Gas Co. Ltd [1967] HCA 41 (1967) 120 CLR 118 at 127 per Barwick CJ, McTiernan J, Kitto J and Taylor J.

[4] Section 855-15 lists categories of CGT assets that are taxable Australian property. Item 1 is Taxable Australian real property. Section 855-20 says Taxable Australian real property includes real property situated in Australia.

[5] Macmillan Publishers Australia, The Macquarie Dictionary online, www.macquariedictionary.com.au ('The Macquarie Dictionary'), accessed 10 August 2021.

[6] The Macquarie Dictionary, accessed 2 August 2021.

[7] Macquarie Dictionary, accessed 10 August 2021.

[8] To consult the Macquarie Dictionary (accessed 10 August 2021) once again, in this context, 'agent' would seem to carry the meaning 'something or something that acts or has the power to act.'

[9] Just to give context, according to Google Maps road distances, Town A (urban population less than 5,000) is about 300km away from Town D which appears to be the nearest township (urban population also less than 5,000). Accessed 11 August 2021. Town E, which is the largest town in Region B, has an urban population less than 20,000, and is more than 500km away from Town A. Population information obtained from Australian Bureau of Statistics (October 2017) 2016 Census QuickStats abs.gov.au, accessed 11 August 2021.