Edited version of private advice

Authorisation Number: 1051964129965

Date of advice: 22 March 2022

Ruling

Subject: CGT - compulsory acquisition

Question 1

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

Answer

Yes

Question 2

Will the Commissioner exercise the discretion available under paragraph 124-75(3)(b) of the ITAA 1997 to provide an extension of two years to acquire a replacement asset?

Answer

No

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commences on:

20XX

Relevant facts and circumstances

A trust owned commercial properties that it used as investment assets.

The properties were compulsorily acquired by a government authority.

The trust lodged a claim for compensation.

Negotiations to settle the claim early failed and the government only agreed to pay part of the compensation.

The advance payment was not sufficient for the trust to purchase a similar property as a replacement.

A number of years later the trust filed an Originating Application seeking determination of the compensation amount.

The compensation claim was settled eventually with the balance of the compensation payment received early 20XX.

After receiving the final payment, the trust has been actively looking for replacement properties similar to the compulsorily acquired property.

Travel and inspections to access suitable properties have been restricted due to COVID-19.

No suitable property has yet been located.

The trust is considering of interstate properties.

Extensions of time have previously been approved under subsection 124-75(3) of theITAA 1997 on the basis that the amount of compensation had not been determined.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 section 124-75.

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

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

Reasons for decision

Question 1

Summary

The Commissioner will grant an extension of time for the trust to obtain a replacement asset following settlement received for the compulsory acquisition of the trust's property.

Detailed reasoning

Under subsection 124-70(1) of the ITAA 1997 you may be able to choose a roll-over if a capital gains tax (CGT) asset is compulsorily acquired by an Australian Government agency. If you receive money for the sale of the asset further conditions are imposed by section 124-75 of the ITAA 1997.

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? (TD 2000/40) provides guidelines as to when the Commissioner will extend the period in which a replacement asset can be acquired, in particular what are special circumstances.

The impact of COVID-19 is considered to have created 'special circumstances'.

Question 2

Summary

An extension of one year has been granted for the trust to acquire a property which can be used for a similar purpose to the asset which was compulsorily acquired.

Detailed reasoning

An extension of time has been provided to the applicants since the entity's asset was compulsorily acquired on the basis that the amount of compensation had not been determined. The reasons for the Commissioner repeatedly allowing an extension of time are addressed in Example 3 of TD 2000/40. The example described a 'protracted legal dispute with an authority over the quantum of the compensation' and in that instance the Commissioner would allow an extension.

The current extension of time concludes on 30 June 20XX and full payment in compensation was received in January 20XX. Another extension of time has been requested until 30 June 20XX. The reasons provided for the request are the difficulties of travel and property inspections due to COVID-19. The applicant has repeated that they are looking for a 'similar' property.

Subsection 124-75(4) of the ITAA 1997 indicates that an entity must use the replacement asset for the same or similar purpose to the purpose for which an entity used the original asset just before the event giving rise to the roll-over. As discussed in 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? there is no requirement for the replacement asset to be a similar asset, it must merely be used for the same or a similar purpose.

The examples of circumstances where an extension of time can be accepted are provided in TD 2000/40 did not contemplate COVID-19 however the reasoning still applies. At Example 4 the determination considers a situation where an extension would not be provided if the owners of the acquired property did not take action or measures to acquire a replacement asset as they did not know that there was a required time frame.

The trust was aware of the timeframe to acquire a replacement asset. Extensions of time have already been granted because of the protracted legal dispute and extensive delays in receiving settlement. Although COVID-19 may add a degree of difficulty to the acquisition of a 'similar' property, it should not create an insurmountable barrier to acquiring a property which can be used for the same or similar purpose as the compulsorily acquired asset - which is a commercial property used by the business as an investment asset.

An extension of time for one year until 30 June 20XX has been granted.