Edited version of private advice

Authorisation Number: 1051979072328

Date of advice: 4 May 2022

Ruling

Subject: CGT - extension of time for incurring expenditure to acquire a replacement asset

Question

Will the Commissioner exercise his discretion in subsection 124-75(3) of the Income Tax Assessment Act 1997 (ITAA 1997) and allow the extension of time until 30 June 20YY to the Trustee for the Trust for incurring expenditure to acquire a replacement asset from the proceeds received pursuant to the compulsory acquisition of their asset to meet the eligibility requirements for a Subdivision 124-B of the ITAA 1997 roll-over?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20YY

The scheme commences on:

Date 2

Relevant facts and circumstances

The Trustee of a Trust owned land (the Land) in their capacity as trustee for the purposes of developing the Land and to continue holding the Land following development for the purposes of deriving passive income. The Trustee has an income year end of 30 June.

On Date 1, the Trust received a notice from XX advising that the Land was to be compulsorily acquired.

In conjunction with the notice of the compulsory acquisition (the Agreement), the Trust was issued with a claim for compensation form to assist in the determination of a compensation payable to them for the compulsorily acquired landholdings.

The Trustee included its own independent valuation of the Land along with the claim for compensation form.

Upon review of the Agreement, the Trustee was informed that if a purchase and exchange contract was not achieved by a certain time, a notification of compulsory acquisition would be published in the Government Gazette on or about Date 2.

A notification of compulsory acquisition (the Acquisition Notice) was published in the Government Gazette Date 2.

The Trustee has not received any compensation amount, or an offer of a compensation amount payable in relation to the compulsory acquisition of the Land despite its numerous attempts to collaboratively engage with XX since the commencement of the compulsory acquisition process.

The provision of a formal offer of compensation has been continually delayed by XX and no explanations have been provided for the delay.

To date means that the Trustee is unable to accurately anticipate the expected amount of compensation, and the time at which that compensation will be received. This significantly impacts the Trustee's ability to find a suitable replacement asset.

The Trustee intends to purchase land and property to replace the compulsorily acquired landholdings.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 section 124-70

Income Tax Assessment Act 1997 section 124-75

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

Reasons for decision

All references made in these reasons for decision are to the Income Tax Assessment Act 1997 (ITAA 1997)unless otherwise stated.

Summary

The Commissioner will exercise his discretion in subsection 124-75(3) and allow an extension of time until 30 June 20YY for you to incur expenditure to acquire a replacement asset to meet the eligibility requirements for a Subdivision 124-B.

Detailed reasoning

Section 124-70 describes different events when a roll-over is available to an entity if that event happens to the CGT asset of that entity. According to subsection 124-70(1), an entity can choose a roll-over if the CGT asset that the entity owns is compulsorily acquired by an Australian government agency.

Subsection 124-70(2) 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 to mean the Commonwealth, a State or a Territory, or an authority of the Commonwealth or of a State or Territory.

The Land was compulsorily acquired by XX on Date 2, and you have not yet received money as compensation for the CGT event A1 happening.

As subsection 124-70(3) does not apply you can choose a roll-over in relation to the capital gain, 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:

(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.

124-75(3) 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.

The relevant provision for you is paragraph 124-75(2)(a) whereby they are required to incur expenditure to acquire another CGT asset to obtain the roll-over.

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 CGT event A1 is determined by subsection 104-10(6):

If the asset was *acquired from you by an entity under a power of compulsory acquisition conferred by an *Australian law or a *foreign law, the time of the event is the earliest of:

(a) when you received compensation from the entity; or

(b) when the entity became the asset ' s owner; or

(c) when the entity entered it under that power; or

(d) when the entity took possession under that power.

XX compulsorily acquired the Land approximately a year ago and you have not received compensation to date. The time of the event under subsection 104-10(6) is therefore the date the Land was compulsorily acquired.

You did not acquire a replacement asset prior to the disposal of the Land therefore to satisfy subsection 124-75(3), they must incur at least some of the expenditure in acquiring another CGT asset no later than 30 June 20XX, (being one year after the end of the income year in which the event happened), or within such further time as the Commissioner allows in special circumstances (paragraph 124-75(3)(b)).

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

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? explains that the expression special circumstances in the context of subsection 124-75(3) by its nature is incapable of a precise or exhaustive definition. Some examples of special circumstances are provided under the tax determination.

Example 3 is relevant to your circumstances, as XX has not yet made an offer of compensation since compulsorily acquiring the Land just under a year ago. You have made efforts to resolve the matter however XX has delayed providing a formal offer and has not provided any explanation for the delay.

You are unable to accurately anticipate the expected amount of compensation, and the time at which that compensation will be received. This significantly impacts your ability to find a suitable replacement asset.

Your situation falls within scope of what would be considered special circumstances therefore the Commissioner will exercise his discretion under paragraph 124-75(3)(b) to allow an extension of time until 30 June 20YY to incur some of the expenditure to acquire a replacement CGT asset.