Edited version of private advice

Authorisation Number: 1051986606581

Date of advice: 24 May 2022

Ruling

Subject: Extension of time to acquire a replacement asset

Question 1

Will the Commissioner exercise his discretion under paragraph 124-75(3)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow an extension of time until 30 June 20XD to acquire a replacement asset?

Answer

Yes

This ruling applies for the following period(s)

Income year ended 30 June 20XX

Income year ended 30 June 20XA

Income year ended 30 June 20XB

Income year ending 30 June 20XC

Income year ending 30 June 20XD

The scheme commences on

X XXX 20XX

Relevant facts and circumstances

Background

1. The Company (Company A) and Company B acquired a building in NSW on the 30 XXXX 19XX (the Property).

2.    The Property was X,XXX square metres in size.

3.    On X XXXX 20XX the Property was compulsorily acquired by the State of NSW from Company A and Company B for $XX,XXX,XXX.

4. The share of proceeds from the compulsory acquisition received by the Company was $XX,XXX,XXX.
5. On the XX XXXX 20XX, the Company purchased a replacement asset for $X,XXX,XXX. Appropriate replacement assets have not been acquired for the balance of the proceeds ($XX,XXX,XXX) despite a concerted effort by Company A.
6. Since July 20XX, the Company has inspected several properties with a view to acquiring them with the remaining balance of the share of proceeds.
7. The Property compulsorily acquired by the State of NSW had a strong long term tenancy profile with an annual average yield of X%.
8. In 20XA, the Company applied for a private ruling, requesting an extension of the replacement asset period. On XX XXX 20XA, the Company was granted an extension of the replacement asset period until 30 June 20XB.
9. In 20XB the Company applied for another private ruling, requesting a further extension of the replacement asset period. On XX XXXX 20XB, the Company was granted a further extension until 30 June 20XC. It was claimed in this application that you had difficulty acquiring a replacement asset due to COVID-19 and the economic impact on the acquisition market for commercial properties - specifically the decrease in listings, increase in purchase price and a lack of supply.

Replacement Asset

10. In the past 12 months, the directors of Company A have continued to actively search the commercial property market for suitable replacement assets, but with no success. You provided a spreadsheet that summarises the properties considered during that period.
11. The Covid-19 pandemic has made it difficult for the directors to access and inspect properties and to undertake the appropriate due diligence. The abovementioned spreadsheet lists many properties in which, for the majority, an offer was made to the vendors.
12. Company A has been the under bidder on a few properties and the directors have incurred legal fees reviewing contracts for transactions that did not proceed. The invoices provided were in respect of a number of properties. You state you entered into Legal Due Diligence in respect of a number of properties highlighted on the spreadsheet.
13. Company A has recently made an offer of $XX million to purchase a suitable replacement property and negotiations are continuing. If successful, settlement is expected to occur no earlier than September 20XC and may be as late as December 20XC. This will, however, be well after the current extension deadline of 30 June 20XC.
14. If the current offer is successful, Company A's new investment in property assets significantly exceeds the capital proceeds amount required to be expended to satisfy the CGT rollover conditions. This clearly demonstrates the directors' preferred asset class.
15. There has continued to be excess demand for suitable property but the high prices being achieved are expected to encourage sellers into the market. The impending increase in interest rates may attract capital away from the property market and into other investment classes.
16. The directors are committed to investment in commercial property and so request a further extension of time until 30 June 20XD to purchase replacement assets.

Relevant legislative provisions

Income Tax Assessment Act 1997

Subdivision 124-B

Section 124-70

Section 124-75

Subsection 124-75(3)

Paragraph 124-75(3)(a)

Paragraph 124-75(3)(b)

Reasons for decision

Question 1

Summary

The Commissioner will exercise his discretion to extend the period in which Company A can seek to be eligible for the rollover under subsection 124-75(3) of the ITAA 1997 until 30 June 2023.

Detailed reasoning

Unless otherwise stated, all legislative references are to the Income Tax Assessment Act 1997.

Section 124-70 allows capital gains tax (CGT) roll-over relief if an asset, owned by a taxpayer, is compulsorily acquired by an entity under a power conferred by Australian law. If the taxpayer receives money for the sale of the asset then the conditions in section 124-75 must be satisfied.

Under paragraph:

• 124-75(3)(a) you must incur some expenditure in acquiring a replacement CGT asset no earlier than one year before the CGT event relating to the compulsory acquisition the CGT asset or within such further time as allowed by the Commissioner in special circumstances.
• 124-75(3)(b) you must incur some expenditure in acquiring a replacement CGT asset no later than one year after the CGT event relating to the compulsory acquisition of the CGT asset or within such further time as allowed by the Commissioner in special circumstances.

The asset was compulsorily acquired under a power of compulsory acquisition conferred on the State of NSW by an Australian law for monetary compensation, satisfying section 124-70.

Where monetary compensation is received for the acquisition of the asset, section 124-75 outlines further requirements that must be satisfied in order to be able to choose the roll-over.

Subsection 124-75(3) states that at least some of the expenditure to replace the compulsorily acquired asset has been incurred no earlier than one year before the event and no later than one year after the end of the financial year in which the event occurred unless such further time is allowed by the Commissioner 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) sets out the Commissioners view on special circumstances for the purpose of extending the replacement asset roll-over period in subdivision 124-B.

Paragraph 3 of TD 2000/40 states that:

What are 'special circumstances' depends on the facts of each particular case. Application of the expression is best illustrated by examples.

TD 2000/40 provides that the expression 'special circumstances', by its nature, is incapable of a precise and exhaustive definition, and that what constitutes 'special circumstances' depends on the facts of each particular case.

The situation faced by Company A as a result of the COVID-19 pandemic is not contemplated in TD 2000/40 but can reasonably be seen to be extraordinary in nature and impact; and subsequently falls within the broad definition of 'special circumstance' as explained in TD 2000/40.

The Commissioner accepts that locating and purchasing suitable replacement properties can take significant time, effort, and resources and the current situation as a result of COVID-19 would see this process take even longer.

You have provided evidence that COVID-19 has impacted on your ability to locate suitable replacement assets, carry out due diligence on the replacement assets, and have confidence in the commercial rent/s from those assets.

Considering the current market conditions, limitation of physical inspections and interstate travel, the size and scale of the Property which is being replaced, and the level of due diligence to be undertaken by Company A in relation to its strategic objectives, an extension until 30 June 20XD in which to elect to acquire a replacement asset is appropriate.

Taking into account the efforts made thus far to obtain a suitable replacement asset for the business, the Commissioner accepts that the restrictions impeding the directors' continued efforts due to the Covid-19 pandemic, are special circumstances.

For these reasons, the Commissioner accepts that the Company has a special circumstance that warrants the favourable exercise of the Commissioner's discretion to extend the time to find a replacement asset (or assets) for a further year to 30 June 20XD under subsection 124-75(3).

There is nothing that would indicate that the Commissioner would suffer any material prejudice as a result of granting the extension.

There is no identifiable mischief in relation to the disposal and acquisition outside of the statutory timeframe.

The consequences of the extension will purely be to provide for Company A to be able to consider its eligibility for the rollover once it has been able to acquire an appropriate replacement asset.

It is without doubt that the impacts of the COVID-19 pandemic were unprecedented and substantial, causing a significant period to be not available to Company A to seek an appropriate replacement asset.

Conclusion

For these reasons, the Commissioner accepts that Company A has a special circumstance that warrants the favourable exercise of the Commissioner's discretion to extend the time to find replacement assets for a further year to 30 June 20XD under subsection 124-75(3).