Edited version of private advice

Authorisation Number: 1052004153999

Date of advice: 7 July 2022

Ruling

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

Question

Will the Commissioner exercise his discretion under paragraph 124-75(3)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) to extend the time limit for a replacement asset/s in regard to the Original Asset compulsorily acquired to 30 June 20XZ?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XW

Year ended 30 June 20XX

Year ended 30 June 20XY

Year ended 30 June 20XZ

The scheme commences on:

20XW

Relevant facts and circumstances

You held an interest in a lease (Original Asset) over a part of some land where you carried on your business.

A government authority compulsorily acquired the Original Asset.

The compensation for the compulsory acquisition will result in a taxable capital gain.

You have received an advance payment of a percentage of the compensation offered. Prior to this you were not able to find a replacement asset.

The amount of the compensation is in dispute and you have commenced legal proceedings in relation to this.

Given the significant difference in opinion on value between the parties, resolving the dispute will take a significant amount of time. You have provided an estimated timeframe based on legal advice.

Without knowing the amount of compensation, it is not feasible for you to invest significant resources or to incur expenditure on a replacement asset.

You will need time to find a suitable replacement asset once the amount of compensation is known.

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.

Question 1

Summary

The Commissioner will exercise his discretion in subsection 124-75(3) and allow an extension of time until 30 June 20XZ to 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 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.

To be eligible for a roll-over, subsection 124-70(2) provides that the entity must receive money or another CGT asset (except a car, motorcycle, or similar vehicle) or both as compensation for the event happening.

An authority of a State compulsorily acquired the Original Asset, and you have received advance payment of compensation for CGT event A1.

Subsection 124-70(3) does not apply as you as youwere not a foreign trust for CGT purposes as defined in subsection 995-1(1) just before the compulsory acquisition.

Consequently, 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.

Paragraph 124-75(2)(a) applies to the you, and you are required to incur expenditure in acquiring another CGT asset to obtain the roll-over.

Subsection 124-75(3) requires you to incur some of that 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 timing of 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.

The acquisition notice for the Original Asset was published in the Government Gazette on a date in 20XW, prior to you receiving an advance payment of compensation, therefore, it is the time of the event.

You did not acquire a replacement asset prior to the disposal of the Original Asset therefore to satisfy subsection 124-75(3), you must incur at least some of the expenditure in acquiring another CGT asset no later than 30 June 20XX, or within such further time as the Commissioner allows in 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). 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 in TD 2000/40 is relevant for you because of your legal dispute about the amount of compensation being offered.

You are unable to accurately anticipate the expected amount of compensation as the amount received so far may change, and they may be required to repay part of that amount. This significantly impacts your ability to find a suitable replacement asset.

Additionally, you will need time to find a suitable replacement asset once the amount of compensation is known.

The 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 20XZ for you to incur some of the expenditure to acquire a replacement CGT asset.