Edited version of private advice

Authorisation Number: 1052011077026

Date of advice: 3 August 2022

Ruling

Subject: Extension of time to acquire a replacement asset

Question

Will the Commissioner of Taxation exercise his discretion to allow the taxpayer an extension of time to 30 June 20XX under subsection 124-75(3) of the Income Tax Assessment Act 1997?

Answer

Yes.

This ruling applies for the following periods:

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Taxpayer is the trustee of an Australian discretionary resident trust established before 20 September 1985.

The Taxpayer forms part of a group whose main business operation involves owning, developing and managing substantial office, retail and other developments in both CBD and metropolitan business districts in Australia.

The Taxpayer's group assesses and acquires premier commercial real estate with development potential, redevelops the acquired assets to realise their capability and continues to manage the property with the view to long-term profit. Often this requires acquiring a number of separate land holdings over an extended period of time until the consolidated land held is considered appropriate for redevelopment. Once redeveloped, the property is managed by the Taxpayer's group and held for long term rent.

Over a period of about 20 years, the Taxpayer acquired the various parcels of land (the Property).

The Taxpayer was at all times the owner and tenant in common in equal shares of the Property with Entity A (the Owners). Entity A is not a member of the Taxpayer's group and is owned by another property group, with which the taxpayer's group has a business relationship.

The Property was at all material times during the Taxpayer's ownership period leased to numerous commercial and retail tenants and derived long term rental income. The Property was held by the Taxpayer on behalf of its trust on capital account and did not represent trading stock.

In 20xx, the Council approved a development application for the Property for the demolition of existing buildings and the construction of a multi-storey commercial office tower.

In 20xx, Sydney Metro (Metro) advised that the Owners that the Property will be required for the purpose of the construction of a railway station forming part of the Sydney Metro West Project, and commenced commercial discussions and negotiations to acquire it.

As an agreement was not reached between the Owners and the Metro, in 20xx, a Proposed Acquisition Notice under Section 11 of the Land Acquisition (Just Terms Compensation) Act 1991 was issued by Metro confirming its intention to compulsorily acquire the Property.

In 20xx (the Acquisition Date), the Metro compulsorily acquired the Property in accordance with the Land Acquisition (Just Terms Compensation) Act 1991.

As at the Acquisition Date, a mixed-use office and retail complex was situated on the Property and it was leased to and occupied by various tenants.

Metro subsequently offered compensation of approximately $xx million to the Owners in its compensation notice with the majority of the amount being paid to the Owners.

The Owners lodged an objection in the Land and Environment Court of New South Wales (the court) to the amount of compensation offered, requesting compensation of more than $xx million. This claim may increase in the course of the proceedings.

The court has listed the matter for hearing for a future date.

The Taxpayer submits that it has commenced acquiring some properties as possible replacement assets for the Property. Although some of the properties were acquired with the Taxpayer as the sole owner rather than as a tenant in common, all the properties are currently leased to commercial and retail clients, and the Taxpayer's intention is to hold these properties for long term commercial and retail leasing.

The Taxpayer submits that:

•         It intends to acquire more replacement assets when the legal proceedings in the court have been concluded and a final amount of compensation amount has been determined.

•         It cannot reasonably determine the amount of the proceeds it will receive to invest to acquire more replacement assets until the proceedings have been completed and the final compensation amount is known. Given the status of these proceedings, the Trustee expects that this amount may not be known until sometime in a future year.

Relevant legislative provisions

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

Reasons for decision

Involuntary disposal of a CGT asset

Section 124-70 describes different events when a roll-over is available to an entity if that event happens to the Capital Gains Tax (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 as a Commonwealth, a State or a Territory or an authority of Commonwealth or of a State or Territory. In this case, the Property was compulsorily acquired by the Metro, a state agency. Therefore, the Trustee can choose a roll-over in relation to the capital gain that the Trustee received from the compulsory acquisition, 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.

In the Taxpayer's case, their original asset, namely the Property, is not lost or destroyed. Therefore, the relevant provision for the Trustee is paragraph 124-75(2)(a) whereby it is required to incur expenditure to acquire another CGT asset in order 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 event is determined by subsection 104-10(6). The time of the event will be the earliest of:

•         when you received full compensation from the entity;

•         when the entity becomes the asset's owner;

•         when the entity entered it under that power, or

•         when the entity took possession under that power.

In the Taxpayer's case, the Property was compulsorily acquired by Metro, and it had received majority of the payment. The time of the event under subsection 104-10(6) is therefore the date when the Property was compulsorily acquired.

The Taxpayer did not acquire a replacement CGT asset prior to the disposal of the Property and therefore to satisfy subsection 124-75(3), a replacement CGT asset must be acquired no later than 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)).

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.

In determining whether special circumstances exist that will allow the Commissioner to extend the period to acquire a replacement asset, regard must be had to 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).

In determining if the discretion would be exercised, the Commissioner will consider the following factors:

•         there should be evidence of an acceptable explanation for the period of extension requested and that it would be fair and equitable in the circumstances to provide such an extension;

•         account must be had to 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;

•         there must be a consideration of fairness to people in like positions and the wider public interest;

•         whether there is any mischief involved; and

•         a consideration of the consequences.

TD 2000/40 states that the expression 'special circumstances' in the context of subsection 124-75(3) of the ITAA 1997 by its nature is incapable of a precise or exhaustive definition. Some examples of special circumstances are provided under the tax determination. The Commissioner has granted an extension of time where there have been special circumstances and there is an acceptable explanation for the period of extension requested. These can include, but are not limited to, medical or financial issues, personal issues, or natural disasters.

Example 3 of TD 2000/40 states:

6. Graeme had a commercial property compulsorily acquired by a State authority. Graeme is having a protracted legal dispute with the authority over the quantum of the compensation. On these facts, we would accept that there are special circumstances to allow further time.

The Owners (including the Taxpayer) lodged an objection in the court to the amount of compensation offered, requesting compensation of more than $xxx million, being more than the amount of million offered in the compensation notice issued by Metro.

The court has listed the matter for hearing on a future date. The Taxpayer has submitted that given the status of these proceedings, it is expected that the exact compensation amount may not be known until sometime in a future year.

To date, the Taxpayer has acquired a few properties as replacement assets for the Property but requires more time to acquire further replacement assets, as the final amount of compensation it will receive for this purpose is not known until after the completion of the litigation and the payment of the final compensation amount.

The Commissioner considers that it would be reasonable to give the Taxpayer further time to search for further replacement assets for the Property following the court's determination, given that the quantum of compensation which will ultimately be received by the Trustee, being essential to the acquisition of a suitable replacement property, will not be known prior to the determination.

Conclusion

Based on the guidelines in TD 2000/40 and upon a review of the facts in this case, it is considered that the Taxpayer's situation falls within scope of what would be considered special circumstances which would warrant the Commissioner allowing further time under paragraph 124-75(3)(b) to 30 June 20XX.