Edited version of private advice

Authorisation Number: 1052020502138

Date of advice: 11 August 2022

Ruling

Subject: CGT - acquisition of replacement asset

Question

Will the Commissioner exercise his discretion under subsection 124-75(3) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow the taxpayer an additional 12 months within which to acquire replacement asset regarding the compulsorily acquired properties?

Answer

Yes, the Commissioner will exercise his discretion under subsection 124-75(3) of the ITAA 1997 to allow the taxpayer an extension of 12 months.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

Day Month 20XX

Relevant facts and circumstances

The taxpayers owned properties where they conducted their business operations.

The properties were compulsorily acquired by a Government Authority (the Authority).

The original offer price for the properties was paid with additional compensation paid later.

The value of the properties became the subject of contention and litigation process.

The taxpayer has full intention of purchasing a replacement asset to continue their business operation.

The taxpayer has been actively and diligently searching for a suitable property during the court proceeding to enable them to acquire a replacement asset as soon as possible to continue their business which has been interrupted by the compulsory acquisition.

The taxpayer encountered several issues in search for a replacement property.

The taxpayer faced challenges in determining what would be an appropriate property given the level of compensation to be received and was highly uncertain as there was a large gap between the Authority's position and the taxpayers. Furthermore, the onset of COVID-19 significantly affected the process in search of a replacement asset.

The taxpayer took relevant and appropriate steps to carry out their obligations, like engaging solicitors, appointing an independent valuation expert, engaging tax advisors to provide tax advice regarding Subdivision 124-B of the ITAA 1997 compulsory acquisition, rollover and the requirements in regard to the appropriate type and value of replacement asset and liaising with the major real estate agents in search for a replacement property

The taxpayer states, despite their difficulty they still fully intend to acquire a replacement asset to carry on with their business, and to date have not used the funds for other investments.

Relevant legislative provisions

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

Income Tax Assessment Act 1997section 124-70

Income Tax Assessment Act 1997section 124-75

Income Tax Assessment Act 1997subsection 124-75(1)

Income Tax Assessment Act 1997 paragraph 124-75(2)(a)

Income Tax Assessment Act 1997paragraph 124-75(3)(a)

Income Tax Assessment Act 1997paragraph 124-75(3)(b)

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

Reasons for decision

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

Summary

The Commissioner will exercise his discretion under subsection 124-75(3) to allow the taxpayer an extension of 12 months until 30 June 2023.

Detailed reasoning

Section 124-70 describes different events when a roll-over is available to an entity if that event happens to a Capital Gains Tax (CGT) asset of that entity. According to subsection 124-70(1), a taxpayer 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 taxpayer 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.

An Australian government agency compulsorily acquired your properties. Therefore, the agency's compulsory acquisition of your properties are events which gives rise to a roll-over.

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 you 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 CGT 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.

The time of the event under subsection 104-10(6) is therefore the date the property was compulsorily acquired by the agency.

You requested for an extension of time from the Commissioner to acquire a replacement asset.

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.

Restrictions and lockdowns imposed by the State Government of Australia arising from the COVID-19 pandemic have significantly affected your ability to look for an appropriate replacement asset that suits your business needs. You have kept the compensation amount to acquire a replacement asset and are actively trying to locate an appropriate property.

Your circumstances fall 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 for 12 months for you to acquire a replacement CGT asset.