Edited version of private advice

Authorisation Number: 1052031079924

Date of advice: 8 September 2022

Ruling

Subject: CGT - replacement asset

Question 1

Did capital gains tax (CGT) event A1 happen in the 20XW income year to the asset (being a 50% interest in a property) held by the Taxpayer?

Answer

Yes.

Question 2

Will the Commissioner exercise his discretion under paragraph 124-75(3)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow the Taxpayer an additional 12 months from 30 June 20XX, namely, until 30 June 20XY to acquire a replacement asset?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XW

Year ended 30 June 20XX

Year ended 30 June 20XY

The scheme commences on:

20XW

Relevant facts and circumstances

You and your business partner (Partner) together owned the property. You and your Partner have held each of your 50% ownership interests in the Property continuously.

Throughout the ownership period, the Property has been used a partnership comprising you and your Partner (the Partnership) to derive rental income from a tenant operating a business.

The Partnership does not conduct any business apart from renting out the Property.

The Property was compulsorily acquired by a government entity and published in the gazette of date in 20XW.

On a date later in 20XW, following proceedings that you and your Partner brought about, the government entity made an offer as to the total consideration for the compulsory acquisition of the Property. You accepted this offer.

On a date in 20XX you, your Partner and the government entity executed an acceptance deed.

You received your share of Consideration in three instalments, with the final payment on a date in 20XX.

You intend to use your 50% share of the Consideration to acquire a replacement asset.

Since receiving the Consideration, you have been actively searching for a suitable replacement asset for the Property. This includes having made several unsuccessful offers on potential replacement assets.

The delay in payment of the Consideration and finalisation of the acceptance deed with the government entity has considerably reduced the time available to find a replacement asset.

You had also had an accident early in 20XX which then led to a significant recovery and rehabilitation period, which affected your ability to acquire a replacement asset.

The COVID-19 pandemic has impacted you in the following ways:

• the timing and length of the legal proceedings, and
• the timing of when you received the Consideration in full.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 section 124-75

Reasons for decision

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

Question 1

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 government entity published the acquisition notice for the Property in the gazette on a date in 20XW, prior to when you received your first instalment of compensation. Therefore, the CGT event A1 occurred in the 20XW income year.

Question 2

Summary

The Commissioner will exercise his discretion under paragraph 124-75(3)(b) to allow you an additional 12 months from 30 June 20XX, until 30 June 20XY to incur some of the expenditure to acquire a replacement asset.

Detailed reasoning

Section 124-70 allows 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.

According to section 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.

(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.

(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 you as you are required to incur expenditure in acquiring another CGT asset to obtain the roll-over.

In accordance with subsection 124-75(3) you must 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.

In your situation, one year after the end of the income year in which the CGT event happened is 30 June 20XX. You have asked whether the Commissioner would allow further time for you to incur some of the expenditure in acquiring another CGT 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.

Example 3 in TD 2000/40 is relevant for you because of the delay caused by your legal dispute with the government entity about the amount of compensation being offered.

Example 1 in TD 2000/40 is also relevant as you received your final instalment of compensation very close to 30 June 20XX.

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