Edited version of private advice

Authorisation Number: 1052103707260

Date of advice: 16 June 2023

Ruling

Subject: CGT - replacement asset

Question 1

Will the Commissioner exercise his discretion under subsection 124-75(3) of the Income Tax Assessment 1997 (ITAA 1997) to allow the Entity additional time until 30 June 20XX acquire a replacement asset?

Answer

Yes.

This ruling applies for the following period

Year ended June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

1.    The Trust acquired a property at XXX XXXXXXX Road, XXXXXXX XXX XXXX on 2 July 19XX which was used as a commercial rental property throughout the ownership period.

2.    On 30 November 20XX, The Trust received a notice of intention from the agency, for the compulsory acquisition of the property under the State Government Act 19WW.

3.    On 27 May 20XX, the agency compulsorily acquired the property. The Trust began to search for a replacement property at the same time.

4.    On 10 June 20XX, the Trust received an initial offer of compensation letter including a valuation of the property.

5.    The agency deposited compensation proceeds of $X, XXX,XXX in the relevant bank account on 22 July 20XX, (a new financial year period).

6.    The Trust was in negotiation with the agency on the amount of final compensation from 10 May 20XX, until May 20XX.

7.    The Trust received the final revised compensation amount on 30 June 20XX.

8.    Due to the length of the ongoing negotiations, the Trust was reluctant to commit to an acquisition of a replacement asset prior to confirmation of the compensation amount.

9.    Since receiving the final compensation amount on 30 June 20XX, the Trust has actively looked for a suitable replacement asset.

10.  The trust experienced difficulties in finding a suitable replacement asset due to a competitive market created by the large scale of compulsory acquisitions by the agency and the need for many impacted business owners to bid for the same properties.

11.  On 6 March 20XX, the Trust acquired a replacement property at X XXXXXX Place, XXXXXXXX XXX XXXX.

12.  The replacement property was not used as an item of trading stock, a depreciating asset or to become a register emissions unit.

Relevant legislative provisions

Section 104-5 of the ITAA 1997

Subsection 104-10(1) of the ITAA 1997

Subsection 104-10(2) of the ITAA 1997

Subsection 104-10(6) of the ITAA 1997

Section 124-70 of the ITAA 1997

Section 124-75 of the ITAA 1997

Subsection 124-75 (1) of the ITAA 1997

Subsection 124-75 (2) of the ITAA 1997

Subsection 124-75 (3) of the ITAA 1997

Subsection 124-75(5) of the ITAA 1997

Subsection 124-75(6) of the ITAA 1997

Subsection 995-1 (1) of the ITAA 1997

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless indicated otherwise.

Question 1

Will the Commissioner exercise his discretion under subsection 124-75(3) of the Income Tax Assessment 1997 to allow the Entity additional time until 30 June 20XX acquire a replacement asset?

EXPLANATION OF LEGISLATION

Disposal of CGT Asset - CGT event A1

13.  Section 104-5 sets out a summary of the CGT events. CGT event A1 is the disposal of a CGT asset as per subsection 104-10(1). Subsection 104-10(2) further indicates, the taxpayer will dispose of the CGT asset if a change of ownership occurs from the taxpayer to another entity.

14.  Subsection 104-10(6) summarises that a compulsory acquisition of a CGT asset will commence if the CGT asset was acquired by the agency, from the Trust, under a power of compulsory acquisition conferred by an Australian law or Foreign law, at the earliest time of the CGT event:

•         (a) When the taxpayer received the 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.

CGT events giving rise to the roll-over

15.  Section 124-70 explains the events giving rise to a roll-over. In particular, paragraph 124-70(1) provides that a roll-over is obtainable by a taxpayer who owns a CGT asset that has been compulsorily acquired by an Australian government agency.

16.  Subsection 124-70(2) clarifies that a taxpayer must receive money or another CGT asset (except a car, motorcycle or similar vehicle) or both, as compensation for the event happening.

Definition of Australian Government agency

17.  The term 'Australian Government agency' is defined in subsection 995-1(1) as:

•         the Commonwealth, a State or a Territory; or

•         an authority of the Commonwealth or of a State or a Territory.

Other requirements to CGT event if taxpayer received money

18.  Subsection 124-75(1) provides that if money has been received for the CGT event, other requirements must be satisfied to allow a taxpayer to choose to obtain a roll-over.

19.  Subsection 124-75(2) further explains to be eligible for the rollover, the taxpayer 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.

20.  Subsection 124-75(3) also details at least some 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

What are 'special circumstances'

21.  As detailed by Taxation Determination (TD 2000/40) Income tax - capital gains - what are 'special circumstances' for the purposes of subsection 124-75(3) of ITAA 1997? - the expression special circumstances in relation to subsection 124-75(3) is by its nature incapable of a detailed or comprehensive definition.

22.  Some examples of special circumstances are provided in the Tax Determination to give guidance on what would be considered special circumstances by the Commissioner.

23.  In this incidence, example 1 in TD 2000/40 provides a scenario in which a taxpayer's asset is compulsorily acquired by a State Authority. The taxpayer is then involved in a legal dispute with the authority over the compensation received within less than 12-month period before they are required by subsection 124-75(3) to replace the asset. In this occasion, the commissioner accepts that there are special circumstances to allow further time for the taxpayer.

24.  Example 3 of TD 2000/40 outlines another case in which it would be accepted that special circumstances would exist. In this example Graeme's commercial property was compulsorily acquired by a State authority. He was in protracted legal disputes with the State authority regarding the quantum of the compensation figure. Based on these facts the Commissioner would accept that there are special circumstances to allow further time, pursuant to subsection 124-75(3).

Application to the Trust's circumstances

25.  The disposal of the Commercial property by the taxpayer through compulsory acquisition from the agency satisfies section 104-5 such that CGT event A1 occurred.

26.  The earliest time of the CGT event, under paragraph 104-10(6)(b) is consequently the date the property was compulsorily acquired as the 'asset's owner' by the agency from the taxpayer on 27 May 20XX.

27.  In relation to a CGT event giving rise to a roll-over based on the CGT asset being compulsorily acquired, paragraph 124-70(1) the Entity must satisfy the relevant provisions in Division 124. Paragraph 124-70(1) requires that for a roll-over to be obtainable to an entity, which owns a CGT asset, that asset must have been compulsorily acquired by an Australian government agency. The agency is an Australian government agency, so this provision is satisfied.

28.  In addition, subsection 124-70(2) is satisfied due to the Trust receiving a disclosed amount of money of $X, XXX,XXX as initial compensation proceeds for the CGT event occurring.

29.  The relevant provision for the Entity is paragraph 124-75(2)(a) due to the Entity being required to incur expenditure to acquire another CGT asset to gain the rollover. The entity has incurred expenditure to acquire another CGT asset.

30.  As the Trust didn't acquire a replacement asset prior to the disposal of the property, to satisfy subsection 124-75(3), the Trust must incur at least some expenditure in acquiring another CGT asset no later than 30 June 20XX (this is one year after the end of the income year in which the event happened) or within further time the Commissioner allows in special circumstances after the end of the income year in which the event happens under paragraph 124-75(3)(b).

31.  The Trust acquired the replacement asset on 20 March 20XX which is post the 30 June 20XX deadline.

32.  As the acquisition of the replacement property was not used as an item of trading stock, depreciating asset or to become a register emissions unit, this meets the requirements under subsection 124-75(5) & (6) of the ITAA 1997.

33.  The Commissioner accepts that the reason for failure to acquire a replacement asset within the requisite period was due to special circumstances, being that:

•         delays caused by the negotiations with the agency, on the amount of final compensation for the compulsory acquisition of the property, prevented the acquisition of a replacement asset within the initial 12-month period.

•         The large scale of competition, as a result of the compulsory acquisition process, in the search for replacement assets ensured properties were difficult to source in a timely fashion.

34.  Therefore, the Commissioner will exercise his discretion under paragraph 124-75 (3)(b) to allow additional time until 30 June 20XX for the Trust to acquire a replacement CGT asset.