Edited version of private advice

Authorisation Number: 1052104424968

Date of advice: 4 April 2023

Ruling

Subject: Extension of time - compulsory acquisition

Question 1

Did capital gains tax ("CGT") event A1 under section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) happen in the 20XX income year to the property owned by the Taxpayers?

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 Taxpayers an additional 12 months from the resolution of the Dispute to acquire a replacement asset?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The Taxpayers, are Australian tax residents, who entered into a Joint Venture to acquire the Property as tenants-in-common.

The Property consists of the land.

On DDMMYY, a notice of intention to acquire interest in the Property was served by the Government.

On DDMMYY, the Government caused a Notice of Acquisition ("Acquisition Notice") to be published in the Government Gazette pursuant to the provisions of Division 4 of the Land Acquisition and Compensation Act 1986 (the "LACA").

The Taxpayer sought to challenge the acquisition process unsuccessfully.

The Government proceeded with the acquisition. On DDMMYY, the Government was registered as the proprietor on the Certificate of Titles.

On DDMMYY, the Government offered the sum of $XXXXXX to the Taxpayer for compensation in respect of the acquisition of the Property.

On DDMMYY, lawyers for the Government confirmed in writing that they have been instructed to pay advance compensation.

The Interim Payment was deposited electronically in the Taxpayer's bank account on DDMMYY.

The Taxpayer continues to be engaged in a dispute with the Government in relation to the value of the Property and the quantum of the final compensation amount.

Due to the nature of the Dispute and the respective parties' disagreement on the value of the Property, there continues to be significant delays in determining the final compensation sum to be offered to the Taxpayer for the Property.

The Taxpayers are unable to incur expenditure in acquiring another CGT asset within one year after the end of the 20XX income year as the final compensation amount to be received is uncertain and it is possible that the final compensation amount is less than the amount of the interim payment.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 104-10(2)

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

Income Tax Assessment Act 1997 Subdivision 124-B

Income Tax Assessment Act 1997 subsection 124-70(1)

Income Tax Assessment Act 1997 subsection 124-70(2)

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

Income Tax Assessment Act 1997 subsection 124-75(4)

Income Tax Assessment Act 1997 subsection 124-75(5)

Income Tax Assessment Act 1997 subsection 124-75(6)

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

Reasons for decision

Question 1

Summary

CGT event A1 occurred in respect of the Property, in the 20XX income year when the Minister published the Acquisition Notice for the Property in the gazette on 26 April 20XX.

Detailed reasoning

Section 104-10(2) of the ITAA 1997 specifies that a CGT event A1 occurs if a change of ownership occurs from one entity to another entity due to an act or event by operation of law.

Capital Gains Tax (CGT) event A1 is triggered as a result of acquisition of a CGT asset by another entity under a power of compulsory acquisition.

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.

Subsection 104-10(6) of the ITAA 1997 provides that the time of the event is the earliest of when compensation is received or when the change of ownership of an asset occurs.

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.

Application to your circumstances

Under subsection 104-10(6) of the ITAA 1997, CGT event A1 occurred on DDMMYY, when the Government caused a notice of acquisition to be published in the Gazette. As a result a change of ownership of the asset occurred. This was prior to the Taxpayers' receiving any compensation. Accordingly, CGT event A1 occurred on this date.

Question 2

Summary

The Commissioner will exercise his discretion under paragraph 124-75(3)(b) of the ITAA 1997 to allow an extension to obtain a replacement asset for landholdings that were compulsorily acquired by the Government until 30 June 20XX in order to meet the eligibility requirements for a Subdivision 124-B of the ITAA 1997 roll-over.

Detailed reasoning

Roll-over relief for the compulsory acquisition of a CGT asset is available where the conditions outlined in Subdivision 124-B of the ITAA 1997 are met.

Under subsection 124-70(1) of the ITAA 1997, an entity may be able to choose a replacement asset rollover if a CGT asset owned by the entity is compulsorily acquired by an Australian government agency paragraph 124-70(1)(a) of the ITAA 1997.

A replacement-asset rollover allows you, in special cases, to defer the making of a capital gain or loss from one CGT event until a later CGT event happens.

Subsection 995-1(1) of the ITAA 1997 defines an Australian government agency as a Commonwealth, a State or a Territory, or an authority of Commonwealth or of a State or Territory.

A further requirement is that the owner of the original asset must receive money or another CGT asset or both for the CGT event to be eligible for a rollover (subsection 124-70(2) of the ITAA 1997). On satisfying these conditions, section 124-75 of the ITAA 1997 provides other requirements which must be satisfied if money is received for the event happening.

Subsection 124-75(2) of the ITAA 1997 requires that the owner of the asset must incur expenditure in acquiring another CGT asset. Subsection 124-75(3) of ITAA 1997 requires the entity 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.

Subsection 124-75(4) of the ITAA 1997 requires that the replacement asset acquired must be used for the same or similar purpose as the taxpayer used the original asset. This replacement asset cannot become trading stock just after the acquisition or be a depreciating asset (subsection 124-75(5) of ITAA 1997), nor become a "registered emissions unit" just after the acquisition (subsection 124-75(6) of ITAA 1997).

In determining whether special circumstances exist for the Commissioner to extend the period in which to acquire a replacement asset, Taxation Determination TD 2000/40 Income tax: capital gains: what are 'special circumstances' for the purposes of subsection 124-75(3) of the ITAA 1997? (TD 2000/40) provides guidance on interpreting subsection 124-75(3) of the ITAA 1997, in particular what are 'special circumstances'.

TD 2000/40 states that the expression 'special circumstances' by its nature is incapable of a precise or exhaustive definition. What constitute 'special circumstances' depends on the facts of each particular case.

Example 3 in TD 2000/40 provides an illustration in which a taxpayer's asset is compulsorily acquired by a State authority. The taxpayer is then involved in a protracted legal dispute with the authority over the quantum of the compensation. In this instance, the Commissioner accepts that there are special circumstances to allow further time for the taxpayer.

In determining whether the discretion will be exercised, the Commissioner also considers the following factors:

•         there should be evidence of an acceptable explanation for the period of the 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;

•         account must be had of any unsettling of people, other than the Commissioner, or of established practices;

•         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.

Application to your circumstances

In the Taxpayers' case, Subdivision 124-B of the ITAA 1997 allows the Taxpayers to choose rollover relief for the land (CGT asset) compulsorily acquired by the Government, as they received money from the Government as part compensation. The compulsory acquisition by the Government of the Taxpayers' land satisfies the conditions in subsection 124-70(1) of the ITAA 1997. The receipt of monetary compensation as advance payment for compulsory acquisition of the land also meets the conditions of subsection 124-70(2) of the ITAA 1997.

As discussed in question 1 above, under subsection 104-10(6) of the ITAA 1997, CGT event A1 occurred when the Government took possession of the land on DDMMYY, when it was gazetted and the change of ownership of the asset occurred. Under paragraph 124-75(3)(b) of the ITAA 1997 the Taxpayers would need to acquire a replacement asset no later than one year after the end of the income year in which the gazettal took place, that is until 30 June 20XX.

However, due to special circumstances of the Taxpayers, mainly because of their ongoing dispute with the Government, it was not feasible for the Taxpayers to acquire a suitable replacement asset by the required time. Accordingly, the Taxpayers request the Commissioner's discretion to allow an extension of time in accordance with paragraph 124-75(3)(b) of the ITAA 1997 to acquire a replacement asset.

The Taxpayers are in dispute over the amount offered by the Government as compensation for the land compulsorily acquired, and have commenced proceedings to claim a greater amount. The Taxpayers continue to be engaged in a dispute with the Government in relation to the value of the property and the quantum of the final compensation amount. As at DDMMYY this has remained on-going. As such, purchasing a replacement asset has been delayed.

The lack of certainty as to the amount and timing of the compensation it will receive has also delayed the Taxpayers' ability to search and acquire an appropriate replacement asset.

Based on these facts, it is deemed that special circumstances exist to warrant the Commissioner to exercise his discretion and allow an extension of time to obtain a replacement asset, as it would be fair and equitable to do so given that the circumstances represent an acceptable explanation for the delay.

Also by granting this extension of time to acquire replacement asset:

•         there does not appear to be any prejudice to the Commissioner or any other parties;

•         there is no unsettling of people or of established practices;

•         there does not appear to be any mischief involved in this case; and

•         the Commissioner considers it to be fair to people in like positions and the wider public interest.

Therefore, the Commissioner will exercise his discretion under paragraph 124-75(3)(b) of the ITAA 1997 to allow an extension to obtain a replacement asset for landholdings that were compulsorily acquired by the Government until 30 June 20XX.