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Edited version of private advice
Authorisation Number: 1052110248030
Date of advice: 20 April 2023
Ruling
Subject: CGT - rollover - compulsory acquisition
Question 1
Has the same or similar purpose test in subsection 124-75(4) of the Income Tax Assessment Act 1997 (ITAA 1997) been satisfied?
Answer
Yes.
The guidance provided by Taxation Determination TD 2000/42 Income tax: capital gains: what is the scope of the words 'use the other asset... for the same purpose... or for a similar purpose' in subsection 124-75(4) of the Income Tax Assessment Act 1997 in relation to a replacement asset? (TD 2000/42), states that whether an asset is used for the same or similar purpose as another asset is a question of fact and degree. In this case, there is evidence that you acquired the Replacement Properties for the purpose of being used in a primary production business, that is, the same purpose as the Compulsory Acquired Property.
Question 2
Has the reasonable time element in subsection 124-75(4) of the ITAA 1997 been satisfied?
Answer
Yes.
The guidance provided by Taxation determination TD 2000/44 Income tax: capital gains: what constitutes 'a reasonable time' for the purposes of subsection 124-75(4) of the Income Tax Assessment Act 1997? (TD 2000/44), states that that the reasonable time test relation to the use of a replacement asset after its acquisition will be satisfied if the taxpayer continues to own the asset without a change in its nature or use. It is accepted, for the Replacement Properties, the period from the date of acquisition to the present date will satisfy the reasonable time element.
Question 3
Has the reasonable time element in subsection 124-75(4) of the ITAA 1997 (ITAA 1997) been satisfied such that you may consider leasing the replacement asset to a third party.
Answer
Yes.
Our view is that the same or similar purpose test will no longer be satisfied if the Replacement Properties is leased out to a third party as the Properties will no longer be used in carrying on a business, but instead for deriving rental income. However, it is accepted that the roll-over relief will still be available as the Replacement Properties will have previously satisfied the same or similar purpose test and reasonable time element.
This ruling applies for the following periods:
Year ending 30 June 201X
Year ending 30 June 201X
Year ending 30 June 201X
Year ending 30 June 201X
Year ending 30 June 201X
Year ending 30 June 20XX
Year ending 30 June 20XX
Year ending 30 June 20XX
Year ending 30 June 20XX
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
You are operating a business in the primary production industry through a partnership.
Together with your partner as tenants in common with equal shares, you were the registered proprietors of property that was used in carrying on your business.
In 20XX, two thirds of the total area of the property was compulsorily acquired by an Australian Government Agency. You received compensation for the acquisition (the Compulsory Acquired Property).
You purchased two properties as replacement assets for the compulsory acquired properties (the Replacement Properties) in the 20XX-XX financial year.
You are now considering leasing the Replacement Properties to a related third party to derive income.
Relevant legislative provisions
Income Tax Assessment Act 1997 subsection 124-75(4)