Edited version of private advice

Authorisation Number: 1052130398766

Date of advice: 28 June 2023

Ruling

Subject: Commissioner's discretion - extension of time

Question

Will the Commissioner exercise his discretion under subsection 124-75(3) of the Income Tax Assessment Act 1997 (ITAA 1997)to allow you an extension of time to 30 June 2024 to incur expenditure to acquire another CGT asset under subsection 124-75(2) of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

1 July 20XX to 30 June 20XX

The scheme commenced on:

30 June 20XX

Relevant facts and circumstances

You are an Australian resident for tax purposes.

You acquired property prior to the introduction of CGT in 19XX, satisfying your statuses as pre-CGT assets and therefore are not subject to CGT upon disposal.

You acquired property in 20XX and hence, it will be subject to CGT upon disposal.

Your original Properties had no registered leases on Title relating to any identified lessees, however, had unregistered leases with multiple related parties. As the Original Properties derived long term rental income, it is understood that you held the Original Properties on capital account for the purpose of deriving commercial rent. They did not represent trading stock, or an asset used in "business".

In 20XX, XX sent letters to you advising the acquisition of properties, including the Original Properties, and that the XX intended instructing XX to commence the process for the acquisition of the identified properties and related interests.

XX sent further letters in 20XX, in relation to the negotiations that had been occurring in relation to the Original Properties, which outlined that upon failing a final agreement it was their intention to utilise the compulsory acquisition provisions contained within the Land Acquisition (Just Terms Compensation) Act 1991 (NSW).

XX made payments to you in 20XX as advance payments to assist with searching for a replacement property.

Activities commenced in relation to searching for a replacement property for the Original Properties when it became apparent that its acquisition by XX was inevitable.

You found a replacement property, which was controlled by you.

The replacement property was sold to you with the contract exchanging in 20XX.

The unregistered leases of the Original Properties with the multiple related parties were renewed in 20XX for another 5 years.

As agreement was not reached between you and XX, Proposed Acquisition Notices under Section 11 of the Land Acquisition (Just Terms Compensation) Act 1991 (NSW) were issued confirming XX intention to compulsorily acquire the Original Properties.

The Acquisition Notices were published in Government Gazette in 20XX. The effect of the Acquisition Notices were to extinguish your interests in the Original Properties and convert such interest into a claim for monetary compensation.

In late 20XX, XX sent letters to you, offering an amount of compensation for each respectively and recoupment of legal fees for the compulsory acquisition of the land, as determined by the XX.

In early 20XX, XX sent a further letter to you, offering an early advance (part) payment of compensation.

In early 20XX, you lodged a Class 3 Application in the Land and Environment Court of New South Wales, for the amount of compensation offered, requesting compensation in excess of the original offer.

The XX listed the matter for hearing in July 20XX.

In 20XX, XX sent a further letter to you in relation to the advance payment of compensation received, in accordance with section 68 of Land Acquisition (Just Terms Compensation) Act 1991 (NSW). The letter further stated that XX would engage a solicitor to act for it in response to the Class Application lodged by you.

You received the above proceeds were received by you in 20XX.

You acquired the Replacement Property in 20XX.

You satisfy all the requirements of Subdivision 124-B of the in order to obtain roll-over relief.

You wish to acquire additional replacement properties and apply the rollover relief under Sub-division 124-B of the Act for the balance of the potential compensation as per the relevant court proceedings.

Given the circumstances of these proceedings, the negotiation has only just been completed and the Deed of Release is currently in the process of being drafted.

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 Section 124-70

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(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

The Commissioner will exercise his discretion under subsection 124-75(3) of the Income Tax Assessment Act 1997(ITAA 1997) to allow you an extension of time to 30 June 2024 to incur expenditure to acquire another CGT asset under subsection 124-75(2) of the ITAA 1997.

Detailed reasoning

All legislative references are to the Income Tax Assessment Act 1997.

Request for extension of time to disclose compensation amount received for compulsory acquired properties.

Section 124-70 describes different events when a roll-over is available to an entity if that event happens to the Capital Gains Tax (CGT) asset of that entity. According to subsection 124-70(1), an entity 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 entity 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 as a Commonwealth, a State or a Territory or an authority of Commonwealth or of a State or Territory. In this case, the Property was compulsorily acquired by the XX in 20XX. Therefore, you can choose a roll-over in relation to the capital gain that you received from the compulsory acquisition, 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.

In your case, the original asset, namely the Property, is not lost or destroyed. Therefore, the relevant provision for you is paragraph 124-75(2)(a) whereby it is required to incur expenditure to acquire another CGT asset in order 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 event happens or within such further time as the Commissioner allows in special circumstances.

The time of the event is determined by subsection 104-10(6). The time of the event will be the earliest of:

• when you received full compensation from the entity,
• when the entity becomes the asset's owner,
• when the entity entered it under that power, or
• when the entity took possession under that power.

In your case, the Property was compulsorily acquired by XX in 20XX, and proceeds were paid to you. The time of the event under subsection 104-10(6) is therefore the date when the Property was compulsorily acquired, which was 20XX.

You acquired one replacement property for in 20XX and wish to acquire additional replacement properties. As you did not acquire all replacement CGT assets prior to the disposal of the Property and therefore to satisfy subsection 124-75(3), a replacement CGT asset must be acquired no later than 30 June 20XX, (being one year after the end of the income year in which the event happened), or within such further time as the Commissioner allows in special circumstances (paragraph 124-75(3)(b)).

Special circumstances

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.

In determining whether special circumstances exist that will allow the Commissioner to extend the period to acquire a replacement asset, regard must be had to 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? (TD 2000/40).

In determining if the discretion would be exercised, the Commissioner will consider the following factors:

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

•         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.

TD 2000/40 states that the expression 'special circumstances' in the context of subsection 124-75(3) of the ITAA 1997 by its nature is incapable of a precise or exhaustive definition. Some examples of special circumstances are provided under the tax determination. The Commissioner has granted an extension of time where there have been special circumstances and there is an acceptable explanation for the period of extension requested. These can include, but are not limited to, medical or financial issues, personal issues, or natural disasters.

Example 3 of TD 2000/40 states:

6. Graeme had a commercial property compulsorily acquired by a State authority. Graeme is having a protracted legal dispute with the authority over the quantum of the compensation. On these facts, we would accept that there are special circumstances to allow further time.

On 20XX, you lodged an objection in the Land and Environment Court to the amount of compensation offered, requesting compensation of $XX, being more than the amount of $XX offered in the compensation notice issued by XX dated 20XX.

The court has listed the matter for a hearing on 20XX.

The negotiations have only been completed in 20XX in which the Deed of Release is currently in the process of being drafted.

You satisfy all of the requirements of Subdivision 124-B of the ITAA 1997 in order to obtain roll-over relief.

You wish to acquire additional replacement properties and apply the rollover relief under Sub-division 124-B of the Act for the balance of the potential compensation as per the relevant court proceedings.

With the uncertainty of final compensation amount, you have not been able to reasonably assess the balance of the proceeds for the purposes of acquiring additional replacement properties until the relevant court proceedings referred to above have been completed.

To date, you have not acquired further replacement assets for the Property and are unlikely to acquire a replacement asset until after the completion of the litigation and the payment of the final compensation amount.

The Commissioner considers that it would be reasonable to give you further time to search for a replacement asset for the Property following the court's determination, given that the quantum of compensation which will ultimately be received by you, being essential to the acquisition of a suitable replacement property, will not be known prior to the determination.

Conclusion

Based on the guidelines in TD 2000/40 and upon a review of the facts in this case, it is considered that your situation falls within scope of what would be considered special circumstances which would warrant the Commissioner allowing further time under paragraph 124-75(3)(b) to 20XX.