Edited version of private advice

Authorisation Number: 1052133053328

Date of advice: 5 July 2023

Ruling

Subject: CGT - replacement asset rollover

Question 1

Does the deposit paid by Company A for the property located at Location A meet the requirement, imposed by subsection 124-75(3) of the Income Tax Assessment Act (ITAA 1997), for Company A to incur 'at least some' of the expenditure within the relevant period?

Answer

Yes.

Question 2

Will the Commissioner exercise his discretion pursuant to subsection 124-75(3) of the ITAA 1997 to allow an extension of time in which to spend some of the proceeds following the compulsory acquisition of the Company A's asset in order to meet the eligibility requirements for a Subdivision 124-B of the ITAA 1997 roll-over?

Answer

No.

Question 3

If the answer to Question 2 is yes, will the Commissioner allow a further time until the date, as specified in the application, for Company A to acquire a replacement asset?

Answer

As the answer to Question 2 is no, this question has not been answered.

This ruling applies for the following periods:

Year ended 30 June 2023

Year ended 30 June 2024

The scheme commenced on:

XX/XX/XXXX

Relevant facts and circumstances

1.         On Date X, Company A received a notice advising that their interest in the land at Location X was to be compulsorily acquired, pursuant to legislation in effect in the State of Australia in which Location X is situated.

2.         At the time Location X was compulsorily acquired Company A held non-residential land and property (including Location X) which it leased and was generating rental income from those leases.

3.         An acquisition notice was published in the relevant State Government Gazette and a compensation amount was offered to Company for the compulsorily acquired landholdings.

4.         Company A subsequently objected to the compensation amount offered and made a claim for a higher amount of compensation.

5.         Company A was paid part of the compensation amount when the objection was lodged with the balance to be paid when the dispute was settled.

6.         The dispute was settled and Company A received and the balance of the total settled compensation amount on date Z. Date Z was before 30 June 2021.

7.         While the dispute was in progress, the Commissioner had ruled that special circumstances existed to extend the time under subsection 124-75(3) in which some of the expenditure must be incurred in acquiring another replacement asset from the end of the income year in which the landholdings were acquired, to 30 June 2021.

8.         Before 30 June 2021, Company A acquired Location B which was for a price that was less than the total compensation amount Company A received for their land at Location X.

9.         On a date around 30 June 2021 (the Previous Ruling Date), the Commissioner the ruled that special circumstances, including factors related to the COVID-19 pandemic still existed[1] and extended the time under subsection 124-75(3) in which some of the expenditure must be incurred in acquiring another replacement asset to Date Y.

10.      Since the Previous Ruling Date, Company A identified the property at Location A and entered into a contract to purchase Location A on a date (the Contract Date) before Date Y.

11.      Under the terms of purchase Company A was required to pay a non-refundable deposit on a date (Deposit Date) which was paid before Date Y.

12.      The purchase of Location A was settled on a date (the Settlement Date) after Date Y.

13.      The total amount paid by Company A for Location A exceeded the balance of the compensation amount received Company A received for Location X.

Relevant legislative provisions

Income Tax Assessment Act Subdivision 124-B

Income Tax Assessment Act subsection 124-75(2)

Income Tax Assessment Act subsection 124-75(3)

Income Tax Assessment Act paragraph 124-75(3)(b)

Income Tax Assessment Act subsection 124-85(2)

Reasons for decision

All legislative references are to the ITAA 1997 unless otherwise indicated.

Issue 1

Question 1

Does the deposit paid by Company A for the property located at Location A meet the requirement, imposed by subsection 124-75(3) for Company A to incur 'at least some' of the expenditure within the relevant period?

Summary

Yes, the deposit was incurred by Company A before Date Y and that deposit was some of the total expenditure incurred in acquiring Location A.

Detailed reasoning

14.      Subsection 124-75(2) says 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.

15.      Subsection 124-75(3) then states:

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.

16.      The phrase 'incur expenditure' is not defined. The Macquarie Dictionary[2] says meanings of:

•        'incur' include 'to become liable or subject to through one's own action; bring upon oneself'

•        'expenditure' includes 'that which is expended; expense'

•        'expense' includes a 'cost or charge'.

17.      The Commissioner's view, as set out in TD 2000/39[3], is that the word 'incur' has the same meaning as under the general deduction provision in subsection 8-1(1). In other words, it means that you outlay expenditure, or have definitively committed or subjected yourself to a presently existing liability to outlay the expenditure.

18.      TR 97/7[4]provides guidance about the Commissioner's view on the meaning of 'incurred' under the general deduction provision. Paragraph 6 of TR 97/7 summarises some 'general rules' taken from case law, relevant to determining whether and when an outgoing has been incurred, including:

•        a taxpayer need not have actually paid any money provided they are definitively committed, or completely subjected to paying it

•        a taxpayer may have a presently existing liability, even though that may be defeasible, or it cannot be precisely ascertained

•        whether there is a presently existing liability is a legal question in each case, considering the circumstances, including the terms of the relevant contract or arrangement

•        for payments made in the absence of a presently existing liability, the expense is incurred when the money is paid, and ceases to the taxpayer's funds.

19.      As settlement on Location A occurred on the Settlement Date for the contract price it can be concluded that Company A incurred expenditure to acquire the Location A.

20.      Settlement occurred after Date Y, but the deposit was paid and the contract for purchase of Location A was entered into before Date Y. What needs to be determined in respect of subsection 124-75(3) is whether some of the total expenditure, being the deposit, to acquire Location A was incurred before Date Y.

21.      Whether a deposit has been 'incurred' for the purposes of either a general deduction, or capital expenditure under Subdivision 124-B, would depend on the terms of the payment and any related agreement. Some payments described as 'deposits' are held by the recipient as security to ensure that the payer performs some connected obligation, and may be refunded. In those circumstances, the money remains the payer's property, but is held by the recipient, with rights to take security under an agreement. It is possible that a security deposit payment would not have been 'incurred,' because the money remains the payer's property, and will have it returned to them subject to the performance of certain obligations.

22.      In this case, Company A was required to pay a non-refundable payment which is described in the contract as a 'deposit'. The deposit was then applied to the total purchase price when the property settled.

23.      While the payment is described as a deposit, and was applied against the total cost at settlement, had settlement not eventuated the deposit would have been retained by the seller. Therefore, when the contract was entered into on the Contact Date the deposit amount paid on the Deposit Date ceased to be Company A's property.

24.      The deposit payment would be an expense according to its ordinary meaning, and therefore, it is 'expenditure', which had been 'incurred' by Date Y.

25.      The phrase 'at least some' is not explained. The Macquarie Dictionary[5]says meanings of 'some' include:

•        'of a certain unspecified number, amount, degree, etc.: some variation.'

•        'unspecified but considerable in number, amount, degree, etc.: he was here some weeks.'

•        'an unspecified number, amount, etc., as distinguished from the rest.'

26.      In this context, the phrase 'at least some' means an amount, which is more than nil, but does not necessarily encompass 'all' expenditure incurred on acquiring the relevant asset.

27.      The Explanatory Memorandum to the Tax Law Improvement Bill (No. 1) 1998, which introduced Subdivision 124-B, said that the words 'at least some' were introduced to clarify the previous law:

The 1936 Act requires expenditure on acquiring a new asset, or on the repair or restoration of the original asset to be incurred within a specified time of the disposal of the original asset. It is unclear whether it is the total expenditure, or only a part of it, that must be incurred within this period. The rewritten provision adopts current administrative practice that only some of the expenditure must be incurred within the specified time.

28.      The payment of the deposit is 'some' expenditure because it is an amount greater than nil. It does not matter that it is less than 'all' or the 'total' expenditure that was ultimately incurred to acquire Location A.

29.      Therefore, the conditions of paragraph 124-75(3)(b) have been met in respect of the acquisition of Location A.

Question 2

Will the Commissioner exercise his discretion pursuant to subsection 124-75(3) to allow an extension of time in which to spend some of the proceeds following the compulsory acquisition of the Company A's asset in order to meet the eligibility requirements for a Subdivision 124-B of the ITAA 1997 roll-over?

Summary

No. As a result of acquiring Location A, the total cost of buying replacement assets for the asset that was compulsory repossessed already exceeds the compensation received for the compulsorily acquired asset.

Any additional assets that may be purchased after Date Y onwards would only increase this excess.

If:

•         Company A subsequently determines that they do not satisfy the other requirements of Subdivision 124-B in relation to the acquisition of Location A, or

•         we provide a private ruling to the effect that Company A does not satisfy the requirements of Subdivision 124-B in relation to the acquisition of Location A

within a reasonable period of time Company A should apply again for an extension of time to acquire a further replacement.

Detailed reasoning

30.      Paragraph 124-75(3)(b) says that at least some of the expenditure must be incurred '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.'

31.      Note 2 at paragraph 12 of TD 2000/41[6] states:

There is no restriction on the number of CGT assets which may be treated as replacement assets for an original CGT asset in the replacement-asset roll-over provisions in Subdivision 124-B provided that they each satisfy the relevant requirements of that Subdivision.

32.      The Explanatory Memorandum to the Tax Law Improvement Bill (No. 1) 1998, which introduced section 124-75, does not explain or reference the Commissioner's power to allow more time for the taxpayer to incur the relevant expenditure.

33.      In our view, the phrase 'if the Commissioner allows further time in special circumstances' implies two requirements:

•        'special circumstances'

•        the Commissioner must think it appropriate to allow further time.

34.      'Special circumstances' is not defined. The Macquarie Dictionary[7] says meanings of:

•        'special' include 'extraordinary; exceptional...' or 'distinguished or different from what is ordinary or usual'

•        'circumstance' includes 'a condition, with respect to time, place, manner, agent, etc., which accompanies, determines, or modifies a fact or event;' or 'the existing condition or state of affairs surrounding and affecting an agent'.[8]

35.      TD 2000/40[9] says that 'special circumstances' in subsection 124-75(3) "by its nature is incapable of a precise or exhaustive definition." It suggests what are 'special circumstances' depends on the facts of each case, and is best explained by example. It gives four examples:

•        In Example 1, land is compulsorily acquired. The owner does not receive, compensation until one month before the period ends. TD 2000/40 concludes this is likely to be special circumstances which warrant extending time.

•        Example 2 is a factory is destroyed by fire. The owner immediately commenced negotiations to purchase a replacement factory, but the purchase falls through. The taxpayer purchases another property just outside the relevant period. TD 2000/40 concludes this is likely to be special circumstances which warrant extending time.

•        Example 3 is another compulsory acquisition of land. The owner has a protracted legal dispute with the state authority about the quantum of compensation. TD 2000/40 concludes this is likely to be special circumstances which warrant extending time.

•        Example 4 is a compulsory acquisition of a rental property. The owners failed to acquire a replacement asset because they didn't know there was a timeframe. TD 2000/40 concludes this is not special circumstances, and the Commissioner would not allow further time.

36.      The meaning of 'special circumstances' was also discussed in TR 2007/6[10]. At paragraphs 42-52, this ruling cited statements from case law to the general effect that 'special circumstances' defies prescriptive definition, and must be read in context, but would normally be something unusual, different, uncommon, exceptional, or out of the ordinary or normal course.

37.      In our view, the 'special circumstances' need to explain why more time should be allowed 'to incur' the relevant expenditure. It isn't enough to have 'special circumstances' alone if those circumstances aren't relevant to the delay or why the taxpayer needs more time. The 'special circumstances' should explain why more time is both necessary and reasonable.

38.      An administrative power to allow further time (which might loosely be described as a 'discretion') should be exercised reasonably and consistently, in light of the consequences for the taxpayer, the community, and tax administration more generally ATO ID 2003/102[11] (now withdrawn because it involves the exercise of a discretion) gave an illustration of the sorts of factors which might be relevant to exercising a power to allow further time, albeit in the context of the small business roll-over in subdivision 328-G. Despite the different statutory context and withdrawal of ATO ID 2003/102, we consider that these factors are also relevant to decisions to allow further time under subdivision 124-B.

39.      To paraphrase ATO ID 2003/102, these factors are:

•        evidence of an acceptable explanation for the period of the extension requested

•        whether it would be fair and equitable in the circumstances to provide such an extension

•        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)

•        of any unsettling of people, other than the Commissioner, or of established practices

•        fairness to people in like positions and the wider public interest

•        whether there is any mischief involved; and

•        a consideration of the consequences.

40.      As explained in our reasons in respect of Question 1, the requirements of subsection 124-75(3) were met in respect of the acquisition of Location A before Date Y.

41.      The cost to acquire Location A will exceed the balance of compensation payment received for Location X that remained after the acquisition of Location B.

42.      As Location A has now been acquired by Company A, in respect of the table in subsection 124-85(2), the total expenditure incurred in acquiring the replacement assets exceeds the money received for the compulsorily acquired asset. Item 3 of the table in subsection 124-85(2) is thus the relevant item.

43.      It would only be necessary for the Commissioner to allow further time if the special rules under subsections 174-75(4) to 175-75(6) are not met in respect of Location A.

44.      Company A has not applied for a private ruling in respect of the application of subsections 174-75(4) to 175-75(6). Nor has Company A included as a fact to this ruling that as full self-assessment taxpayer[12] that they have determined that any of subsections 174-75(4) to 175-75(6) apply to exclude Location A.

45.      Therefore, without clear evidence that Location A is not an eligible replacement asset, the Commissioner will not exercise his discretion under subsection 124-75(3) to allow further time beyond Date Y to acquire additional replacement assets, as there is no reason to provide Company A with this additional time.

Question 3

If the answer to Question 2 is yes, will the Commissioner allow a further time until the date, as specified in the application, for Company A to acquire a replacement asset?

Summary

As the answer to question 2 was no, this question was not answered.

[1] in respect of the balance of the total compensation amount Company A received for their land at Location X.

[2] The Macquarie Dictionary online, www.macquariedictionary.com.au ('The Macquarie Dictionary'), Macmillan Publishers Australia, accessed 21 March 2023.

[3] Taxation Determination 2000/39 Income tax: capital gains: what does the word 'incur' in subsection 124-75(2) of the Income Tax Assessment Act 1997 mean?

[4] Taxation Ruling TR 97/7: Income tax: section 8-1 - meaning of 'incurred' - timing of deductions.

[5] The Macquarie Dictionary, accessed 23 March 2023.

[6] Taxation Determination TD 2000/41 Income tax: capital gains: are the two requirements in subsection 124-75(4) of the Income Tax Assessment Act 1997 for a CGT asset acquired to replace an original asset alternative and mutually exclusive requirements?

[7] Macquarie Dictionary, accessed 27 June 2023.

[8] To consult the Macquarie Dictionary (accessed 10 August 2021) once again, in this context, 'agent' would seem to carry the meaning 'something or something that acts or has the power to act.'

[9] 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?

[10] Taxation Ruling TR 2007/6 Income tax: non-commercial business losses: Commissioner's discretion.

[11] ATO Interpretive Decision ATO ID 2003/102 Capital Gains Tax: Extension of time to choose the small business roll-over.

[12] As per the definition of full self-assessment taxpayer in paragraph 6(1AA)(a) Income Tax Assessment Act 1936.