Edited version of private advice

Authorisation Number: 1052137116464

Date of advice: 6 July 2023

Ruling

Subject: Replacement asset rollover

Question 1

Will the Commissioner exercise his discretion under subsection 124-75(3) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow the Trustee for the Trust an extension of time to 30 June 20XX to incur expenditure to acquire another CGT asset under subsection 124-75(2) of the ITAA 1997?

Answer

Yes

Question 2

Will expenditure relating to the acquisition of a strata title subject to a contractual obligation to construct one or more commercial buildings on that title constitute incurring 'expenditure in acquiring another CGT asset' under paragraph 124-75(2)(a) of the ITAA 1997?

Answer

Yes

Question 3

Will expenditure relating to the construction of the abovementioned commercial buildings constitute incurring 'expenditure in acquiring another CGT asset' under paragraph 124-75(2)(a) of the ITAA 1997?

Answer

Yes

This ruling applies for the following periods:

Income year ending 30 June 20XX

Income year ending 30 June 20XX

Income year ending 30 June 20XX

The scheme commenced on:

20XX

Relevant facts and circumstances

The Trustee is the trustee for the Trust.

The Trust is an Australian resident unit trust, established by a trust deed.

The Trustee forms part of the Group.

The Group is in the business of owning, developing, and managing substantial office, retail and other developments in Australia.

The Trustee was the owner of the Property.

The Trustee received written notification from the Government dated 20XX that the Property will be required for the Government.

On 20XX, the Government compulsorily acquired the Property in accordance with the Land Acquisition (Just Terms Compensation) Act 1991 (the Act) for the purpose of the construction of a Government asset.

On 20XX the Trustee received a written notice of the compulsory acquisition, for the purposes of section 42 of the Act, which provided for their entitlement to compensation and the amount of compensation of $XXX and their right to object to the amount offered.

On 20XX, the Trustee lodged an application objecting to the amount of compensation offered by the Government.

The Government have since paid the Trustee $XXX, part of the amount offered.

The Property has, at all material times during the Trustee's ownership period, been leased to numerous unrelated commercial and retail tenants and derived long term rental income. It was therefore held by the Trustee on capital account.

The Property was always held by the Trustee with a view to undertaking a redevelopment of that property.

The Group had intended to develop the Property into a building to be held long term and leased to tenants, deriving rental and related income in a manner consistent with their investment philosophy.

The Trustee participated in a tender process in relation to another government asset.

Should the bid with the government be successful, the taxpayer will likely acquire a strata interest in part of the government asset site. This will likely also be subject to an obligation to construct one or more commercial buildings on the land with a design specification agreed to by all parties.

The Trustee will then commence development works on that site with the intention to construct and hold a commercial building.

As discussed above, the intent remains to hold this investment long term to generate rental and related income as a commercial landlord.

The Trustee cannot reasonably determine the amount of proceeds it will need to invest to acquire a replacement asset until the relevant legal proceedings have been completed and the final compensation amount is known.

As a consequence, the Trustee will not reasonably be in a position to determine the appropriate compensation available to acquire a replacement asset until the 20XX income year (or later if there is an appeal).

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 40

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

Income Tax Assessment Act 1997 subsections 108-5(1)

Income Tax Assessment Act 1997 subsections 108-5(2)

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 section 124-75

Income Tax Assessment Act 1997 subsection 124-75(1)

Income Tax Assessment Act 1997 subsection 124-75(2)

Income Tax Assessment Act 1997 paragraph 124-75(2)(a)

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

Income Tax Assessment Act 1997 paragraph 124-75(3)(b)

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

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

Income Tax Assessment Act 1997 Division 328

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

Reasons for decision

All legislative references are to theIncome Tax Assessment Act 1997 unless otherwise stated.

Question 1

Summary

The Commissioner will exercise his discretion under subsection 124-75(3) to allow the Trustee an extension of time to 30 June 20XX to incur expenditure to acquire another CGT asset under subsection 124-75(2).

Detailed reasoning

Section 124-70 describes different events when a roll-over is available to an entity if that event happens to the 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 an Australian government agency. Therefore, the Trustee can choose a roll-over in relation to the capital gain that the Trustee 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 the Trustee's case, their original asset, namely the Property, was not lost or destroyed. Therefore, the relevant provision for the Trustee 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 the Trustee 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 the Trustee's case, the Property was compulsorily acquired by the Government on 20XX, and it has only received part of the amount offered by the Government since that date. The time of the event under subsection 104-10(6) is therefore the date when the Property was compulsorily acquired, which was 20XX.

The Trustee did not acquire a replacement CGT asset 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? (TD2000/40).

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

•         a consideration of the consequences.

TD 2000/40 states that the expression 'special circumstances' in the context of subsection 124-75(3) 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, the Trustee lodged an objection requesting compensation of $XXX being more than the amount of $XXX offered in the compensation notice issued by the Government dated 20XX.

The Trustee has submitted that given the status of relevant legal proceedings, it is expected that the exact compensation amount may not be known until sometime in the year ended 30 June 20XX.

To date, the Trustee has not acquired a replacement asset for the Property and is 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 the Trustee 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 the Trustee, 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 the Trustee's 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 30 June 20XX.

Question 2

Summary

The expenditure on the acquisition of a strata title subject to a contractual obligation to construct one or more commercial buildings on that title will constitute 'incurring expenditure in acquiring another CGT asset' under paragraph 124-75(2)(a)

Detailed reasoning

A taxpayer may be able to choose CGT replacement asset rollover relief under Subdivision 124-B if the asset is compulsorily acquired by an Australian government agency. Where the taxpayer receives money as compensation for the event happening the conditions in section 124-75 must also be met in order for the CGT roll-over relief to apply.

Subsection 124-75(2) provides that:

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 ...

Should the Trustee be successful in its bid it expects to acquire a strata interest that will have an attached obligation to undertake construction on the land.

The strata title is considered to be a CGT asset as it is either a kind of property or part thereof as described in subsections 108-5(1) and (2).

The strata title is not a depreciating asset whose decline in value is worked out under Division 40 or deductions for which are calculated under Division 328.

The conditions in subsection 124-75(3) relate to the time period in which expenditure on a replacement asset must be made. These requirements have been discussed at question 1.

There are two requirements in subsection 124-75(4), either of which can be satisfied.

The first requirement in subsection 124-75(4) relates to the use of the replacement asset. This requirement is satisfied if, just before the event giving rise to a roll-over under Subdivision 124-B happened, the original asset:

•         was used in your business;

•         was installed ready for use in your business; or

•         was in the process of being installed ready for use in your business;

and the replacement asset is used in the same business, or is installed ready for use in the same business, for a reasonable time after it is acquired.

The second requirement in subsection 124-75(4) is satisfied if you use the replacement asset for a reasonable time after you acquire it and you use that asset for the same purpose as, or for a similar purpose to, the purpose for which you used the original asset just before the event giving rise to a roll-over under Subdivision 124-B happened.

As the strata title will be used for the same or similar purpose as the original property, it will satisfy the requirement in subsection 124-75(4).

It is further required by subsection 124-75(5) that the replacement asset cannot become an item of your trading stock just after you acquire it. Given that the strata title will be held long term by the trustee, it is not considered that it will form part of the entities trading stock.

As the strata title meets the relevant requirements of section 124-75, the expenditure on the strata title will meet the requirement of 'incurring expenditure in acquiring another CGT asset' under paragraph 124-75 (2)(a).

Question 3

Summary

The expenditure relating to the construction of the proposed commercial buildings will constitute incurring expenditure in acquiring another CGT asset under paragraph 124-75 (2)(a).

Detailed reasoning

As discussed in question 2, a taxpayer may be able to choose CGT replacement asset rollover relief under Subdivision 124-B. In the Trustee's circumstances the conditions in section 124-75 must also be met in order for the CGT roll-over relief to apply.

The trustee intends to construct real property or properties for investment purposes, which will subsequently be held long term to generate rental income.

As detailed at paragraph 13 of 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?, 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.

Buildings are CGT assets as defined in section 108-5.

Buildings are not a depreciating asset whose decline in value is worked out under Division 40 or deductions for which are calculated under Division 328.

The buildings will be acquired within the time limits allowed as discussed in question 1 above.

The buildings will be used for the same or similar purpose as the original property, being long term rental income.

The buildings will not form part of the trading stock of the Trustee.

As the buildings meet the relevant requirements of section 124-75, the expenditure on the construction of the buildings will meet the requirement of "incurring expenditure in acquiring another CGT asset" under paragraph 124-75 (2)(a).