Edited version of private advice

Authorisation Number: 1052146944003

Date of advice: 27 July 2023

Ruling

Subject: CGT - replacement asset roll-over - Commissioner's discretion

Question

Will the Commissioner exercise his discretion under paragraph 124-75(3)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you the replacement asset roll-over for the expenditure you incurred in acquiring a real property for investment purpose?

Answer

Yes

This ruling applies for the following period:

Income year ended 30 June 20XX.

The scheme commenced on:

1 July 20XX.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You owned properties (the Properties).

The Properties were used for investments throughout the period of its ownership and derived rental income through the lease agreements.

You were advised of the prospect of a Compulsory acquisition of the Properties by the Local Council (the Council).

The Council subsequently:

•                     provided you with documents regarding the acquisition;

•                     approved the terms of the purchase at their meeting;

You purchased a property (the Replacement Property) and exchanged it prior to the compulsory acquisition of the Properties. You purchased the Replacement Property with an intention that it would be a replacement asset for the Properties to be compulsorily acquired by the Council.

The Replacement Property is being used as an investment asset in a similar way as the Properties that were compulsorily acquired by the Council.

The Deed of Release was signed for the Properties that contained the terms and conditions of the acquisition.

You have requested a private ruling for your properties compulsorily acquired

The Council was one of the areas impacted by COVID-19 and suffered severe lockdowns.

Relevant legislative provisions

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

Income Tax Assessment Act 1997section 124-70

Income Tax Assessment Act 1997section 124-75

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

Income Tax Assessment Act 1997 subsection124-75(4)

Income Tax Assessment Act 1997subsection 995(1)

Reasons for decision

Subsection 124-70(1) states, 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 to mean the Commonwealth, a State or a Territory, or an authority of the Commonwealth or of a State or Territory.

The Property was compulsorily acquired by the Local Council (the Council), an authority of a State, and you received money as compensation for the CGT event A1 happening.

You were an Australian tax resident just before the compulsory acquisition, therefore subsection 124-70(3) does not apply.

You can choose a roll-over in relation to the capital gain, provided other requirements as stated in section 124-75 are met.

Subsection 124-75(1) states:

If you receive money for the event happening, you can choose to obtain a roll-over only if these other requirements are satisfied.

Subsection 124-75(2) states:

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.

Subsection 124-75(3) 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.

Subsection 124-75(4) states:

If just before the event happened the original asset:

(a)          was used in your *business; or

(b)          was *installed ready for use in your business; or

(c)          was in the process of being *installed ready for use in your business;

the other asset must be used in the business, or be installed ready for use in the business, for a reasonable time after you *acquired it.

Otherwise, you must use the other asset (for a reasonable time after you *acquired it) for the same purpose as, or for a similar purpose to, the purpose for which you used the original asset just before the event happened.

The relevant provision for you is paragraph 124-75(2)(a) whereby you are required to incur expenditure to acquire another CGT asset 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 CGT event A1 for Compulsory acquisition is determined by subsection 104-10(6), that states:

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.

In your case:

•                     the Council:

-                    notified of the prospect of the compulsory acquisition of your Properties;

-                    compulsorily acquired your Properties;

-                    you received compensation money from the compulsory acquisition;

•                     the Properties were leased out and used as investments throughout its period of ownership;

•                     you acquired a Replacement asset, with an intension that it would be a replacement asset for the Properties compulsorily acquired; which is being used for the similar purpose as the compulsorily acquired Properties;

•                     the Council was one of the areas impacted by COVID-19 that suffered severe lockdowns

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? provides that whether an asset is used for the same or similar purposes as another asset is a question of fact and degree.

In your case the Properties were acquired for property investment purposes and they regularly derived rental income through lease agreements.

The Replacement Property was acquired with an intention to use for the similar purpose as the Properties, that is to derive rental income the same use as the compulsorily acquired Properties.

Therefore, a property of this nature would satisfy the use test and constitute the entity incurring expenditure in acquiring another CGT asset.

To satisfy subsection 124-75(3), you must incur at least some of the expenditure in acquiring another CGT asset no later than XX June 20XX, (being one year before the event happened), or within such further time as the Commissioner allows in special circumstances (paragraph 124-75(3)(a)).

There are no legislative provisions which provide guidance as to what may constitute special circumstances for the purposes of subsection 124-75(3). These depend on the facts of each case.

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) explains 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 in TD 2000/40. There are no examples of purchases of replacement assets prior to compulsory acquisition.

You were advised of the prospect of compulsory acquisition sometime prior to the actual acquisition date. Further, in your case, the whole process of the compulsory acquisition occurred during the Covid-19 pandemic.

In view of the above, the Commissioner will exercise his discretion under paragraph 124-75(3)(a) to allow and extend the 12 months to the requested period for you to acquire a replacement CGT asset.