Edited version of private advice

Authorisation Number: 1052160216971

Date of advice: 1 September 2023

Ruling

Subject: Replacement asset roll-over

Question 1

Will the Commissioner exercise the discretion under subsection 124-75(3) of the Income Tax Assessment Act 1997 to extend the period for the Trust to acquire another asset to 30 June 20xx?

Answer

Yes.

Question 2

Will the expenditure on the property and another property yet to be purchased, constitute incurring "expenditure in acquiring another CGT asset" under paragraph 124-75(2)(a) of the Income Tax Assessment Act 1997?

Answer

Yes.

Question 3

Will a residential rental property purchased by the Trust as a replacement asset be considered an asset used for the same or similar purpose as the property for the purpose of subsection 124-75(4) of the Income Tax Assessment Act 1997?

Answer

Yes.

This ruling applies for the following period:

Income year ending 30 June 20xx.

The scheme commenced on:

20XX

Relevant facts and circumstances

The Trust acquired a property in 20xx, with settlement occurring in 20xx.

The property was a commercial property consisting of office and warehouse, and was leased to an unrelated third party, producing passive rental income. The property had not been used in a business carried on by the Trust, or any other related party.

A 'Notice of Intent to Acquire Land" was issued in 20xx offering to purchase this property in relation to a project that had previously been announced. This offer contained in this notice was not accepted at that time.

In 20xx, a notice was published stating that the property was to be compulsory acquired.

The price offered in the 20xx notice was $X. This was increased to $X in 20xx.

A final price of $X was agreed to in 20xx.

A payment of $X was received in 20xx, representing the amount offered at that time.

An additional amount of $X was received late 20xx. As at the date of this application, no documentation has been received in relation to this additional payment.

On 20xx, the Trust entered into a contract to purchase a new property.

The purchase price of the property was $X.

The property is a commercial property consisting of an office and warehouse and was subject to a lease to an unrelated third party, which was assigned at the time of purchase.

The property will continue to be held to generate passive rental income.

The Trust has been looking to purchase an additional passive rental property (the additional property) with the remaining compensation from the compulsory acquisition of the property.

However, this decision was deferred pending the receipt of the balance of the compensation and obtaining this private ruling.

The additional property will also be leased to unrelated parties in order to generate passive rental income. It has not been decided yet whether to purchase a commercial property, or a residential property.

Due to the final amount of compensation not being agreed to until 20xx, and the final payment only being received in 20xx, it was not possible for the Trust to commit to purchase another suitable asset prior to 30 June 20xx.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 40

Income Tax Assessment Act 1997 section 100-25

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(1)(a)

Income Tax Assessment Act 1997 subsection 124-70(2)

Income Tax Assessment Act 1997 subsection 124-70(2)(a)

Income Tax Assessment Act 1997 section 124-75

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

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)

Reasons for decision

Summary

Question 1

The Commissioner will exercise the discretion under subsection 124-75(3) of the Income Tax Assessment Act 1997 to extend the period for the Trust to acquire another replacement asset to 30 June 20xx.

Detailed reasoning

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

Subdivision 124-B contains a roll-over for when assets are compulsory acquired, lost, or destroyed.

Section 124-70 sets out the circumstances in which the roll-over relief may be available.

Paragraph 124-70(1)(a) provides that you may be able to choose a roll-over if a CGT asset you own is compulsorily acquired by an Australian government agency.

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. Paragraph 124-70(2)(a) provides that the roll-over is available if an entity receives either money or another CGT asset, or both, as compensation for the original asset being compulsorily acquired.

In this case, the property was compulsorily acquired in 20xx, and money was received as compensation for the event happening.

Therefore, the Trust can choose a roll-over in relation to the capital gain that the Trust received from the compulsory acquisition, provided other requirements in section 124-75 are satisfied.

Relevant to the Trust's circumstances, these requirements are:

• expenditure must be incurred in acquiring another CGT asset (except a depreciating asset) (subsection 124-75(2))
• at least some of the expenditure must be incurred within a period starting one year before the compulsory acquisition event and ending one year after the end of the income year in which the event occurred, or such further time as the Commissioner allows in special circumstances (subsection 124-75(3))
• the other asset acquired must be used (for a reasonable time after it is acquired) for the same purpose as, or for a similar purpose to, the purpose for which the original asset was used just before the event happened (subsection 124-75(4)).

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 this case, the property was compulsorily acquired in 20xx. The time of the event is therefore 20xx.

Acquisition of the property

The Trust entered into a contract to purchase the property in 20xx. As this date is prior to the disposal of the property in 20xx, but not more than a year before the event, paragraph 124-75(3)(a) is satisfied.

Acquisition of an additional property

The Trust will purchase an additional property to use the balance of the compensation money received.

To satisfy paragraph 124-75(3)(b), some expenditure to acquire the additional property must have been incurred no later than 30 June 20xx, (being one year after the end of the income year in which the property disposal event happened), or within such further time as the Commissioner allows in special circumstances.

No expenditure on an additional property was able to be made by 30 June 20xx.

Special circumstances

There are no legislative provisions which provide guidance on 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?

What are 'special circumstances' is illustrated by examples in TD 2000/40, including:

• Example 1 regarding a scenario in which an asset of the taxpayers is compulsorily acquired by a State Authority. Compensation was not received by the taxpayers until one month before they were required by subsection 124-75(3) to replace the asset. They were unable to acquire a replacement asset in this time. We accepted that the delay in receiving the compensation constitutes special circumstances warranting an extension of time.
• Example 3 in which a taxpayer's asset was compulsorily acquired by a state authority but the taxpayer was having a protracted legal dispute with the authority over the quantum of the compensation. On these facts we accepted that there are special circumstances to allow further time.

Special circumstances relating to the yet to be purchased property

The property was compulsorily acquired in 20xx. Following an initial offer of $X in 20xx, compensation was increased to $X in 20xx. That amount was received in 20xx however $X had already been paid for the property.

A final price of $X for the property was agreed to in 20xx and an additional amount of $X was accordingly received in late 20xx.

We accept that the length of time taken to reach an agreement on the final compensation for the property and the time taken to receive the final compensation payment made it impractical for the Trust to commit to purchasing an additional property prior to the 30 June 20xx deadline.

After a review of the facts in this case, the Trust's circumstances fall within the scope of what would be considered special circumstances based on the guidelines in TD 2000/40. Therefore, the Commissioner will exercise their discretion under paragraph 124-75(3)(b) to allow an extension of time for the Trust to acquire another CGT asset by 30 June 20xx.

Summary

Question 2

The property acquired and another property yet to be purchased are considered to be replacement assets under paragraph 124-75(2)(a) of the Income Tax Assessment Act 1997.

Detailed reasoning

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

Section 124-75 contains other requirements that must be satisfied if an entity receives money for the compulsory acquisition of its CGT asset and chooses to apply the roll-over.

Relevant to the Trust's circumstances, subsection 124-75(2) requires that an entity must incur expenditure in acquiring another CGT asset. Subsection 124-75(3) stipulates when at least some of the expenditure must be incurred, and subsection 124-75(4) states, that the replacement asset must be used for the same purpose as, or for a similar purpose to, the purpose the original asset was used for just before the disposal event.

The Trust purchased the property in 20xx. Expenditure of $X was incurred in acquiring the property. The property is a CGT asset for the purposes of section 100-25. Expenditure on that property was incurred no earlier than one year before the property was compulsorily acquired in 20xx. The property is being used to produce passive rental income, being the same purpose for which the trust used the property up to the time of its disposal. Therefore, the property satisfies the relevant requirements of subdivision 124-B.

The Trust intends to acquire another property with the balance of the compensation money received from the compulsory acquisition of the property.

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? states that there is no restriction on the number of CGT assets which may be treated as replacement assets for an original asset, provided that they each satisfy the requirements of Subdivision 124-B.

The additional property will be a CGT asset. At least some expenditure to acquire this other property will be incurred by 30 June 20xx, being the additional time, the Commissioner has allowed at Question 1. Further, the additional property will be used to produce passive rental income, being the same purpose for which the Trust used the property for up to the time of its disposal.

The additional property therefore satisfies the relevant requirements of Subdivision 124-B. Accordingly, the already purchased property and another property yet to be purchased qualify as replacement assets under Subdivision 124-B.

Summary

Question 3

A residential rental property purchased by the Trust as a replacement asset will be considered an asset used for the same or similar purpose as the property for the purpose of subsection 124-75(4) of the Income Tax Assessment Act 1997.

Detailed reasoning

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

As supported by Taxation Determination TD 2000/41 there are two requirements in subsection 124-75(4), either of which can be satisfied.

The first requirement relates to the use of the 'other asset' (that is, the replacement CGT asset) in your business or its installation ready for use in the business.

The second requirement relates to the use of the other asset for the same purpose as, or for a similar purpose to, the purpose for which you used the original asset. The second requirement is satisfied if you use the other asset for a reasonable time after you acquired it and your use of that asset is 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.

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 ITTA 1997 in relation to a replacement asset? states that whether a CGT asset is used for the same or similar purposes as another asset is a question of fact and degree.

In this case, as the Trust is not in business, the first requirement is not relevant. The second requirement in the subsection must therefore be satisfied for a roll-over to be available.

The property was a commercial property leased to an unrelated third party and used to produce passive rental income up to when it was compulsory acquired.

The residential property the Trust purchases will also be leased to an unrelated party and used to produce passive rental income.

While this situation is not specifically covered in the examples in TD 2000/42, we do not consider that the outcome is affected if the replacement rental property is a commercial or residential property, provided that it is used to produce passive rental income.

Accordingly, the residential property will be considered an asset used for the same or similar purpose as the property, satisfying the second requirement of subsection 124-75(4).