Edited version of private advice

Authorisation Number: 1052162532016

Date of advice: 29 August 2023

Ruling

Subject:CGT - extension of time

Question 1

Has CGT event A1 occurred for the income year 30 June 20XW or prior with respect to the compulsory acquisition of land you hold by the government body?

Answer

Yes

Question 2

To the extent that the Commissioner's answer to Question 1 is yes, will the Commissioner exercise his discretion under paragraph 124-75(3)(b) of the Income Tax Assessment Act 1997 ("ITAA 1997") to allow you an extension of time to 30 June 20XZ to obtain a replacement asset for an asset that was compulsorily acquired by a government body?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XY

Year ended 30 June 20XZ

The scheme commenced on:

20XV

Relevant facts and circumstances

You are part of a wider group of entities which comprise of both corporate entities and trusts.

Your activities involve long term leasing of commercial properties.

You acquired vacant land of approximately X hectares (the Land).

Since acquiring the Land in you have constructed buildings on part of the Land over multiple stages.

On DATE 1, a portion of Land was compulsory acquired. This was the subject of a separate Private ruling authorisation number XXXXXXXXXXXXX. This reduced the total land you held.

On DATE 2, a government body published in the Gazette that it acquired an interest by way of easement registration the Land. No consideration was paid with respect of this interest at that time.

The purpose of the proposed easement was to enable construction of a roadway.

On a letter dated DATE 3, the government body made an offer of compensation.

After receiving the letter with an offer of compensation, you issued proceedings in the Supreme Court regarding the rights of the government body to acquire an interest in the Land for the easement in DATE 4. The court ultimately found in favour of the government body, and you did not appeal the decision.

On DATE 5, you entered a commercial land lease (concurrent lease) with a related entity. It provides the related entity with the authority to operate its business on the Land and the ability to undertake development works (as and where required) on the existing buildings and the remaining land.

There have been significant delays with respect to negotiations with the government body with respect to the easement identified in the Gazette and the amount of compensation. You have provided details of the basis for the dispute.

On DATE 6, your legal representatives sent a letter to the government body's legal representatives outlining the issues related to the easement. As a part of the letter, your legal representatives requested that the government body made an advance payment of $X on a "without prejudice" basis.

In response to this letter, the government body has taken actions to address the issues raised in your letter.

On DATE 7, the government body made an advance payment to you on the basis that it was without prejudice to the rights of either party to contest that the amount of compensation. The receipt of funds was reflected in your financial accounts for the year ended 30 June 20XW.

You have provided details of actions to be undertaken to resolve the issues related to the easement.

There is an ongoing dispute between you and the government body on value. On DATE 8, you briefed a valuer to provide a valuation of the portion of the land subject to the easement, with consideration made to the cost and the value of roadway construction costs. There have been ongoing discussions with the government body and valuers on the further development of the site.

To the extent that the parties cannot agree on an adjusted compensation amount, it is likely that the matter could result in a dispute before the Courts. This may result in a significant delay in any formal hearing and judgement (which could be several years away from being finalised).

You have not yet incurred any expenditure in acquiring another CGT asset.

The market for finding a replacement commercial lease asset is likely to be restricted, which will make it difficult to find a suitable replacement asset in a short period of time.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 124-75

Reasons for decision

This is to explain how we reached our decision. This is not part of the private ruling.

All references made in these reasons for decision are to the Income Tax Assessment Act 1997 (ITAA 1997)unless otherwise stated.

Question 1

Summary

CGT event A1 occurred prior to 30 June 20XW as the government body compulsorily acquired an interest by way of easement registration in land you held.

Detailed reasoning

An easement is a right over someone else's land or property.

CGT event A1 happens if you dispose of a CGT asset.

Taxation Ruling TR 97/3 Income tax: capital gains: compensation received by landowners from public authorities (TR 97/3), explains thatthe acquisition of an easement by a public authority using the compulsory process provided in the relevant statute culminates in a declaration by notice in the Gazette that the easement has been acquired.

In accordance with subsection 104-10(6):

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.

The original declaration is in the Gazette of DATE 2. There is an issue with the easement identified. This is now in the process of being rectified.

Regardless of the effect this has in relation to the date on which the government body acquired the Land for the easement, you received compensation from the government body in relation to that acquisition on DATE 7.

Consequently, CGT A1 happened prior to 30 June 20XW.

Question 2

Summary

The Commissioner will exercise his discretion under paragraph 124-75(3)(b) to allow you an extension of time to 30 June 20XZ to incur some of the expenditure to acquire a replacement asset for an asset that was compulsorily acquired by a government body.

Detailed reasoning

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.

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, including examples 1 and 3:

Amanda and John own a saddle shop. A State authority compulsorily acquires the shop to build a railway shunting yard. Compensation was not received by Amanda and John until one month before they are required by subsection 124-75(3) to replace the shop. Amanda and John are unable to acquire a replacement asset in this time. We would accept in this case that the delay in receiving the compensation constitutes special circumstances warranting an extension of time.

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.

Since the government body published that it acquired an interest by way of easement registration in the Land, there have been significant delays due to negotiations with the government body with respect to the easement and the amount of compensation.

The issues arising from dispute about the easement are in the process of being resolved.

The dispute between you and the government body on value is ongoing and may result in the matter going before the Courts.

Additionally, you must consider subsection124-75(4) when looking for a suitable replacement asset, it provides that:

If just before the event happened to 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.

Your situation falls within scope of what would be considered special circumstances therefore the Commissioner will exercise his discretion under paragraph 124-75(3)(b) to allow an extension of time until 30 June 20XZ for you to incur some of the expenditure to acquire a replacement CGT asset.