Edited version of private advice

Authorisation Number: 1052165471627

Date of advice: 8 September 2023

Ruling

Subject: CGT - 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 trustee to acquire another asset to 30 June 20XX?

Answer

Yes.

This ruling applies for the following period:

Income year 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The trustee purchased a commercial property on 18 December 20XX. The commercial property was used to generate rental income. On 14 September 20XX, the property was compulsorily acquired for approximately $X. On 17 February 20XX, a replacement property was purchased for $X. The trustee entered into a contract to purchase another replacement property however, the contract fell through, and the purchase did not proceed.

Previous extensions of time

1. On 13 May 20XX, a private ruling application was submitted seeking the Commissioner's discretion to allow an extension of time until 30 June 20XX to purchase a second replacement asset in accordance with subsection 124-75(3) (ITTA1997). The trustee had entered into a contract to purchase a second replacement asset however, at that time the sale did not proceed. On 10 July 20XX, the Commissioner granted an extension of time until 30 June 20XX to purchase a second replacement asset in accordance with subsection 124-75(3).
2. On 4 May 20XX a second private ruling application was submitted seeking the Commissioner's discretion to extend the time for the purchase of a replacement asset until 30 June 20XX. In this application, it was explained that due of the impact of COVID-19 on the property market, specifically the national lockdowns; decrease in property listings; and increase in prices, it was difficult for the trustee to identify and acquire a suitable replacement asset. On 29 May 20XX, the Commissioner allowed a second extension of time until 30 June 20XX for the purchase of a second replacement asset in accordance with subsection 124-75(3).

During the second extended replacement period, a property was identified as a suitable replacement asset. Although a contract of sale was entered into and contracts signed, it was not completely executed. On 28 February 20XX, the Trust's business was affected by a flood. Due to the flood damage to this business and associated stress experienced, another extension of time to complete the negotiations and execution for the purchase of the property was requested. A request for an extension of the contract was not accepted by the vendor and 50% of the property was sold to an unrelated purchaser. As 50% of the property was sold to an unrelated purchaser, it was determined to not be a viable replacement asset.

3. On 21 June 20XX, the Commissioner allowed a third extension of time until 30 June 20XX for the purchase of a second replacement asset in accordance with subsection 124-75(3).

Current request for extension of time

4. On 5 July 20XX, a fourth request was submitted to the Commissioner for a further extension of time to purchase a replacement asset until 30 June 20XX, stating special circumstances including a natural disaster (flood); the impact of COVID-19 on the property market, specifically the national lockdowns; decrease in property listings; and increase in prices. Therefore, making it difficult for the trustee to identify and acquire a suitable replacement property. During the period from 1 July 20XX to 31 May 20XX, the trustee issued expressions of interest to purchase suitable replacement assets however, they were not successful. On 13 June 20XX, an agent approached the trustee with another property. An expression of interest to purchase the property was submitted on 29 June 20XX with a price of $X submitted. The trustee intends to locate a suitable replacement commercial property asset, which will be used for a similar purpose as the acquired property to generate rental income.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 40

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)(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 subsection 124-75(6)

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

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 trustee 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 on 14 September 20XX, and money was received as compensation for the event happening.

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 in section 124-75 are satisfied.

Relevant to 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.

The disposal of the property through compulsorily acquisition 14 September 20XX satisfies section 104-5 such that a CGT event A1 occurred.

Acquisition of the replacement property

On 17 February 20XX, the trustee purchased a replacement property with a purchase price of $X.

Acquisition of additional property(s)

The trustee will purchase an additional property to utilise the balance of the compensation money received.

To satisfy paragraph 124-75(3), some expenditure to acquire the additional property must have been incurred no later than 30 June 20XX, (after the third granted extension of time), 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 2 regarding a scenario in which an asset of a taxpayer was destroyed by fire. The taxpayer commenced negotiations to purchase a replacement asset however, after lengthy negotiations, the purchase fell through. The taxpayer then purchased another property outside of the two-year time period. On these facts, we would accept that the taxpayer has done what is reasonable to acquire a replacement asset and we would allow the taxpayer further time.

Application to your circumstances

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 the discretion under paragraph 124-75(3)(b) to allow an extension of time for trustee to acquire another CGT asset by 30 June 20XX.