Edited version of private advice

Authorisation Number: 1052166193680

Date of advice: 6 October 2023

Ruling

Subject: Extension of time to acquire CGT replacement asset

Question

Will the Commissioner exercise the discretion pursuant to paragraph 124-75(3)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) to extend the one-year period for the Applicant to acquire a replacement asset/s to the earlier of DD MM YYYY or 12 months after the date on which the Applicant and the Secretary to the Australian government agency ('the Authority') reach a settlement on the market value of the interest in land acquired by the Authority?

Answer

Yes

This ruling applies for the following periods:

Year ending DD MM YYYY

Year ending DD MM YYYY

The scheme commences on:

DD MM YYYY

Relevant facts and circumstances

1.    The Applicant was the registered proprietor of the land contained in Certificate of Title Volume XXXXX and Folio XXX ('the Property') which it acquired post 21 September 1985.

2.    The Applicant used the Property as a passive investment, by leasing the residence on the Property and part of the property for a sales office to third parties.

3.    The Property also gave the Applicant potential future development prospects and was to be held until such time as it became ripe for future development.

4.    An Australian government agency ('the Authority') compulsorily acquired part of the Property on DD MM YYYY upon publication of a Notice of Acquisition in a state government gazette.

5.    On DD MM YYYY, an offer of compensation was made to the Applicant by the Authority in the sum of $X for market value of the acquired land. In response to the Applicant lodging its claim for compensation pursuant to the Land Acquisition and Compensation Act 1986, the Authority has provided an updated figure for the market value of the acquired land, being the larger amount of $Y, based on advice from the Valuer-General of the State in which the property was located.

6.    The Applicant has obtained a separate valuation which provides that the market value of the acquired land is $Z - a larger amount than the updated figure of $Y.

7.    The Applicant and the Authority are continuing to negotiate in this respect, and a further valuers conference may take place in future.

8.    The Commissioner has previously issued a Private Binding Ruling to the Applicant where an extension was granted to extend the time to find an additional replacement asset to DD MM YYYY.

9.    As detailed in the previously issued a Private Binding Ruling, the Applicant purchased a replacement property known as Property B on XDD MM YYYY in the sum of $Z. The cost of the Replacement Property does not exceed 120% of the market value at the time of the acquisition and will not exceed the compensation received for compulsory acquisition of the Property in light of the current offer from the Authority. Accordingly, the Applicant seeks an extension of time to purchase a further replacement CGT asset/s to an amount that does not exceed the final amount of compensation received for the compulsory acquisition of the land.

Information provided

10.  You have provided a number of documents containing detailed information in relation to the Applicant's application including:

•           Private Binding Ruling ('PBR') Application, dated DD MM YYYY.

11. We have referred to the relevant information within these documents in applying the relevant tests to your circumstances.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 124-B

Income Tax Assessment Act 1997 Subsection 124-70(1)

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

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

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

The Commissioner will exercise the discretion pursuant to paragraph 124-75(3)(b) of the Income Tax Assessment Act 1997 ('ITAA 1997') to extend the one-year period for the Applicant to acquire a replacement asset until the earlier of 30 June 2025 or 12 months after the date on which the Applicant and the Authority reach a settlement on the market value of the interest in the land acquired by the Authority.

Detailed reasoning

1.      Roll-over relief for the compulsory acquisition of a CGT asset is available where the conditions outlined in Subdivision 124-B of the ITAA 1997 are met.

2.      Under subsection 124-70(1) of the ITAA 1997, an entity may be able to choose a replacement asset rollover if a CGT asset owned by the entity is compulsorily acquired by an Australian government agency as per paragraph 124-70(1)(a) of the ITAA 1997.

3.      A replacement-asset rollover allows you, in special cases, to defer the making of a capital gain or loss from one CGT event until a later CGT event happens.

4.      Subsection 995-1(1) of the ITAA 1997 defines an Australian government agency as the Commonwealth, a State or a Territory, or an authority of the Commonwealth or of a State or Territory.

5.      A further requirement is that the owner of the original asset must receive money or another CGT asset or both, for the CGT event to be eligible for a rollover (subsection 124-70(2) of the ITAA 1997). On satisfying these conditions, section 124-75 of the ITAA 1997 provides other requirements which must be satisfied if money is received for the event happening.

6.      Subsection 124-75(2) of the ITAA 1997 requires that the owner of the asset must incur expenditure in acquiring another CGT asset. Subsection 124-75(3) of ITAA 1997 requires the entity to incur some of that 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.

7.      Subsection 124-75(4) of the ITAA 1997 requires that the replacement asset acquired must be used for the same or similar purpose as the taxpayer used the original asset. This replacement asset cannot become an item of trading stock just after the acquisition or be a depreciating asset (subsection 124-75(5) of ITAA 1997), nor become a 'registered emissions unit' just after the acquisition (subsection 124-75(6) of ITAA 1997).

8.      In determining whether special circumstances exist for the Commissioner to extend the period in which to acquire a replacement asset, 'Taxation DeterminationTD 2000/40 Income tax: capital gains: what are 'special circumstances' for the purposes of subsection 124-75(3) of the ITAA 1997?' ('TD 2000/40') provides guidance on interpreting subsection 124-75(3) of the ITAA 1997, in particular, what are 'special circumstances'.

9.      TD 2000/40 states that the expression 'special circumstances' by its nature is incapable of a precise or exhaustive definition. What constitutes 'special circumstances' depends on the facts of each particular case.

10.   Example 3 in TD 2000/40 provides an illustration in which a taxpayer's asset is compulsorily acquired by a State Authority. The taxpayer is then involved in a protracted legal dispute with the authority over the quantum of the compensation. In this instance, the Commissioner accepts that there are special circumstances to allow further time for the taxpayer.

11.   In determining whether the discretion will be exercised, the Commissioner also considers the following factors:

•           there should be evidence of an acceptable explanation for the period of the 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;

•           account must be had of any unsettling of people, other than the Commissioner, or of established practices;

•           there must be a consideration of fairness to people in like positions and the wider public interest;

•           whether there is any mischief involved; and a consideration of the consequences.

Application to your circumstances

12.   Part of the Property was compulsorily acquired by an Australian government agency ('the Authority') on DD MM YYYY.

13.   On DD MM YYYY, an offer of compensation was made to the Applicant by the Authority in the sum of $X for market value of the acquired land. In response to the Applicant lodging its claim for compensation pursuant to the Land Acquisition and Compensation Act 1986, the Authority has provided an updated figure for the market value of the acquired land, being the larger value $Y, based on advice from the Valuer-General of the State in which the property was located.

14.   The Applicant has obtained a separate valuation which provides that the market value of the acquired land is $Z - a larger amount than the updated figure of $Y.

15.   The Applicant and the Authority are continuing to negotiate in this respect, and a further valuers conference may take place in future.

16.   The Commissioner has previously issued a Private Binding Ruling to the Applicant where an extension was granted to extend the time to find an additional replacement asset to DD MM YYYY.

17.   As detailed in the previously issued Private Binding Ruling, the Applicant purchased a replacement property known as Property B on DD MM YYYY in the sum of $Z. The cost of the Replacement Property will not exceed the compensation received for compulsory acquisition of the Property in light of the current/updated offer from the Authority.

18.   The dispute with the Authority over the amount that the Applicant will be paid as compensation for the land acquired is currently ongoing.

19.   Until the amount of the compensation to be paid to the Applicant is known, the Applicant is unable to determine the CGT consequences of obtaining a roll-over.

20.   The Applicant seeks an extension of time to purchase a further replacement CGT asset/s to an amount that does not exceed the final amount of compensation received for the compulsory acquisition of the land.

21.   TD 2000/40's Example 3 provides an illustration in which a taxpayer's asset is compulsorily acquired by a State Authority. The taxpayer is then involved in a protracted legal dispute with the authority over the quantum of the compensation. In this instance, the Commissioner accepts that there are special circumstances to allow further time for the taxpayer.

22.   The Applicant's situation mirrors Example 3 of the special circumstances within TD 2000/40.

23.   Based on these facts, it is deemed that special circumstances do exist to warrant the Commissioner to exercise his discretion and allow an extension of time to obtain an additional replacement asset/s, as it would be fair and equitable to do so, given that the circumstances represent an acceptable explanation for the delay.

24.   Also, by granting this extension of time to acquire replacement asset/s:

•           there does not appear to be any prejudice to the Commissioner or any other parties;

•           there is no unsettling of people or of established practices;

•           there does not appear to be any mischief involved in this case; and

•           the Commissioner considers it to be fair to people in like positions and the wider public interest.

25.   Therefore, the Commissioner will exercise his discretion under paragraph 124-75(3)(b) of the ITAA 1997 to allow an extension of time to obtain additional replacement asset/s for the land that was compulsorily acquired by the Authority until the earlier of 30 June 2025 or 12 months after the date on which the Applicant and the Authority reach a settlement on the market value of the interest in the land acquired by the Authority.

CONCLUSION

26.   The Commissioner will exercise the discretion pursuant to paragraph 124-75(3)(b) of the Income Tax Assessment Act 1997 ('ITAA 1997') to extend the one-year period for the Applicant to acquire additional replacement asset/s until the earlier of 30 June 2025 or 12 months after the date on which the Applicant and the Authority reach a settlement on the market value of the interest in the land acquired by the Authority.

ATO view documents

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".