Edited version of private advice

Authorisation Number: 1052186539142

Date of advice: 30 October 2023

Ruling

Subject: Extension of time to acquire CGT replacement asset

Question:

Will the Commissioner exercise the discretional power under paragraph 124-75(3)(b) of the Income Tax Assessment Act 1997 ('ITAA 1997') to extend the time period for the Taxpayer to acquire a replacement asset to DD MM YYYY?

Answer:

Yes

This ruling applies for the following periods:

DD MM YYYY to DD MM YYYY

The Scheme commences on:

DD MM YYYY

Relevant facts and circumstances

Background Information

1.      The Taxpayer owns a part interest in the land comprised within XXX ('the Property')as tenant-in-common. The remaining part interest in the Property is held by Company X.

2.      On DD MM YYYY, part of the Property was compulsorily acquired by Authority X. The share of proceeds from the compulsory acquisition received by the Taxpayer was $xxx.

3.      Since the compulsory acquisition, the Taxpayer has been looking for a suitable commercial property to acquire as a replacement asset.

4.      The Taxpayer was engaged in protracted dealings with Company Y and this hindered them from being able to locate and purchase a suitable replacement asset during the initial 12-month period following the compulsory acquisition.

5.      On DD MM YYYY, Company X made a formal application to Company Y for an owner-initiated hardship acquisition in respect of the balance of the Property. It was argued that the compulsory acquisition of only part of the Property resulted in the owners suffering significant income loss from the ability to sell the balance of the Property for its market value.

6.      During the time the hardship application was on foot, the Taxpayer could not complete their search for a replacement asset on the basis that they could not ascertain the amount of money they could potentially apply towards the replacement asset.

7.      As a result of the protracted dealing with Company Y in respect of the hardship Application, the Taxpayer did not have enough time to locate and purchase a suitable replacement asset within xx months.

Previous Private Ruling

8.      On DD MM YYYY, the Taxpayer submitted an application for a private ruling to the Commissioner of Taxation seeking an extension of time in which to acquire the replacement asset.

9.      On DD MM YYYY, the Commissioner of Taxation exercised his discretion under paragraph 124-75(3)(b) of the ITAA 1997 and approved an extension of time until DD MM YYYY for the Taxpayer to incur expenditure in acquiring a replacement CGT asset that meets the conditions to claim roll-over under Subdivision 124-B of the ITAA 1997.

Search for replacement asset

10.   During this extension period, the Taxpayer has been actively searching for a replacement asset and has pursued various investment opportunities, including some that have progressed through to the draft contract stage.

11.   The Taxpayer has been negotiating on properties located in rural or semi-rural areas in XXX and has been willing to cast his net widely, for example, the Taxpayer entered into preliminary contract negotiations to acquire the underlying parcel of land located in ZZZ.

12.   Additionally, the Taxpayer recently looked at acquiring a property in XYZ, a parcel of land situated within XXX, and submitted a tender on a property near ZZZ.

13.   Whilst the Taxpayer has not been able to finalise his search for a replacement asset during this period to date, he continues to closely monitor the property market and liaises with commercial real estate agents on a regular basis. Undoubtedly, factors such as interest rate uncertainty, volatile fluctuations in the value of properties in the current market, and enterprise yield concerns have made this search more challenging than initially anticipated.

14.   The Taxpayer remains committed to investing in a replacement commercial property and requests an extension of time until DD MM YYYY.

Information provided

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

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

16.   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 subsection 104-10(6)

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

All legislative references are to the Income Tax Assessment Act 1997 ('ITAA 1997') unless otherwise stated.

Summary

The Commissioner will exercise the discretion under paragraph 124-75(3)(b) of the Income Tax Assessment Act 1997 to extend the time period for the Taxpayer to acquire a replacement asset until DD MM YYYY.

Detailed reasoning

17.   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.

18.   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.

19.   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.

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

21.   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.

22.   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.

23.   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).

24.   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'.

25.   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.

26.   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 that instance, the Commissioner accepts that there are special circumstances to allow further time for the taxpayer.

27.   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

28.   The part property interest in the property located at XXX was compulsorily acquired by Authority X on DD MM YYYY.

29.   The Taxpayer received $xxx in MM YYYY, for the property acquisition.

30.   On DD MM YYYY, Company X made a formal application to Company Y for an owner-initiated hardship acquisition in respect of the balance of the Property for further negotiations.

31.   On DD MM YYYY, Company Y confirmed they would not be proceeding with the hardship application, as they needed consent from all landowners.

32.   The Taxpayer states they could not secure a suitable replacement asset within the 12 months period due to the protracted dealing with Company Y in respect of the hardship application, as it did not allow enough time to locate and purchase a replacement property. The proceeds from the Authority X acquisition have been invested in a bank account and no replacement asset has been acquired yet.

33.   During the current extension period, the Taxpayer has been actively searching for a replacement asset and has pursued various investment opportunities, including some that have progressed through to the draft contract stage.

34.   The Taxpayer has been negotiating on properties located in rural or semi-rural areas in XXX and has been willing to cast his net widely, for example, the Taxpayer entered into preliminary contract negotiations to acquire the underlying parcel of land located in YYY.

35.   Additionally, the Taxpayer recently looked at acquiring a property in ZZZ, a parcel of land situated within XYZ, and submitted a tender on a property near XXX.

36.   Whilst the Taxpayer has not been able to finalise his search for a replacement asset during this period to date, he continues to closely monitor the property market and liaises with commercial real estate agents on a regular basis. Undoubtedly, factors such as interest rate uncertainty, volatile fluctuations in the value of properties in the current market, and enterprise yield concerns have made this search more challenging than initially anticipated.

37.   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.

38.   The Taxpayer's situation is similar to Example 3 of the special circumstances within TD 2000/40, in that the property was compulsorily acquired by Authority X. There were delays caused by the hardship application that was lodged by Company X and the Taxpayer failed to meet the requirements to acquire the replacement CGT asset.

39.   The Taxpayer's situation falls within the scope of what would be considered special circumstances.

40.   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 a replacement asset, as it would be fair and equitable to do so, given that the circumstances represent an acceptable explanation for the delay.

41.   Also, by granting this extension of time to acquire replacement asset:

•                     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.

42.   Therefore, the Commissioner will exercise the discretion under paragraph 124-75(3)(b) of the ITAA 1997 to allow an extension of time to obtain a replacement asset for landholdings that were compulsorily acquired by Authority X until DD MM YYYY.

Conclusion

The Commissioner will exercise the discretion under paragraph 124-75(3)(b) of the Income Tax Assessment Act 1997 to extend the time period for the Taxpayer to acquire a replacement asset until DD MM YYYY.

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".