Edited version of private advice

Authorisation Number: 1052220984003

Date of advice: 12 February 2024

Ruling

Subject: Additional time to acquire a replacement CGT 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 allow the Trust further time to acquire replacement Capital Gains Tax ('CGT') assets following the compulsory acquisition of property to DD MM YYYY?

Answer:

Yes

This ruling applies for the following periods:

DD MM YYYY to DD MM YYYY

The Scheme commenced on:

DD MM YYYY

RELEVANT FACTS AND CIRCUMSTANCES

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect, and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Background Information

1.      Company X, as trustee for the Trust was incorporated in MM YYYY.

2.      In MM YYYY, the Trust purchased a commercial complex in XXX, consisting of a number of buildings.

3.      The Trust owned and held the commercial property as an investment asset. The Trust self-managed the asset, receiving rental income from the tenants.

4.      In late YYYY, a state authority announced that the site would be required for the YYY project.

5.      From MM YYYY, the main building became vacant under the threat of compulsory acquisition. The Trust received no further income from the main building. The only remaining tenant was a particular company that occupied a portion of the site. The Trust received rental income from this remaining tenant until the property was compulsorily acquired by the state authority on DD MM YYYY.

6.      Just before the asset was compulsorily acquired, the CGT asset was used and held for an investment purpose.

7.      Following the compulsory acquisition:

•           the Trust lodged a claim for compensation with the state authority on DD MM YYYY

•           the Trust first received compensation as payment for the compulsory acquisition from the state authority in MM YYYY (an advance payment)

•           a protracted legal dispute over the quantum of compensation took more than a decade to resolve

•           the claim was settled in late MM YYYY and full compensation was received in MM YYYY

8.      An extension of time had been granted to the Trust in YYYY on the basis that the amount of compensation had not been determined. The protracted legal dispute with the state authority over the quantum of the compensation took more than a decade to resolve.

9.      The original asset was held as an investment. The Trust received income by way of periodic payments from tenants.

Search for replacement asset

10.   Since receiving the final payment, the Trust has been actively seeking commercial properties for replacement assets similar to the compulsorily acquired property:

•           travel and inspections to access suitable properties was restricted for some time due to COVID-19

•           as the pandemic situation eased the Trust continued to actively search for suitable replacement properties

•           the Trust has an extensive list of email correspondence with various agents regarding the properties

•           the Trust also made a separate offer to purchase another commercial property off-market from a public listed property group and is still waiting for the due diligence information to be released

•           the Trust has been the under bidder on a few properties

•           the Trust has approached agents making offers for off-market properties. The Trust has made an expression of interest offer to purchase a property and is still waiting for the vendor's reply

11.   Another difficulty for the Trust finding a replacement asset is that the amount of compensation received for the compulsorily acquired property is based on market prices in YYYY. Prices have increased significantly to make this amount insufficient to purchase a similar property in today's market. Current demand for quality commercial property makes it difficult for the Trust to outbid competing purchasers.

12.   The Trust has been the under-bidder on several commercial properties. It appears with the compensation amount received, the Trust is unable to purchase similar commercial properties as replacement assets.

Other investment assets

13.   The Trust faced challenges in acquiring replacement property given the level of compensation received was not enough to purchase a similar property. The Trust then looked and searched for other investment assets, such as particular shares or direct shares in listed property trusts as an alternative replacement asset.

14.   On DD MM YYYY, the Trust applied for a private ruling seeking the Commissioner's guidelines on whether the Commissioner would allow particular shares as replacement assets.

15.   On DD MM YYYY, the Trust purchased some particular shares.

16.   At the same time, the Trust continued actively seeking similar commercial properties for replacement. On DD MM YYYY, the Trust submitted an Expression of Interest tender to purchase a similar commercial property. The offer was not accepted by the vendor.

17.   On DD MM YYYY, in a private ruling, the Commissioner was of the view that these particular shares would not be used for the same purpose as the original assets. Hence, if the Trust purchased these particular shares as replacement assets, the Commissioner would not allow CGT roll-over. The private ruling applies for the periods ended DD MM YYYY and DD MM YYYY.

18.   On DD MM YYYY, the Trust sought an internal review of that ruling.

19.   At the same time, the Trust continued diligently seeking similar commercial properties for replacement. On DD MM YYYY, the Trust submitted an Expression of Interest tender to purchase a similar commercial property. However, the offer was not accepted by the vendor.

20.   On DD MM YYYY, the internal review decision affirmed the original decision of DD MM YYYY.

21.   The Trust subsequently applied to a government tribunal for an external review of decision.

22.   At this time, the government tribunal is yet to make a determination.

23.   The Trust would need a final determination, for the purpose of a CGT roll-over, to know whether these particular shares would be allowed as replacement assets. If yes, then the Trust would have more options to choose as suitable replacement assets.

Previous Private Rulings

24.   On DD MM YYYY, a private ruling provided an extension of time until DD MM YYYY to purchase a replacement asset.

25.   On DD MM YYYY, a private ruling provided a further extension of time until DD MM YYYY to purchase a replacement asset.

26.   On DD MM YYYY, a private ruling provided a further extension of time until DD MM YYYY to purchase a replacement asset.

27.   On DD MM YYYY, a private ruling provided a further extension of time until DD MM YYYY to purchase a replacement asset.

28.   On DD MM YYYY, a private ruling provided a further extension of time until DD MM YYYY to purchase a replacement asset.

29.   On DD MM YYYY, a private ruling provided a further extension of time until DD MM YYYY to purchase a replacement asset.

30.   On DD MM YYYY, a private ruling provided a further extension of time until DD MM YYYY to purchase a replacement asset.

31.   On DD MM YYYY, a private ruling provided a further extension of time until DD MM YYYY to purchase a replacement asset.

32.   On DD MM YYYY, a private ruling provided a further extension of time until DD MM YYYY to purchase a replacement asset.

Information provided

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

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

34.   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 1997section 108-5

Income Tax Assessment Act 1997 Division 124

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 Trust to acquire replacement CGT assets until DD MM YYYY.

DETAILED REASONING

35.   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.

36.   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.

37.   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.

38.   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.

39.   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.

40.   Section 124-75 of the ITAA 1997 applies where an asset is compulsorily acquired, a roll-over is available, and you receive money.

41.   Subsection 124-75(2) of the ITAA 1997 requires that the owner of the asset must incur expenditure in acquiring another CGT asset (except a depreciating asset whose decline in value is worked out under Division 40 or deductions for which are calculated under Division 328). 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, after the end of the income year in which the event happens.

42.   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).

43.   Subsection 124-75(6) of the ITAA 1997 states that the other asset cannot become a registered emissions unit held by you just after you acquire it.

44.   To address the question on whether replacement CGT assets have a same or similar purpose as the original CGT asset under subsection 124-75(4) of the ITAA 1997, the Commissioner needs to know, in addition to other information, whether or not:

•           you were using the compulsorily acquired CGT asset(s) in carrying on a business just before the CGT event

•           details of the proposed replacement asset(s), and

•           how you consider they will be used for the same or similar purpose to the assets that were compulsorily acquired.

45.   This is explained in 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? at paragraphs 2 to 8.

46.   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 Income Tax Assessment Act 1997 in relation to a replacement asset? provides guidance on using a replacement asset for the same or a similar purpose in the context in subsection 124-75(4) of the ITAA 1997.

47.   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'.

48.   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.

49.   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.

50.   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

51.   In MM YYYY, the Trust purchased a commercial complex in XXX, consisting of a number of buildings and car parks. The Trust owned and held the commercial property as an investment asset. The Trust self-managed the asset, receiving rental income from the tenants.

52.   In late YYYY, the state authority announced that the site would be required for the YYY project. From MM YYYY, the main building became vacant under the threat of compulsory acquisition. The Trust received no further income from the main building. The only remaining tenant was a particular company that occupied a portion of the site. The Trust received rental income from this remaining tenant until the property was compulsory acquired by the state authority on DD MM YYYY.

53.   Just before the asset was compulsorily acquired, the CGT asset was used and held for an investment purpose.

54.   Following the compulsory acquisition:

•           the Trust lodged a claim for compensation with the state authority on DD MM YYYY

•           the Trust first received compensation as payment for the compulsory acquisition from the state authority in MM YYYY (an advance payment)

•           a protracted legal dispute over the quantum of compensation took more than a decade to resolve

•           the claim was settled in late MM YYYY and full compensation was received in MM YYYY

55.   An extension of time had been granted to the Trust in YYYY on the basis that the amount of compensation had not been determined. The protracted legal dispute with the state authority over the quantum of the compensation took more than a decade to resolve.

56.   During the current extension period, the Trust has been actively searching for a replacement asset and has pursued various investment opportunities.

57.   Since receiving the final payment, the Trust has been actively seeking commercial properties for replacement assets similar to the compulsorily acquired property:

•           travel and inspections to access suitable properties was restricted for some time due to COVID-19

•           as the pandemic situation eased the Trust continued to actively search for suitable replacement properties

•           the Trust has an extensive list of email correspondence with various agents regarding the properties

•           the Trust also made a separate offer to purchase another commercial property off-market from a public listed property group and is still waiting for the due diligence information to be released

•           the Trust has been the under bidder on a few properties

•           the Trust has approached agents making offers for off-market properties. The Trust has made an expression of interest offer to purchase a property and is still waiting for the vendor's reply

58.   The Trust faced challenges in acquiring a replacement property given the level of compensation received was not enough to purchase a similar property in the current market. The Trust searched for other investment assets, such as particular shares or direct shares in listed property trusts as an alternative replacement asset.

59.   On DD MM YYYY, the Trust applied for a private ruling seeking the Commissioner's guidelines on whether the Commissioner would allow particular shares as replacement assets.

60.   On DD MM YYYY, the Trust purchased some particular shares.

61.   At the same time, the Trust continued actively seeking similar commercial properties for replacement. On DD MM YYYY, the Trust submitted an Expression of Interest tender to purchase a similar commercial property. The offer was not accepted by the vendor.

62.   On DD MM YYYY, in a private ruling, the Commissioner was of the view that particular shares would be not used as the same purpose as the original assets. Hence, if the Trust purchased particular shares as replacement assets, the Commissioner would not allow CGT roll-over. The private ruling applies for the periods ended DD MM YYYY and DD MM YYYY. On DD MM YYYY the Trust sought an internal review of that ruling.

63.   At the same time, the Trust continued diligently seeking similar commercial properties for replacement. On DD MM YYYY, the Trust submitted an Expression of Interest tender to purchase a similar commercial property. However, the offer was not accepted by the vendor.

64.   On DD MM YYYY, the internal review decision affirmed the original decision of DD MM YYYY.

65.   The Trust subsequently applied to a government tribunal for an external review of decision. At this time, the government tribunal is yet to make a determination.

66.   Whilst the Trust has not been able to finalise their search for a replacement asset during this period to date, it continues to closely monitor the property market and liaises with commercial real estate agents on a regular basis.

67.   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.

68.   The Trust's situation is similar to Example 3 of the special circumstances within TD 2000/40, in that the property was compulsorily acquired by a state authority.

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

70.   The original private ruling, concerning whether particular shares would be treated as replacement assets for CGT roll­ over purposes, covers the periods ended DD MM YYYY and DD MM YYYY. In addition, the issue is yet to be determined by the government tribunal, therefore it would be fair to allow the Trust an extended time to purchase replacement assets to covers the same period ended DD MM YYYY.

71.   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. The Commissioner considers it would be fair and equitable to do so given that the circumstances represent an acceptable explanation for the delay.

72.   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.

73.   Therefore, 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 Trust to acquire replacement CGT assets until DD MM YYYY for landholdings that were compulsorily acquired by the state authority on 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 Trust to acquire replacement CGT assets 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" ('TD 2000/40').

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?" ('TD 2000/41').

Taxation Determination TD 2000/42 "Income tax: 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 Income Tax Assessment Act 1997 in relation to a replacement asset?"('TD 2000/42').