Edited version of private advice

Authorisation Number: 1052238281128

Date of advice: 5 April 2024

Ruling

Subject: Replacement asset roll-over relief

Question 1

Is a rollover available to the Taxpayer under Subdivision 124-B of the Income Tax Assessment Act 1997 (ITAA 1997) on the disposal of the property B to an Australian government agency?

Answer

Yes.

Summary

A replacement asset roll-over relief is available to the taxpayer for the CGT event occurring from the compulsory acquisition of property B, by an Australian government agency.

Question 2

Can the rollover be applied to the whole of property B, both house and 4.95 hectares of land?

Answer

Yes.

Summary

As one CGT event occurred due to the sale of property B which included a house and 4.95 hectares of land, the total CGT can be deferred until a later CGT event.

This ruling applies for the following period:

30 June 20BB

The scheme commenced on:

1 July 20AA

Relevant facts and circumstances

The taxpayer owned a property (property A).

The taxpayer purchased a second property (property B) in 20XX.

Property B consists of a small house on a XX-hectare block of land.

The taxpayer extensively renovated and enlarged the house on property B, erected shedding and fencing and moved into the house as soon as practicable after completion in month 20XX.

The dwelling has been the taxpayer's main residence since 20XX and has never been income producing.

While the renovations were being completed, the taxpayer was residing in property A.

The taxpayer rented out property A from the time she moved out until selling it.

For capital gains purposes, the taxpayer applied the main residence and absence rules, to claim an exemption up to XX May 20XX on property A.

The taxpayer entered into a contract of sale for property B on X month 20XX, to a government agency (council).

The sale was part of the redevelopment of a Reserve, which was adjacent to property B.

In 20XX, the government agency's Recreation Plan outlined the need for additional sporting grounds within the Town council area.

Within the plan, one of the strategies recommended to achieve this goal was an extension to the Reserve. It was suggested that this extension could be achieved by acquiring land to the north of the existing reserve or linking the existing reserve it to the adjoining Primary School by acquiring the land between the two.

The Council pursued the latter option and drafted a Master Plan for the development. The Master Plan documents clearly show the need to acquire the properties located between the existing reserve and the school, one of which is property B. It would be impossible for the full Master Plan to go ahead without the acquisition of this land.

The Master Plan was put out for public consultation and the proposed development was highly publicised.

The Council received a State Government grant in 20XX, which was to be spent on the land acquisition, showing a clear intention for the Council to complete the full proposed development.

Throughout this time, there were numerous discussions between the taxpayer and the council about the acquisition.

An email dated X month 20XX from Manager Strategy of the council, states that the taxpayer was invited to negotiate a sale agreement for property B and if the negotiations were unsuccessful, the asset would be compulsorily acquired.

The sale settlement on property B occurred on XX month 20XX through successful negotiations between the taxpayer and the council.

The contract of sale included a special condition allowing the taxpayer to occupy the southern two thirds of property B up to 24 months, at no cost, from the date of settlement.

During the 24 months of occupying property B, the taxpayer was also allowed to remove any fixtures or fittings, including sheds, without any obligation to cover any damage caused by the removals.

A Residential Tenancy Agreement was signed formalising the 24 months allowed to occupy property B.

The taxpayer purchased a new property (property C), contract date XX month 20XX and settlement date of XX month 20XX.

Although, at the date of the ruling application of, the taxpayer had not moved into property C, the taxpayer intends to reside in property C on a long-term basis.

The taxpayer agreed to allow the vendor of property C to occupy the property, with no monetary consideration, up until XX month 20XX.

After the vendor vacated property C, the taxpayer has allowed a relative to move into the property, to look after it and allow it to be covered for insurance. The relative is not charged rent.

Property C is not large enough for the taxpayer to move all the shedding, tools and equipment from property B. Until the taxpayer finds a suitable location for the shed, tools and equipment, she will remain at property B.

If the taxpayer were to move out prior to the 24 months allowed to occupy property B, under the Residential Tenancy Agreement, the landlord has right of entry if they have reasonable grounds that the tenant has abandoned the premises and at such time they could demolish the home and sheds.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 100-20

Income Tax Assessment Act 1997 Section 100-33

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Subsection 104-10(6)

Income Tax Assessment Act 1997 Division 124

Income Tax Assessment Act 1997 Subdivision 124-B

Income Tax Assessment Act 1997 Section 124-70

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

Reasons for decision

Capital gains and losses

Section 100-20 of the ITAA 1997 states that you can make a capital gain or loss only if a CGT event happens.

This section also makes it clear that the specific time of when the CGT event happens is important, particularly for working out in which income year a capital gain or loss occurred.

In specific situations, you may be able to defer or disregard a capital gain or loss from a CGT event by availing yourself of a roll-over.

Section 100-33 of the ITAA 1997 provides that there are two types of roll-overs:

•         replacement-asset roll-over, which allows you to defer a gain or loss from one CGT event until a later CGT event where an asset is replaced with another asset

•         same-asset roll-over, which allows you to disregard a gain or loss from a CGT event where the same asset is involved.

CGT event A1

Section 104-10 of the ITAA 1997 states that CGT event A1 occurs if you dispose of an asset, whether because of some act or event or by operation of law. The capital gain or loss is made at the time of the event.

Subsection 104-10(6) provides that if an asset was acquired from you by an entity under a compulsory acquisition power conferred by Australian law, the time of the event is the earliest of:

•         when you received compensation for the acquisition

•         when the entity became the owner of the asset

•         when the entity entered the asset under the relevant power

•         when the entity took possession under that power.

Replacement-asset roll-overs

Division 124 of the ITAA 1997 contains the replacement-asset roll-overs that allow you, in special cases, to defer the making of a capital gain or loss from one CGT event until a later CGT event.

A replacement-asset roll-over may be available when you give up, surrender, or relinquish an asset you own, or your ownership ends in some other way, and as part of the same circumstances you receive another asset to replace the original asset.

Subdivision 124-B of the ITAA 1997 contains a roll-over for when assets are compulsorily acquired, lost or destroyed. Section 124-70 of the ITAA 1997 sets out the circumstances in which the roll-over relief may be available. You must make a positive choice to avail yourself of the roll-over under section 124-70.

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.

Paragraph 124-70(1)(c) explains that the circumstances of the disposal to an entity must meet all the following conditions:

(i) the disposal takes place after a notice was served on you by or on behalf of the entity;

(ii) the notice invited you to negotiate with the entity with a view to the entity acquiring the asset by agreement;

(iii) the notice informed you that if the negotiations were unsuccessful, the asset would be compulsorily acquired by the entity;

(iv) the compulsory acquisition would have been under a power of compulsory acquisition conferred by a law covered under subsection (1A).

Paragraph 124-70(2)(a) provides that the roll-over is only available if you receive either money or another CGT asset, or both, as compensation for the original asset being compulsorily acquired.

If you received money as compensation for the involuntary disposal of a CGT asset, you must incur expenditure to acquire another CGT asset (but not certain depreciating assets) to avail yourself of the roll-over. Generally, 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.

For the purposes of subdivision 124-B, "Australian government agency" takes its meaning from subsection 995-1(1) of the ITAA 1997:

(a) the Commonwealth, a state or a territory, or

(b) an authority of the Commonwealth or of a state or territory.

In FC of T v Bank of WA Ltd, FC of T v State Bank of NSW Ltd, Hill J listed some of the relevant issues with determining whether an entity is a public authority. Hill J stated that for an entity to be an authority of a state or the Commonwealth, the entity must be an agency or instrument of government set up to exercise control or execute a function in the public interest. It must exist to achieve a government purpose. Hill J also stated the entity must perform a traditional or inalienable function of government and have governmental authority for doing so.

Application to your circumstances

Question 1

A CGT A1 event occurred for the taxpayer when property B was sold, with settlement date of XX March 20XX. The council intended to compulsory acquire property B for extensions to develop sporting grounds within the town but acquired the property prior to this stage during negotiations with the taxpayer. The Commissioner is satisfied that property B was compulsorily acquired meeting the conditions as per paragraph 124-70(1)(c) in subdivision 124-B of the ITAA 1997 by a state agency as per subsection 995-1(1) of the ITAA 1997.

The taxpayer purchased a replacement property with the settlement date occurring on XX month 20XX. Although the taxpayer has an agreement to stay living at property B for 24 months after the settlement date, the taxpayer intends to live in property C as her main residence as she did in property B. During the time that the taxpayer is living in property B, property C has had the vendor and family living there rent free. The roll-over requirements for property B have been met, therefore the replacement asset roll-over relief is available to the taxpayer.

Question 2

Division 124 of the ITAA 1997 explains the circumstances when you can defer the making of a capital gain or loss from one CGT event until a later CGT event.

The taxpayer made a capital gain when property B sold. As a roll-over relief is available to the taxpayer per question 1, the capital gain made from the sale of the taxpayer's house and 4.95-hectare land, resulted in one CGT event, therefore is included in the total CGT that can be deferred until a later CGT event.